What is financial health: how to boost your financial well-being

Dive into the essentials of financial health. Learn what it means, how to gauge it, and effective steps to enhance your monetary well-being.

November 21, 2023

Oluwatosin Jegede

Financial health tells us about our money’s well-being. It looks at savings, retirement funds, and regular expenses. Everyone has a unique financial picture. That’s why it’s key to understand and keep our finances in good shape. Making a personal financial plan can guide us. It helps set clear goals and prepares us for unexpected events.

Table of Contents

Measure your financial health

Wondering about your financial well-being? Let’s dive in with some simple questions. This is like a quick check-up for your money:

Emergencies: Are you ready for life’s surprises? Do you have money saved just in case?
Net worth: Is your total value (what you own minus what you owe) positive or in the red?
Needs and wants: Do you have everything you need? What about the extra things you wish for?
Debt: Think about your debts. Are most of them from high-interest sources like credit cards? Is it over half?
Retirement: Are you saving up for your later years? Do you feel you’re on the right path?
Insurance: Do you have enough coverage, whether for your health or for life’s uncertainties?

Answering these questions will give you a clearer picture of your financial health.

How financial health is determined

Financial health is a snapshot of your financial situation at any given moment. It’s determined by several factors:

Savings and net worth: Look at your savings and total net worth. This is the sum of everything you own minus what you owe. It gives an idea of your financial strength;
Debt overview: Consider your debts – credit cards, mortgages, cars, and student loans. High debt can weigh down your financial health;
Liquidity: This is about how quickly you can turn your assets into cash. Can you handle unexpected expenses without taking on more debt?
Income stability: A regular and reliable income ensures you can meet your daily expenses and invest for the future;
Expenses: Are your expenses steady or fluctuating? If they’re rising faster than your income, it can strain your financial health;
Investment returns: A good return on your investments boosts your financial health. It’s like your money working for you;
Economic factors: Remember, things like inflation can affect buying power. Even if you earn the same, everything might cost more.

A strong financial health means having more assets than debts, a steady income, controlled expenses, and savings for both short-term needs and long-term goals. It’s about balance and preparedness.

Improving your financial health

Let’s break down how to improve your financial health step by step.

Know where you stand

First, get real about your finances. What’s your net worth? List everything you own, like retirement savings, cars, and other stuff. Now, subtract all your debts. That number? That’s where you stand.

Budgeting

Next, make a budget. A good budget isn’t just about planning future spending. It’s about looking at past spending, too. Ask yourself: Are there things you’re paying for that you don’t really use? Maybe that TV subscription? Know the difference between “must-haves” and “nice-to-haves.”

Need help? Use simple tools. Spreadsheets, apps, or even old-school envelopes can do the trick. Each envelope can have cash for things like food or transport.

And here’s a golden rule: Stick to your budget. Even if you start earning more, don’t just start spending more. This trap, where you up your spending as your earnings go up, can hurt your financial health.

Emergency fund

Did you get a surprise bill? An emergency fund is a savior. This is cash you set aside for unexpected stuff, like fixing your car or if you suddenly lose your job. Aim to save enough to cover your bills for three to six months.

Tackle your debt

There are two popular methods to handle debts: avalanche and snowball. Avalanche says: tackle the high-interest debt first. Snowball says: clear the smallest debts first and then move up. Both have their perks. Choose what feels right for you.

Rules and tips for financial health

Here are some tried and true rules and tips to keep your finances healthy:

Go automatic: Make life simpler. Automate bill payments and savings transfers;
Free is best: Always hunt for free checking accounts and other fee-free financial options;
Be a smart shopper: Even if you have insurance or cable, shopping around could score you a better deal;
Budgeting blueprint: Consider the 50/30/20 rule. Spend 50% on essentials, 30% on fun stuff, and save or pay off debts with the remaining 20%;
Home economics: Aim to keep housing costs below 40% of your take-home pay;
Start investing young: As soon as you can, save 10-15% of your income for retirement. The earlier, the better.

Business financial health

Businesses, just like people, have financial health. How do you ascertain a company’s financial health? Some things to look at include:

Revenue flow: Is money coming in consistently?

Investments: Spending on new equipment or offices is good, but only if it’s for future growth;

Expense check: If the company is spending too much on things that don’t grow the business, there’s a problem. It might struggle to cover basic costs like lights and salaries;