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Good financial health isn’t just about being rich. Rather, being financially healthy means being in the right shape to make sound financial decisions and being financially stable. Here’s what it means to be financially healthy, along with signs that you’re financially healthy and small steps you can take to take your financial health to the next level.
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What is good financial health?
Brian Walsh, Manager of Financial Planning and CFP SoFi, said financial health is a spectrum. When people don’t know or understand how to assess their financial health, it can lead to uncertainty or the use of incorrect metrics.
“The core components of financial health are based on how you spend, borrow, save, invest and protect your money,” Walsh said. At a basic level, Walsh said that good financial health means you have the financial tools to pursue what’s important to you without the constant stress of money.
“I love to say always be ready so you don’t have to get ready. That means financial health to me,” said Rianka R. Dorsainvil, CFP and co-founder and co-CEO of 2050 Wealth Partners.
Dorsainvil said that being ready to build wealth can be pretty easy. That means you spend less than you earn, stop wasting your lifestyle and save for your emergency fund and for the financial markets.
Learn: How to go from living paycheck to paycheck to early retirement, according to Dr. Lakisha Simmons
3 Signs You Are Financially Healthy
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 it’s impossible to improve your financial health by spending the same or more than you earn unless you’re retired.
Take a moment to assess your spending habits to see where you stand.
“If you spend less than you earn, you can proceed to evaluate your savings. If you’re spending the same or more than you make, that should be your primary focus on improving your financial health,” Walsh said.
Save enough money
If you have enough cash to cover unexpected expenses, you’re in good financial shape. Cash savings serve as a safety net between unexpected expenses and a difficult financial situation. It also has a major impact on your happiness, stress, and anxiety.
How do you compare your cash savings to your monthly expenses? Walsh said divide your savings by your monthly expenses. If you find yourself with less than a month of expenses, you are in a vulnerable financial position. Your focus must be on increasing that financial cushion.
If you have between a month and three months of expenses, Walsh said you’re in a good place. Focus on increasing your cash cushion or some other aspect of your finances. Those who have expenses for more than three months are in good hands. They can focus on other aspects of their finances.
Debt and Mental Health: The hidden ways of owing money affect your life
Understand 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 weigh on your finances and leave you financially vulnerable.
Good debt, on the other hand, includes mortgages, car loans, and student loans. Yes, student loans can also be considered good debt as long as the monthly payments are reasonable.
“A lot of people always see debt as a bad thing, but when used responsibly, it can actually be a very powerful asset,” Walsh said.
4 steps you need to take to achieve financial health
If you find yourself not in the best shape financially, there are steps you can take now to get in better 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 you continually benefit from it,” Walsh said.
Walsh uses the example of a goal to build your savings. Take a portion of your paycheck and have it deposited directly into your savings account. Those looking to pay off credit card debt can automatically make additional payments on their credit card each month.
Use technology and personal finance tools to track your budget and better understand your personal finances. Apps can be especially helpful for tracking spending habits and understanding what you owe.
Walsh said research shows that digital personal finance tools are linked to more responsible financial behavior and ultimately help improve your overall financial literacy.
Focus on one goal at a time
You may want to pay off debt, build your savings, start a retirement fund, and build an emergency fund, but try not to push yourself to achieve all of your financial goals at once. Instead, focus on one goal at a time.
Walsh said that focusing on one goal at a time allows you to make faster progress. This increases your stamina and the likelihood of achieving your goals.
There is also power in breaking down big goals into smaller goals. Walsh recommends breaking down an overall goal that will take months or years to achieve. Break it down, you can track it for 30, 60 and 90 days. Then rinse and repeat until you reach your larger goals.
Seek help from a financial advisor
If you are physically ill, go to the doctor. Likewise, those struggling with their financial health should seek help from a financial advisor when they need it.
Barry P. Mitchell, Jr., Founder of Private at the next level, recommends working with a trusted financial advisor or attorney. This expert can help you create a financial plan that thoroughly addresses every aspect of your financial situation. After that, you can begin 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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