Similar to physical health, financial health is fundamental for a successful and happy life. Poor financial health—which includes being unable to pay your bills, having little or no savings, and being stuck with a low credit score—can significantly impact your quality of life.
Creating a sound financial present not only helps to alleviate current stress but also ensures a secure and stable financial future. You need to be in good financial standing to elevate your life in virtually any way. Whether you need to rent an apartment, get a new car, or buy a home. It doesn’t just apply to your current situation though, you need to be mindful of your financial health now so that you can set yourself up for the best future.
So how do you do that? Don’t panic, our guide we’ll define financial health, explain what you need to understand about your overall financial well-being, and how to improve it if you’re struggling. Use the links below to navigate the article of keep reading for a full overview of financial health defined.
What is financial health? Financial health definition
You can define financial health in many ways since it’s such a broad term. Generally speaking, financial health refers to a person’s state of monetary affairs, including:
- Whether they’re able to meet their financial obligations
- How much is being saved as a retirement fund
- Whether they are financially prepared for emergencies
- How much is being spent on fixed or non-discretionary expenses
It not only encompasses all activities related to your money management and how you plan for the future but also shows the stability and state of your finances and financial affairs.
Strong financial health is indicated by factors like a:
- Steady flow of income
- Strong returns on investment
- Rare changes in expenses
- Growing savings balance
- Good credit score rating
Financial experts have provided rough guidelines that act as an indicator of financial health; however, each person’s situation is different. As such, it’s vital to develop your individual financial plan to ensure that you set yourself up to reach your goals and limit your risk of falling into financial duress if the unexpected occurs.
How to Measure Your Financial Health
There are many ways in which your financial health can be measured. Your overall net worth and savings represent the monetary resources available at your disposal for future or current use.
These are typically affected debt, including credit cards, student and auto loans, and refinancing a mortgage. Financial health is a continuously changing measurement depending on a person’s assets and liquidity as well as the fluctuation in the price of goods and services.
For instance, a person’s salary may remain unchanged while the cost of food, college tuition, gasoline, and mortgages may rise. In spite of initially being in good financial health, they may face financial problems if their earnings don’t keep pace with the rising costs of goods caused by inflation.
In order to have a better understanding of your financial health, the following key questions will make it easier for you to self-assess your financial health:
- Is your net worth positive or negative?
- How will you handle any financial crisis? Do you have an emergency fund?
- Do you own all the things you need in life? What about the things you want?
- Have you set up a retirement fund that will cover all your future needs? Note that retirement money needs differ from person to person.
- Have you devised a 401k plan while keeping the 401k contribution limits in mind?
- Do you feel you will be able to meet your long-term goals?
- Have you contributed towards the Social Security Fund to enjoy social security benefits?
- What about insurance coverage? Do you have adequate life and health insurance?
If you feel unprepared to answer these questions, take a minute to look into your finances and see where you’re standing. Now is as good a time as any to reassess your financial health and start planning if you need to take next steps toward improving it.
How to Improve Your Financial Health
Usually, we are guided by specific rules of thumb like “you should at least deposit 10% of your income towards your retirement fund” or “do not purchase a house that is more than three years’ worth of income.”
And while these adages are helpful and time-tested, it’s essential to consider the various decisions that can help improve your financial health based on your current circumstances. Unfortunately, there isn’t any one-size-fits-all advice, but there are guidelines.
First, you should take a hard and realistic look at where you stand currently by calculating your net worth. Take everything that you own into account, including vehicles, retirement accounts, and other assets, and subtract any and all debts. Now that you have that number, you can move forward with planning your next steps.
Create & Follow a Budget
The first and most important step to improving your financial health is to create a spending plan or personal budget. Created on an annual or monthly basis, a personal budget is an essential tool that helps you:
- Reduce or eliminate expenses
- Spend wisely
- Save for future goals
- Plan for emergencies
- Prioritize saving and spending
Multiple approaches can be utilized while creating a budget; however, they all involve making projections for expenses and income. These income and expense figures depend on your current financial situation and can change over time.
While making a budget, it is not enough to plan where you will be spending, but it is also vital to scrutinize the areas where you already spend. Do you have any recurring subscriptions that you do not need, such as cable? Are there any expenses where you can cut back? It can be really fortuitous to differentiate between your ‘wants’ and ‘needs.’
You can use mobile apps like Mint or spreadsheets to set up a budget. Or go for the conventional and time-tested envelope method where you allot an envelope for each budget item like groceries and keep the allocated cash in that respective envelope.
In order to maintain your financial health, it is essential to stick to your budget because failure to do so can result in excessive spending and overwhelming debt. Even if you start making more money, sticking to your budget is vital to protect yourself from “lifestyle creep” where you tend to spend more as you make more money.
Build an Emergency Fund
An emergency fund refers to money set aside for emergency purposes. This fund comes in handy to pay for things that are not normally included in your personal budget, such as an emergency trip to the dentist or car repairs.
This fund also helps cover your normal expenses in case your regular income becomes interrupted, for example, if you lose your job or an injury or illness prevents you from working. Although it is considered best to have three to six months’ worth of living expenses in your emergency fund, unfortunately, this amount is not typically enough to weather a loss in income or cover a big expense.
Considering today’s uncertain economic conditions, you should aim to save at least six months’ worth of living expenses, if not more. Including such unforeseen expenses in your budget as a regular expense helps to ensure that you are not spending that money frivolously and saving it for emergencies.
Another thing to keep in mind is that establishing an emergency fund is an ongoing task. It is highly possible that as soon as you have a certain amount in the fund, an expense will come up requiring you to withdraw that amount. Instead of feeling discouraged, you should be happy that you were financially prepared.
Pay Down Debt
Use either the snowball or avalanche method to pay down your debt. The snowball method is where you pay the smallest debt balance first and then save to pay the largest debt. The avalanche method, on the other hand, is where you pay as much as you can towards the highest interest debt first and pay the minimum on all others.
Both these methods have their own advantages and disadvantages. Choose the one that suits you best, depending on your money-handling preferences and debt load.
Keeping your financial health in tip-top shape can be quite a difficult task. That’s true for those with high-paying jobs and more so for individuals who are struggling to find work. Just following finance rules may not be enough to achieve financial success, especially if you have extenuating circumstances or find yourself in the latter category. In order to ensure excellent financial health, it is vital to cultivate and build habits that will allow you to make better financial choices and use all the tools at your disposal to help you stay on track.
By keeping the tips mentioned above in mind, you can make sure your financial health is off to a good start. We also recommend using a money management app like Mint, which keeps track of all your financial information in one place.