Financial Health

A basic measure of the soundness of an individual’s finances – essentially, it’s about what kind of financial shape you’re in overall

What is Financial Health?

Financial health is a basic measure of the soundness of an individual’s finances – essentially, it’s about what kind of financial shape you’re in overall. You may also view it as a reflection of your level of financial security.

 

Financial Health

 

Since your financial health encompasses all the various aspects of your financial life, it is composed of several aspects, such as income, expenses, savings, investments, debts, credit rating, and overall financial planning. Other factors that impact your financial health include the cost of living, rate of inflation, and level of job security.

Being in good financial health is a key part of being in good health overall because the stress that results from not being in good financial health can easily lead to actual physical disease.

Conversely, when you are in good financial health, it’s much easier to improve other areas of your life because you’re not so stressed out about paying your bills, and you have more resources and free time to use in pursuing your goals.

 

Summary

  • Your financial health is essentially an evaluation of your ability to handle your financial needs and wants.
  • Three key steps to good financial health are being aware of your overall financial condition, creating and managing your money with a budget, and making a financial plan that includes regular investing.
  • If you take the time to look at and examine all your expenses, you can usually find some simple ways to reduce them, putting more disposable income back in your pocket.

 

Becoming and Staying Financially Healthy

Unfortunately, being in good financial health doesn’t just happen automatically. Just as you need to watch what you eat and exercise regularly to maintain good physical health, you need to put in the necessary work to achieve and maintain good financial health.

If you know that you’re not in great financial shape, don’t let it get you down – realize that it’s something that you need to work on. According to recent research done by the Financial Health Network, somewhere between one-third and one-half of all individuals in the United States are in poor financial shape.

So, what can you do to improve your financial health? Below are three key steps you can take right now, regardless of your current money situation.

 

Step One – Know Where You Are Financially

Be aware of your current financial condition. A basic metric of your financial health is your net worth. It is simply the total value of all your assets (including cash on hand, savings, investments, car, house, etc.), minus the money that you owe (such as your mortgage loan and total credit card debt).

Add, subtract, and find out what your current net worth is. Then, set yourself a goal to increase your net worth year after year.

 

Step Two – Create a Budget to Manage Your Finances

Living without a budget for your finances and hoping to achieve good financial health is kind of like hoping to arrive at a far-off, desired destination without a map. In other words, it’s not likely that you’ll get where you want to go.

There are two aspects to every budget – income and expenses. It’s easy enough to know what your income is. It takes a little more work to determine what your expenses are.

Write all your basic, monthly expenses, such as rent or mortgage payment, utilities, insurance payments (health, auto, homeowner’s insurance, life insurance, etc.), credit card bills, and any other regular payments.

By looking at your credit card bills and bank statement, find out what else you’re spending money on each week, month, or year. People are often surprised to learn that they’re spending a lot more on things than they thought they were.

The next step is to compare your income with your expenses. When people first sit down and look at their income vs. their expenses, many are shocked to find out that they’re living a lot more within their means than they were aware of.

It’s easy to fall into a pattern where you’re supplementing your income by regularly using credit cards to pay for things. The danger of falling into that habit is that it’s easy to let your credit card debt expand to the point where it becomes unmanageable and begins to cause real financial problems.

Finally, write a monthly budget that you think you can live with and that gets you moving toward a position of stronger financial security. Look for areas where you can reduce your expenses.

Reduce your overall debt by taking steps like making bigger payments on outstanding credit card balances every month or making extra payments to the principal on your mortgage loan.

One of the most important things to build into your budget is a solid plan for putting money into savings and investments on a regular basis.

Financial advisors nearly always advise their clients that they should have enough money in savings to cover 6-12 months of living expenses. Without such a safety net, even a brief period of unemployment can put you in financial distress.

Yes, it can take some time to build up a savings account of that size, but once you do, you’ll have achieved a much greater level of financial security. There are side benefits as well – it can improve your credit score, making it easier to borrow money when you need it and being able to access credit at lower interest rates.

 

Step Three – Planning for Your Financial Future

Perhaps the biggest step you can take toward significantly improving your financial health is that of establishing financial goals and creating a financial plan to achieve them.

It’s a good idea to consult a financial advisor to help you with handling this aspect of your financial life, but if that sounds too expensive, you can usually get affordable basic financial advice from sources such as robo-advisors, which are now commonly available through investment firms like Fidelity or Vanguard, or from your personal banker.

Unless you happen to win the lottery somewhere along the way, for most people, it is virtually impossible to arrive at retirement age with genuine financial security unless you have created and followed a financial plan that includes regularly putting money into investments such as stocks, bonds, or exchange-traded funds (ETFs).

Many shy away from investing either because they don’t feel like they know enough to make wise investments or because they don’t think they have enough money to invest. Well, there are two things to take note of here.

  • You can get whatever investment education and advice you need from several sources, such as online investment sites, most of which are free, or from a brokerage firm.
  • Feeling like you don’t have enough money to invest is one of the best reasons to get started in investing – because it is a great way to substantially increase your wealth. Getting started with investing is one of the wisest financial moves you can make.

 

Tips on Increasing Your Disposable Income

Below are some quick tips to improve your finances and increase your disposable income:

  • Become a smart shopper, always looking for the best deal on everything you buy.
  • Reduce your debt by negotiating for lower interest rates. Often, all you need to do is ask your bank or credit card company to get a better interest rate on your debt obligations.

 

More Resources

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

  • Personal Financial Statement
  • Investment Portfolio
  • Savings Account
  • Disposable Income

Financial Analyst Training

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