Are You Financially Healthy? Here’s How to Find Out.September 13, 2021
Finances can play a part in your overall health. Research has shown that being stressed about money can cause physical health issues, including heightened blood pressure and trouble sleeping.
Today’s blog will explain what financial health is, explore how to measure it and explain how to improve financial health.
What is Financial Health?
Financial health describes the state of a person’s finances.
According to the Consumer Financial Protection Bureau, a person’s fiscal well-being is determined by the control people feel they have over their expenses, the capacity to absorb a financial shock, feeling on track to meet financial goals and the financial freedom to make choices to enjoy life. Similarly, Ally describes financial health as the ability to pay for expenses now and later, whether the expenses are expected or not.
The basic core principles of financial health are based on:
- Having the ability to pay regular expenses
- The ability to handle unexpected financial expenses
- Working towards growing wealth
While not always included in the definition of financial health, many people define their personal fiscal wellness based on their financial freedom. According to a survey conducted by Personal Capital and Empower-Retirement 81% of respondents said they would not feel financially well until they had the freedom and ability to spend how they wanted to.
In that way, fiscal freedom may be the ultimate achievement in terms of financial wellness. Let’s take a closer look at the factors that determine financial health:
- A consistent income stream sufficient to cover regular expenses
- An emergency fund set aside for unexpected expenses
- A financial plan for the future, for example, a retirement fund
If you’re currently doing all three of the above, then you’re likely considered financially healthy, even if you’re still working toward monetary goals. Fiscal wellness does not necessarily mean you’ve accomplished all your savings goals, but rather, that you can maintain a comfortable lifestyle while living within your means.
How Is My Financial Health?
Now that we have answered “what is financial health,” you may be wondering, “how is my financial health?” Here are some ways to determine whether you are financially healthy.
- Ability to pay bills timely – One indicator of strong financial health is the ability to pay your monthly bills on time. This is living within your means and not needing to turn to credit to pay living expenses.
- Spending Compared to Income – To be financially healthy in addition to paying bills on time, you should be spending less than your total income. This allows you to not live paycheck to paycheck and allows for savings.
- Emergency Fund – An emergency fund is integral to strong financial health. Not only can it provide peace of mind, but it can also prevent one unexpected expense from causing financial ruin. Financial experts generally agree at least six months of expenses is adequate for an emergency fund. If that’s unreasonable based on your income, though, work toward a $1,000 emergency fund.
- Debt – You can have debt and still be financially healthy as long as your debt payments are manageable. Debts include mortgage payments, medical bills, car payments, student loan payments, among others. Ideally your debt to income ratio should remain below 40%.
- Savings – Beyond saving for emergencies, making goals and plans for the future and saving for them is financially healthy. Savings can be for a downpayment on a home, future education costs or a dream vacation. No matter the goal, having savings can provide the freedom to live how you choose.
- Retirement Savings – Everyone knows it’s important to save for retirement and start early. To be financially healthy it’s key to consistently save for retirement and stay on track with your goals. Experts tend to agree at least one year’s salary is the target goal for your retirement savings by age 35.
- Credit Score – Your credit score is another indicator of your financial health. Although you can be financially healthy without an excellent credit score, a score of at least 740 can be beneficial when trying to obtain a mortgage or rent housing.
How to Improve Financial Health
If you are concerned about your financial health, here are a few guidelines for how to improve financial health:
- Make a Budget – Maintaining a budget gives you control over your finances. You can determine where to cut back spending to allow for progress toward your priority goals.
- Refinance Student Loans – Student loan refinancing can be a great way to help improve your financial health. Many borrowers can lower their student loan interest rates and adjust their repayment terms by refinancing for more financial flexibility.
- Reduce High Interest Debt – If you are struggling with high-interest credit card debt, make a plan to reduce your balances and commit to not adding any more. Whether you start a side hustle to pay off your credit cards or find extra money in your budget, eliminating high interest debt will drastically improve your financial health.
- Pay Yourself First – In other words, prioritize your savings. When you receive income, attribute money to your retirement account first, and if possible, to other financial goals, before budgeting with the remaining money for your monthly expenses.
Being financially healthy is important for your overall health. And just like becoming physically healthy can be a journey, improving your financial health may take some time. Knowing your current state of financial health can help you determine what steps to take to become financially fit.