How do experts define financial health?
Good financial health is not just about being rich. Rather, being in good financial health means being in the right frame of mind to make sound financial decisions and be financially stable. Here’s what it means to be financially healthy, plus signs that you’re financially healthy and small steps you can take to improve your financial health.
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What is good financial health?
Brian Walsh, Director of Financial Planning and CFP at SoFi, said financial health is a spectrum. If people don’t know or understand how to assess their financial health, it can lead to uncertainty or the wrong metrics being used.
“The essentials of financial health are based on how you spend, borrow, save, invest and protect your money,” Walsh said. On a fundamental level, Walsh said good financial health means you have the financial wherewithal to pursue what’s important to you without the constant stress of money.
“I like to say, always be prepared so you don’t have to prepare. That’s what financial health means to me,” said Rianka R. Dorsainvil, CFP and co-founder and co-CEO of Wealth Partners 2050.
Dorsainvil said being ready to build wealth can be quite simple. This means spending less than you earn, avoiding lifestyle drift, and saving for your emergency fund as well as in the financial markets.
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3 signs that you are in good financial health
Here are some aspects to consider and how these signs contribute to good financial health.
Spend less than you earn
Being financially healthy means spending less than you earn. Walsh said that unless you’re retired, it’s impossible to improve your financial health by spending as much or more than you earn.
Take a moment to assess your spending habits to see where you stand.
“If you spend less than you earn, you can move on to evaluating your savings. If you’re spending as much or more than you earn, that should be your primary focus for improving your financial health,” Walsh said.
Have enough cash savings
If you have enough cash to cover unexpected expenses, you are in good financial shape. Having cash savings acts as a safety net between unexpected expenses and a difficult financial situation. It also has a major impact on your satisfaction, stress and anxiety.
How can you compare your cash savings to your monthly expenses? Walsh said to divide your cash savings by your monthly expenses. If you find that you have less than a month’s worth of expenses, you are in a vulnerable financial position. You will need to focus on increasing this financial cushion.
If you have between one and three months of expenses, Walsh said you’re in a good place. Focus on increasing the financial cushion or another aspect of your finances. Those with more than three months of expenses are well placed. They can focus on other aspects of their finances.
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Understanding good debt and bad debt
Debt comes in two forms: good debt and bad debt. Bad debts include credit cards, medical loans and payday loans. This type of debt can be a drag on your finances and make you financially vulnerable.
Good debt, on the other hand, includes mortgages, auto loans, and student loans. Yes, even student loans can be considered good debt as long as the monthly payments are reasonable.
“A lot of people consider debt to be always bad, but when used responsibly, it can actually be a very powerful benefit,” Walsh said.
4 steps to achieve financial health
If you find that you are not in great financial health, you can take steps now to get back in shape.
Automate what matters
Whatever your financial goal, there is a way to automate it. “The power of automation is that you make a good decision once and reap the rewards continuously,” Walsh said.
Walsh uses the example of a savings goal. Take a portion of your paycheck and have it deposited directly into your savings account. Those considering paying off credit card debt can automatically make additional payments each month to their credit card.
Use technology and personal finance tools to track your budget and better understand your personal finances. Apps can be particularly useful for tracking spending habits and understanding what you owe.
Walsh said research shows that digital personal finance tools are associated with more responsible financial behavior, ultimately helping to increase your overall financial literacy.
Focus on one goal at a time
You may want to pay down debt, build up savings, build a retirement fund, and build an emergency fund, but try to avoid forcing yourself to reach all of your financial goals at once. Instead, focus on one goal at a time.
Walsh said focusing on one goal at a time will allow you to progress faster. This increases your perseverance and the likelihood of achieving your goals.
It is also possible to divide large goals into smaller goals. Walsh recommends breaking down an overall goal that will take months or years to accomplish. Break it down, you can pursue it for 30, 60 and 90 days. Then rinse and repeat until you achieve your bigger goals.
Seek help from a financial advisor
If you are not in good physical health, you will see a doctor. Similarly, people struggling with their financial health should seek help from a financial advisor when they need it.
Barry P. Mitchell, Jr., Founder of Private upper level, recommends working with a trusted financial advisor or attorney. This professional can help you create a financial plan that thoroughly analyzes every aspect of your financial situation. Then you can start strategizing to fund life’s important goals and needs — and work together to take your financial health to the next level.
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