What Is Financial Health?
Financial health is a term used to describe the state of one’s personal monetary affairs. There are many dimensions to financial health, including the amount of savings you have, how much you’re putting away for retirement, and how much of your income you are spending on fixed or non-discretionary expenses.
KEY TAKEAWAYS
- The state and stability of an individual’s personal finances and financial affairs are called their financial health.
- Typical signs of strong financial health include a steady flow of income, rare changes in expenses, strong returns on investments, and a cash balance that is growing.
- To improve your financial health, you need to assess your current net worth, create a budget you can stick to, build an emergency fund, and pay down your debts.
Understanding Financial Health
Financial experts have devised rough guidelines for each indicator of financial health, but each person’s situation is different. For this reason, it is worthwhile to spend time developing your own financial plan to ensure that you are on track to reach your goals and that you’re not putting yourself at undue financial risk if the unexpected occurs.
Measure Your Financial Health
To get a better grasp of your financial health, it might help to ask yourself a few key questions—consider this a self-assessment of your financial health:
- How prepared are you for unexpected events? Do you have an emergency fund?
- What is your net worth? Is it positive or negative?
- Do you have the things you need in life? How about the things you want?
- What percent of your debt would you consider high interest, such as credit cards? Is it more than 50%?
- Are you actively saving for retirement? Do you feel you’re on track to meet your long-term goal?
- Do you have enough insurance coverage—whether it be health or life?
How Financial Health Is Determined
An individual’s financial health can be measured in a number of ways. A person’s savings and overall net worth represent the monetary resources at their disposal for current or future use. These can be affected by debt, such as credit cards, mortgages, and auto and student loans. Financial health is not a static figure. It changes based on an individual’s liquidity and assets, as well as the fluctuation of the price of goods and services.
For example, an individual’s salary might remain constant while the costs for gasoline, food, mortgages, and college tuition increase. Despite the good state of their initial financial health, the person may lose ground and lapse into decline if they do not keep pace with rising costs of goods.
