Definition of Financial Health & How to Know If You're "Healthy"
Just like physical and mental health, there is also financial health to be measured in each person's life.
The definition of financial health, according to the Financial Health Network, is “when your daily systems help you build resilience and pursue opportunities.” In short, this means that your responsibilities are taken care of such as rent, food, utilities and other essential costs — giving you the chance to move onto initiatives like investing or starting a business.
Taking care of the basics first is absolutely essential to growing sustainable wealth, and by following these eight steps, you can quickly move towards having a high level of financial health.
The 8 facts of financial health
It’s no secret that your overall health and your finances are directly correlated. In fact, having financial stress can outright make you sick and lead to larger issues. So getting your money in order isn’t just a case of having more money than less, it can affect nearly every aspect of your life.
Here are the eight steps towards improving your financial health, and why each one matters along the way.
Spend less than what you make
It’s basic advice, but the truth is that many people are spending at or above their threshold — despite their income level. And unfortunately, you can’t outearn bad spending habits. So even if you earn $100 million per year, but spend $100 million — you will eventually be left with nothing.
But to the contrary, there are ways to cut back even on a modest salary. For example, there is a story of a UPS worker that never made more than $14,000 per year, yet retired with $70 million. While the details of the story are slim, it demonstrates one core competency of growing your wealth — living on less than you make and investing the rest.
While everyone’s investing goals and strategies are different, consistently spending less than you make is essential to your financial health and success.
Pay bills on time
Paying your bills on time is essential to your financial health for several reasons, but most important, it becomes a healthy habit over time.
However, if you’re currently struggling to pay your bills, there are resources available. Rather than simply being late or not paying the full amount, contact whoever the bill came from to see if they have any sort of financial assistance programs available.
For example, if you haven’t been able to pay your utility bill on time, there are ways to get assistance. Or if you’re behind on your rent, try contacting your landlord to figure out a payment plan. By at least addressing with your bill collectors that you’re trying to get back on track, you can hopefully avoid fees, penalty or any other significant consequences.
Have sufficient liquid savings
An emergency fund is an essential part of setting money aside for an emergency fund is to make sure that when you dip into the fund that it’s truly for an emergency. Unfortunately, Beyonce tickets are not an emergency situation. This fund is for events like: unexpected car repairs, emergency home repairs, job loss or medical bills. So it’s a two-part ask: to save enough and then to ensure those funds aren't touched unless necessary.
Financial advisors recommend having anywhere between three to six months worth of living expenses set aside. This ensures that in case you have an unexpected expense or life event that you won't need to rely on high interest financial products like credit cards, or resort to borrowing money from friends and family.
This safeguard will help you in case life happens, and give you the boundary you avoid a financial freefall.
Have sufficient long-term savings
Having long-term savings is another way of saying investing for retirement. This means regularly putting money away in your employer-sponsored 401(k), an investment retirement account (IRA) or a Health Savings Account (HSA). The advantage you have by putting money away in these accounts is that you can invest the funds in the stock market for hopeful growth.
The reason for this is that it’s nearly impossible to save your way to retirement — you must invest your money to hope for any meaningful growth.
If you were to put $500 away every month for 30 years in a savings account at 2%, or invest in an index fund that tracks the S&P 500 at a 9% rate of return — you would net two very different results.
Have manageable debt
Financial pundits all have their opinion on debt, and whether or not consumers should have it. But it’s generally regarded that low interest rate debt (>5%) on assets like a home isn’t a bad thing to have on your balance sheet. This is because you can earn even more by investing your additional money in other assets, rather than continuing to pay off debt.
Here’s an example from my own personal experience:
My home mortgage interest rate is currently 3.625%. This is considered manageable debt. And I can earn an even higher return by investing the money for the future, rather than prioritizing paying off the debt. Of course, I still pay the minimum payment each month to satisfy the mortgage. But if I have an extra $100, it’s mathematically better for me to invest the money, rather than expedite paying off the debt.
Have a prime credit score
A prime credit score is a core tenant to financial health, stability and independence. By having a high credit score, you can qualify for housing, low-cost financial products and low-interest lending. Without a high credit score, you could find yourself with fewer options than desired, along with higher interest rates than you should be paying.
Here’s how you can build your credit score:
- Pay your bills on time
- Get access to larger credit lines, but avoid overusing them
- Pull your credit report to ensure you don’t have any negative remarks affecting your score
- Deal with any amounts you have in collections
- Add different types of credit to your credit mix
Have appropriate insurance
Insurance is one of very few products you will purchase that you hope to never use, but is there to protect you in case of an unexpected event.
And there are a nearly infinite amount of insurance policies, but here are the ones that apply to nearly everyone:
- Home insurance (whether you own or rent)
- Auto insurance
- Health insurance
If you have a family to support, you could consider life insurance and disability insurance in case you pass away or become unable to work.
Plan ahead financially
The last one, and arguably the most difficult is to come up with a plan. It doesn’t have to be perfect, because plans will likely change due to life events. But as long as you have a rough idea of what you’re trying to accomplish financially, you will be on the right track.
And by having each of these eight parts of your financial health in order, you’re highly likely to be on a great path ahead towards financial peace and financial freedom.
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