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What does being financially healthy mean?
And just as importantly, how do you get there?
We all have a general idea of what physical health looks like (and doesn’t).
But with financial health, it’s a little trickier to judge by its cover.
That’s because being financially healthy is more than just having a steady flow of income or a sizable bank account (or dressing like you have both). It also means being able to manage unanticipated expenses and planning for a secure financial future.
As you aim for financial health, you’ll have to strike a balance between living for today and preparing for tomorrow — and this article will tell you just how to achieve that balance.
In this article:
4 indicators that you are financially healthy
You can gauge your financial situation through various indicators. Here are some of the main ways to know where you stand:
- Having an emergency fund: An emergency fund acts as a financial safety net for unexpected expenses. Ideally, you should be able to cover three to six months’ worth of living expenses with your emergency fund.
- Keeping a cash balance: Do you end your billing cycle with money in the bank or more debt? If you can’t pay off your credit cards each month, you’re probably living beyond your means. Aim for a positive cash balance and a steady money flow.
- Maintaining a good credit score: A good credit score indicates financial health and low credit risk. A good score starts around 670, while a very good score is above 740. At 800, you’re in the excellent bracket.
- Obtaining a growing net worth: Your net worth is a simple calculation of your assets minus your debts. Ideally, you want the value of your assets to grow faster than your obligations to lenders. Even if your monthly expenses feel tight, your net worth might still be going up.
Key elements to improve your financial health
If you’re struggling with the above, don’t despair. Below are some simple financial health tips you can follow.
Create a budget and stick to it
Although not the only important aspect of financial planning, a budget is a cornerstone of building and maintaining financial health.
Your budget showcases your monthly income, cash balance, and where your money goes. By adhering to your budget, you can allocate funds to essential needs, save for future goals, and avoid unnecessary expenses.
To create a budget, tally up your monthly income and expenses in a spreadsheet. Track your spending over multiple months as it can vary depending on the time of year. For example, you might shop more during the holidays or pay more than your monthly average for utilities during the cold or hot months.
Some expenses, like rent or a mortgage, are fixed, meaning they won’t change much. Others are variable. You can set weekly or monthly goals for your variable expenses to try to cut down on them whenever possible.
By monitoring and managing your budget, you’ll be better prepared to navigate unexpected financial situations and ensure you live within your means.
Establish an emergency fund
What happens if you get nails in your tires and need to replace them all? Or, what if you lose your job, or are furloughed? Keeping enough extra cash in a separate account is an important way to prepare for financial shocks.
If you don’t yet have an emergency fund, or you’re trying to build one, look for ways to save more money each month until you’re satisfied with your fund. One way is to set up a separate savings account — that way, you won’t be tempted to access it for day-to-day expenses, but you’ll still be able to get to your funds should you suddenly need them.
Once you have a place to keep your emergency fund, you can set savings goals. These could be daily, weekly, monthly, or from every paycheck.
For example, if you buy a coffee for $5 every day before work, you could forgo that treat to save $25 a week. Or you could plan to take a small percentage from each paycheck. Or look at anything you have set to autopay — a streaming service you no longer watch, for example — and cancel it, putting the money toward your emergency savings.
Finally, another way to fund your account is to take a lump sum, maybe an annual tax refund if you receive one, to jump-start your savings.
Plan for your short-term and long-term financial goals
Setting clear short and long-term financial goals is a pivotal step toward achieving financial security.
Short-term goals might include saving for a vacation, buying a new gadget, or paying off a specific debt. Long-term goals can include purchasing a home, funding your child’s education, or achieving a comfortable retirement. By laying out these objectives early on, you can allocate your resources more effectively and chart a path to accomplish them.
A good way to do this is by lining up all your income, expenses, savings, investments, and debts. Then, determine how much you need and when you hope to reach your goals. This can help guide your monthly spending and saving decisions.
Manage debt responsibly
Debt, if not managed responsibly, can lead to poor credit and significant interest payments. To avoid this situation, you should first understand the difference between good debt, like a mortgage or student loans, and potentially harmful debt, such as high-interest credit card balances.
For example, if you take out student loans to pay for college, but that education leads to a good job that allows you to pay your loans, that debt furthered your income-earning potential. But if you go on a spending spree courtesy of your credit card and come home with several thousand dollars worth of furniture you can’t pay off, you’ve simply increased what you owe.
To manage your debt, prioritize paying off high-interest debts and avoid accumulating unnecessary liabilities. Start by lining up all your debts by interest rate. If you have a lot of debt, consider paying some of it with what you might otherwise put into your savings.
Start investing to build financial wealth
Investments, such as stocks, bonds, real estate, and mutual funds, can be a powerful tool for growing wealth and securing a financial future.
The investment vehicle you choose should grow your money’s buying power while balancing risk. For instance, holding all your money in a savings account may earn you a little bit of guaranteed interest, but the buying power of that money will decrease if the account’s yield is lower than inflation. By investing some of your funds in a successful company’s stocks, you may be able to outpace inflation and earn money in the long term.
Of course, the trouble with investing is that you run the risk of it going down in value. You can think of potential investment returns as the money you may be able to make for taking that risk.
One way to help alleviate some of this risk is to diversify your investments by purchasing a variety of stocks, mutual funds, and bonds. Additionally, consider looking to other asset classes like real estate or owning businesses to potentially increase your net worth and earn additional income. To help optimize returns, consider seeking professional financial advice from a financial planner or other investment advisor.
Plan for your retirement savings
Retirement planning can help you achieve a financially comfortable and secure future. You can also benefit from tax advantages and compound growth early on by setting aside a portion of your income into retirement accounts like 401(k)s or individual retirement accounts (IRAs).
How much you should save varies depending on your age and retirement goals. If you hope to retire in 10 years but have no savings, your savings rate will need to be higher than that of a 30-year-old planning to work a few more decades. But generally, financial advisors recommend saving 10-15% of your pretax income.
Track your credit performance
Your credit performance, reflected in your credit report, is vital to your financial health. It affects your ability to secure loans, mortgages, rentals, and even job opportunities.
Regularly monitoring your credit report can help you identify any discrepancies, potential fraud, or debts that might be weighing down your score. If your score isn’t where you’d like it to be, you can work on some of the following factors that affect it, such as:
- Payment history: Timely payments boost your score, while late or missed payments can significantly lower it.
- Credit utilization: This is a ratio of outstanding credit balances versus your credit limits. A lower utilization rate of around 30% or less is generally positive.
- Length of credit history: The longer your credit history, the more positively it can impact your score.
- Types of credit accounts: A mix of different types of credit (such as credit cards, mortgages, and auto loans) can be beneficial.
- Recent credit inquiries: Avoid multiple hard inquiries in a short period of time, which can negatively affect your score.
- Public records and collections: Removing bankruptcies, foreclosures, and collection accounts from your credit history can positively impact your score.
Protect yourself and your assets with life insurance
Life insurance is more than just a policy. It’s a promise to help safeguard the financial future of your loved ones in your absence. Whether it’s to cover outstanding debts, provide for your children’s education, or help ensure your family maintains their standard of living, life insurance offers peace of mind.
Many people opt for term life insurance during their working years. Term life insurance is an affordable way of shielding your family’s economic stability during a specified period. It helps ensure that even something as unexpected as your untimely death won’t necessarily derail your family’s financial goals.
Learn about the importance of financial literacy
Financial literacy empowers individuals to make informed decisions about their money.
Understanding the basics of finance, such as the difference between debit and credit cards or how interest rates work, can significantly influence your financial trajectory. Personal finance books are a great way to kickstart your journey.
Use your credit cards wisely
Credit cards, when used responsibly, can be powerful financial tools. They offer convenience and rewards while helping you build a positive credit history.
However, use them judiciously to avoid accumulating high-interest debt. Pay off the full balance each month, understand the card’s terms, and be wary of impulsive spending.
About Chris PearsonRead more by Chris Pearson
Our editorial policy
Haven Life is a customer-centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.
Our editorial policy
Haven Life is a customer centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.
Our content is created for educational purposes only. Haven Life does not endorse the companies, products, services or strategies discussed here, but we hope they can make your life a little less hard if they are a fit for your situation.
Haven Life is not authorized to give tax, legal or investment advice. This material is not intended to provide, and should not be relied on for tax, legal, or investment advice. Individuals are encouraged to seed advice from their own tax or legal counsel.
Haven Term is a Term Life Insurance Policy (DTC and ICC17DTC in certain states, including NC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001 and offered exclusively through Haven Life Insurance Agency, LLC. In NY, Haven Term is DTC-NY 1017. In CA, Haven Term is DTC-CA 042017. Haven Term Simplified is a Simplified Issue Term Life Insurance Policy (ICC19PCM-SI 0819 in certain states, including NC) issued by the C.M. Life Insurance Company, Enfield, CT 06082. Policy and rider form numbers and features may vary by state and may not be available in all states. Our Agency license number in California is OK71922 and in Arkansas 100139527.
MassMutual is rated by A.M. Best Company as A++ (Superior; Top category of 15). The rating is as of Aril 1, 2020 and is subject to change. MassMutual has received different ratings from other rating agencies.
Haven Life Plus (Plus) is the marketing name for the Plus rider, which is included as part of the Haven Term policy and offers access to additional services and benefits at no cost or at a discount. The rider is not available in every state and is subject to change at any time. Neither Haven Life nor MassMutual are responsible for the provision of the benefits and services made accessible under the Plus Rider, which are provided by third party vendors (partners). For more information about Haven Life Plus, please visit: https://havenlife.com/plus
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