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.

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.

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.

Typical signs of strong financial health include a steady flow of income, rare changes in expenses, strong returns on investments that have been made, and a cash balance that is growing and is on track to continue to grow.2

To improve your financial health you must first take a hard, realistic look at where you’re currently at. Calculate your net worth and figure out where you stand. This includes taking everything you own, such as retirement accounts, vehicles, and other assets and subtracting any and all debts. Then you need to create a budget. With your budget, it’s not enough just to plan for where you’ll be spending, but it’s also important to take a hard and close look at where you already spend. Are there areas where you could cut back? Recurring subscriptions that you don’t really need—such as cable? It’s fortuitous to understand what your “needs” are versus what your “wants” are.

Use spreadsheets or mobile apps to help set up a budget. Or, use the time-tested envelope method, which has you create an envelope for each budget item, such as groceries, and keeping the allocated cash in the respective envelope. One of the major keys to a budget, and maintaining your financial health, is to stick to your budget regardless of whether you start making more money or bringing in more income. Lifestyle creep, which includes spending more money as you make more money, is detrimental to your financial health.

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