There is a lot of advice out there about what you should or should not do when it comes to your finances. There are lists of what financial milestones you should hit in your 20’s, 30’s, 40’s, etc. You may feel pressured to buy a house or have a certain amount saved for retirement by a certain point. You may have tackled mountains of debt or feel uncomfortable taking on any debt at all.
So, how do you sift through all the talk to find what makes sense for you? One way to ground yourself is to understand your personal definition of financial health.
Financial health is a way of describing the state of your finances. Measuring your finances in terms of “health” over dollars and cents can often be helpful and gives us a way to talk about overall financial well-being in terms we can better understand. So, let’s talk more about what it means to be financially healthy and how you can use this framework to make better financial decisions.
What Is Financial Health?
According to the Consumer Financial Protection Bureau, a person’s fiscal well-being is determined by the control people feel they have over their expenses, the capacity to absorb a financial shock, feeling on track to meet financial goals, and the financial freedom to make choices to enjoy life.
In other words, fiscal wellness does not necessarily mean you’ve accomplished all your savings goals but that you can maintain a comfortable lifestyle while living within your means.
Tips for Measuring Financial Health
If that definition of financial health didn’t satisfy you, here are some additional dimensions to consider as you take stock of your financial well-being.
Paying Bills on Time – One indicator of strong financial health is the ability to pay your monthly bills on time. This is living within your means and not needing to turn to credit to pay living expenses, and depending on what bills you’re managing may positively impact your credit score.
Spending Compared to Income – Once your bills are paid, how much is left from your total income? Is your spending (or overspending) leading to feeling stressed paycheck to paycheck? Think about how to balance your spending with a savings plan so you can divide your income wisely.
Emergency Fund – An emergency fund can provide peace of mind when unexpected expenses like needing a new tire or incurring a medical bill arise. Financial experts generally agree at least six months’ worth of expenses is adequate for an emergency fund. If that’s unrealistic based on your income, start by working toward a goal like $1,000 for an emergency fund.
Debt – Debts can include mortgage payments, medical bills, car payments, and student loan payments, etc. You can have debt and still be financially healthy if your debt payments are manageable. In fact, taking out and paying certain kinds of debts can increase your credit score. Ideally, your debt-to-income (DTI) ratio should remain below 40%.
Credit Score – Your credit score is another major indicator of your financial health, as we’ve already mentioned. Although you can be financially healthy without an excellent credit score, a score of at least 740 can be beneficial when trying to obtain a mortgage or rental.
Savings – Beyond saving for emergencies, making goals and plans for the future and saving for them is financially healthy. Savings can be for a downpayment on a home, future education costs, or a dream vacation. No matter the goal, having savings can provide the freedom to live how you choose.
Retirement Savings – It’s advice you’ll hear commonly: start saving for retirement early. Having a retirement goal and a plan toward saving what you’ll need to live comfortably is one significant dimension of financial health; however, the “how” and “how much” is entirely up to you. One rule of thumb is to use one year’s salary as the target goal for your retirement savings by age 35. With the help of compound interest and additional savings you contribute, this guidepost may help orient you around the state of your retirement plan.
How to Improve Your Financial Health
Taking all of these dimensions into consideration, what is the state of your finances? If you are concerned about your financial health, here are a few guidelines for how to make steady improvements:
Make a Budget – Maintaining a budget gives you control over your finances. You can determine where to cut back spending to allow for progress toward your priority goals.
Reduce High-Interest Debt – If you are struggling with high-interest credit card debt, make a plan to reduce your balances and commit to not adding any more. Prioritize making additional payments toward this debt if your credit card allows you to so that you can reduce or eliminate this debt more quickly. This will make a significant difference in your financial health.
Refinance Student Loans – If student loan payments feel overwhelming, student loan refinancing can be a great way to help improve your financial health. Many borrowers can lower their student loan interest rates and adjust their repayment terms by refinancing for more financial flexibility.
Pay Yourself First – As much as possible, prioritize your savings. When you receive income, attribute money to your retirement account first, and if possible, to other financial goals, before budgeting with the remaining money for your monthly expenses.
It can feel overwhelming to try to make a lot of changes to your finances at once, so take it one step at a time. Commit to one goal, then take on another when you’re ready. Approach it like any other aspect of your health: what are your “symptoms”? What steps can you take to understand and address the root of the issue? The answers will help you get started.
Final Considerations
Did you know that finances can play a part in your overall health? Research has shown that being stressed about money can cause physical health issues, including heightened blood pressure and trouble sleeping, as well as mental health issues related to feelings of hopelessness and shame.
As researcher Oscar Jiménez-Solomon puts it, “People walk around with secrets and feel unworthy of support. Societies like ours tend to see economic success as a reflection of a person’s qualities and economic difficulties as a sign of personal failure.” However, he says that creating a plan can be helpful. “Having a sense that there’s a way out of your situation can have an important financial and mental wellness impact.”
In other words, understanding and working to improve your financial health can make a difference in your life beyond the bottom line. Tend to your overall well-being by making a plan, maintaining your finances, and working toward personal goals—and don’t be afraid to ask for help!
SouthEast Bank is here to support you at each stage of your financial journey. Visit your local branch anytime to learn more about how our products and services might fit your goals.
