Most of us pay attention to our physical health every day, but it’s just as important to keep financial health in mind, as well.
Without it, our dreams never come true, we don’t reach our goals, and obstacles keep impeding our progress.
On one level, financial health is about having more money coming in than money going out — or, if you like, positive cash flow. On a deeper level, it is about the relationship between your assets — the stuff you own, the money you’ve saved, the investments you’ve made — and your debts.
Financial health is important for a number of reasons, both tangible and intangible. It affects where you live, what you drive, how you spend your free time, how you raise your children (or whether you have them), and your physical and mental health. When you are financially healthy, you are free from anxiety about money and have confidence that you can meet emergencies and take advantage of the opportunities before you.
By many measures, the financial health of many Americans is in serious condition. Two-thirds of people in the United States are considered to be financially unhealthy. As one financial analyst put it, “
The average financial health of people with household incomes above $100,000 improved the most over the past year, while people making less than $30,000 did not see any average improvements.
What’s more, two out of five people in this country do not have enough money to cover an emergency expense of $400.
It does not have to be this way. Financial health, after all, is not an unchanging situation but is a dynamic measure that adjusts to things such as interest rates, credit scores, and the cost of living. While a lot of these factors are out of your hands, many others are in your control.
If you are what you eat in the physical sense, in the financial realm you are what you make, what you spend, what you save or invest, and what you owe.
Those are the four basic elements of your financial health:
To improve your financial health on the income level, you will have to make more money, which for many people means doing things like taking on another job, asking for a raise, or finding a job that pays a more livable wage. But at a time when many of us are fighting just to hang on to the jobs we have, this is all easier said than done.
A step that may be easier for you is to control your spending. That will help you attain a positive cash flow—which is a component of financial health but is only half of the whole story. The other half involves building up your assets and paying down your debts. This is a step that many find difficult to take, but recent innovations in banking and investing have made it easier. The fundamental principle is to pay yourself first. Set up an automated deduction from your checking account that goes into a savings account or an investment account. This is a relatively painless way to build your assets.
It is also important to pay down, if not pay off, your debt, including credit card debt, your mortgage, personal loans, and student debt. Having a manageable amount of debt is a sign of financial health. Establishing a record of regular, timely payments and keeping your credit card balances below 30% of your credit limit will boost your credit score. Then, when you have to finance a new car or buy a house, you will be offered lower interest rates, which will save you thousands of dollars in finance charges. Most lenders recommend that your total debt (excluding your mortgage) should be less than 30% of your annual income, so keep that in mind as a guideline.
As with your physical health, worrying too much over your finances can make you unhealthy.
Money, after all, is only a means to an end. Taking small steps each day, such as monitoring your spending, looking at your credit card balances, thinking about how to improve your income, and writing down your financial goals will help you achieve financial health — and the benefits that go with it.