Have you ever stopped to think about how healthy your finances are? How would you go about answering that question? Measuring financial health sounds complicated, but it doesn’t have to be.
According to the Financial Health Network’s 2021 U.S. Trends Report, 66% of people in the United States are not considered financially healthy, despite overall improvements between 2020 and 2021.
Most of us want to be financially healthy. But what exactly is financial health?
Is it having a lot of money in the bank? Is it being debt-free? Financial health isn’t measured by tracking every penny you spend; it has more to do with managing your finances properly and having the right money mindset.
Let’s face it; we all want a better financial situation than what we are in right now. So whether you are looking to start saving money, retire early, or get out of debt, this article will provide you with some great information on financial health improvement.
We’ll cover the 8 indicators of financial health and provide advice on how to improve in each of those areas. Most importantly, we’ll address the mental health aspect of financial health and how to move from a scarcity mindset to an abundance mindset.
8 Indicators of Financial Health
Most people understand that financial health is essential. Still, when it comes to specifics, many people are unsure what steps they should take to measure and improve their financial health.
Measuring your financial health isn’t an easy task, but it is an important one. It will help keep you on track with your financial goals and even prevent you from making some costly mistakes. For this article, we’ll consider the Financial Health Network’s methods of measuring financial health.
- Spend less than income
- Pay bills on time
- Have sufficient liquid savings
- Have sufficient long-term savings
- Have manageable debt
- Have a prime credit score
- Have appropriate insurance
- Plan ahead financially
Like physical health, financial health is a lifestyle—not something you can achieve overnight. But if you spend less than you earn, pay down debt, and save for emergencies and retirement, then you’re well on your way to achieving financial health.
1. Spending Less Than Your Income
To achieve financial health, you’ll need to manage your money responsibly. That means living within your means, spending less than or equal to your income, and having enough money to cover life’s unexpected events.
In today’s culture, impulse buying is a common issue for many. It happens to everyone (especially in Target).
Maybe you see that someone else has a new gadget, or you want to splurge on a dress you’ve been eyeing. Next thing you know, you’ve spent more than you originally planned and have to reach for the credit card.
Why does this happen? Psychology Today explains that impulse buy are the result of one of three things:
- Trying to live up to social status or image
- Struggling with anxiety or controlling emotions
- Experiencing less happiness and wanting to improve mood
We’re all familiar with the rush of dopamine that comes along with a new purchase. Still, it’s important to practice saying no more often. When you’re itching to make an impulse purchase, step back and take a moment to assess your mood.
Are you anxious or upset? Are you using the purchase to manipulate your emotions? Or maybe you’re trying to impress someone.
Taking the time to be more mindful about your purchase could prevent you from splurging.
If you spend more than you earn, building long-term wealth or paying off short-term debts like credit cards or loans becomes hard. That’s why creating and following a budget is a critical element of building financial health.
BrightUp Tip: Use our financial planning app to track and analyze your spending. You can see trends in different spending categories and identify areas you can change.
2. Paying Bills on Time
Another benefit of budgeting is making sure you’re staying on top of your bills. For most monthly payments, outside of utilities, you can predict how much money you’ll need to set around each month and what week of the month you need to make the payment.
If you consistently miss payments or make late payments, that’s a red flag. Your payment history is one of the most significant factors determining your credit score, and paying late can negatively impact it.
That can affect your ability to get loans and other financial products. Plus, you may be hit with fees and penalties. Penalties can make your bills even more challenging to pay off if you’re tight on money.
BrightUp Tip: If you don’t think you can pay off your credit card balance in full, consider setting up automatic payments of the minimum amount, so it gets paid on time every month.
3. Having Sufficient Liquid Savings
Having sufficient liquid savings to cover expected and unexpected expenses is a key dimension of financial health. Liquid savings can help you avoid debt, increase your ability to weather financial shocks and provide you with the resources to invest in your future.
And yet, BankRate reports that 56% of Americans can’t afford to cover a $1,000 emergency expense.
Even if you don’t need to cover unexpected expenses, having liquid savings can help you get ahead financially with an opportunity to invest in building your future wealth. For example, suppose you have saved $100 per month for two years.
When you come into possession of an unexpected $1,000 from a tax refund, having that $2,400 in liquid savings will enable you to put more money elsewhere. You could put that extra $1,000 towards paying down high-interest debt or investing in assets that will increase your net worth over time.
If you don’t have enough money for unplanned expenses, your financial health can suffer. When you need money and don’t have an emergency fund to cover those costs, it can lead to engaging in harmful borrowing activities, like payday loans.
There are many ways to save money and build wealth, but none work without discipline. The best way to save money is to spend less than you earn automatically. For example, having some of your paycheck deposited directly into a savings account instead of being deposited in your checking account.
Start small if you need to. Even $20 a week is better than nothing.
BrightUp Tip: You’re more likely to meet your savings goals with tools that help you automate your savings and visualize your progress. Our suite of financial planning tools includes a goal and savings tracker that’s perfect for helping you build your nest egg!
And a rainy day fund isn’t the only thing you need to save for. For example, if you want to retire someday, you’ll need to start saving now.
4. Having Sufficient Long-Term Savings
Are you prepared to maintain your current lifestyle after you stop working? A healthy financial life also means you’re setting aside money for the future—your retirement years.
Most Americans hope to retire by the age of 62. That’s according to the Center for Retirement Research at Boston College, which found that in 2016, 62 was the most common age for Americans to stop working. After that, the next most popular retirement age was 65.
And while there are certainly exceptions, it’s a good idea to plan on working until at least that age.
It’s never too early — or too late — to start thinking about retirement and how much you’ll need to put away each month. If you have access to an employer-sponsored 401(k) plan or a Roth IRA, take advantage of them as soon as possible.
BrightUp Tip: Retirement savings recommendations are all over, but many experts agree that putting 10% to 15% of your income into a retirement account such as an IRA or 401(k) is a good target. If you’re starting, saving 5% to 7% of your income might be more realistic. However, if you’re nearing retirement age, 15% to 20% may be more appropriate.
Even if you can only afford $100 per month in contributions when you first start, that’s still better than nothing. You can always increase your contribution later as your income and financial standing improve. The earlier you start saving, the more time your money has to grow.
5. Having Manageable Debt
Debt is a fact of life for most of us. According to Debt.org, the average American has $90,460 in debt!
However, it can be a good thing if it helps you buy something that increases in value – such as a house – or if it enables you to make money – such as an investment. And it’s not always bad to have debt for things such as cars or credit cards if the amount is reasonable and you’re able to pay it off every month.
Types of debt can include:
- Revolving debt
- Installment debt
Credit cards are an example of revolving debt — meaning that once the balance is paid off, you can borrow more money against that same account. For example, if you pay off a $5,000 credit card balance then charge $500 on it again, the $5,000 would be “manageable,” but the $5,500 balance would be too risky. The ideal situation is to use credit cards without carrying a balance.
An auto loan or mortgage is an example of installment debt — meaning that once it’s paid off, it’s closed and doesn’t get used again until you apply for another loan.
If your debts are too high, consider cutting back on discretionary spending and using that money to pay down your debts. One rule of thumb is that you shouldn’t spend more than 20% of your after-tax income on debt payments each month. If you’re spending more, you may be in over your head and need to develop a plan for getting out from under your debts.
If you’re carrying a balance on more than one debt, start by first paying off the one with the highest rate.
BrightUp Tip: If you find that you’re unable to manage your debt, BrightUp can help! You may want to consider a debt consolidation loan to make your payments more manageable.
Our debt consolidation program is different from most lenders because we use an alternative scoring algorithm to provide better access to more manageable interest rates.
6. Having a Prime Credit Score
We have a love-hate relationship with the credit score. While it can be a great tool to gain access to capital, it can become a barrier to financial wellness when individuals have trouble establishing or improving credit. Therefore, empowering yourself to understand the credit score and use it to your advantage is key to financial health.
Your credit score is a central part of your financial profile, no matter your feelings on it. It helps lenders determine whether to lend you money and at what interest rate. Your score considers information from your credit report, including your payment history, credit utilization, credit history, and types of credit.
You can request a free copy from these three credit reporting agencies:
Your credit history is important not just for getting loans. Other companies also use it when making decisions about your insurance premiums and even deciding whether to give you a job or rent an apartment.
Your score can range anywhere from 300 (the lowest) to 850 (the highest). A prime credit score is usually considered 700 or higher.
Anything lower than that may make it harder to be approved for certain types of credit, such as auto loans or mortgages. In addition, it may result in higher interest rates on the loans that you do get approved for.
BrightUp Tip: A financial coach can help you better understand your credit score and create an action plan to work toward a prime credit score.
7. Having Appropriate Insurance
The Financial Health Network suggests that having the right type and extent of insurance coverage is another indicator of financial health. That’s because having appropriate insurance helps an individual be more resilient in the face of costly unexpected expenses, such as the death of your partner or a major medical emergency.
Types of insurance to consider:
- Health Insurance
- Renter/Homeowner Insurance
- Car Insurance
- Life Insurance
- Short or long-term disability insurance
Health and car insurance are two of the more popular types of insurance. Some states even require car insurance to own a registered vehicle. Along with health and car insurance, renter or homeowner insurance are all great ways to protect yourself from a sudden financial disaster.
Life insurance and disability insurance are great ways to protect your family should something happen to you. For example, life insurance will help your family cover the costs of funerals and unpaid debts. In addition, short or long-term disability insurance will provide your family with the financial buffer they need if you’re forced to stop working.
BrightUp Tip: Many insurance companies bundle different types of insurance for a lower cost. Shop around to make sure you get the right amount of coverage for a reasonable price.
8. Planning Ahead Financially
The ability to plan ahead financially will allow you to make better decisions about your money.
The first step in planning is to think about your goals. That may sound easy, but it’s not as simple as you might think. Plans are more powerful when they are specific and measurable — so having a goal like “getting out of debt” may not be as helpful as you’d think. Instead, set a goal like “pay off credit card balance within the next 18 months”.
Let’s discuss different ways you can think about your goals.
Long-term vs. short-term. When you’re young, you can afford to think long-term because you have so much time ahead of you. But as you get older and time becomes more limited, the focus shifts to short-term goals.
Practicality vs. aspirations. No one can fault you for having big dreams, but it’s important to distinguish between what you want and what is feasible. For example, if your goal is to own a home with a swimming pool and a tennis court, it’s essential to know how much you’d need to earn to afford that.
Security vs. risk. Some goals are about safety — paying off debt or building up an emergency fund — while others involve risk, such as investing in the stock market or starting your own business. When deciding how much money to allocate toward each type of goal, consider how comfortable you are with risk and uncertainty.
Wants vs. needs. This is another area where people often need help distinguishing between what they want and what is truly important for their finances. It’s important first to make sure you’re covering your basic human needs like food, water, and shelter. Then, once you’re financially stable in those areas, you can begin to consider wants.
BrightUp Tip: If you are feeling overwhelmed by the idea of financial planning, BrightUp has tools that can help. The BrightUp App can help you track your finances and analyze cash flow patterns. With this information, you can work with a financial coach to forecast your financial obligations and start building your wealth!
Don’t Forget Your Money Mindset!
One less common element of financial health is connected to your mental health! Your money mindset can be a significant indicator of your overall financial health. If you have an unhealthy relationship with money, it can be challenging to build positive financial habits.
You can change your mindset about money to improve your financial health. The key is understanding why you think about money the way you do and then taking steps to change that thinking. It turns out that mindfulness — a type of meditation technique — can help us make better decisions with our money.
Here are three ways to improve your financial health through mindfulness:
- Become aware of what your mind tells you about money. Many of us have negative feelings or thoughts when it comes to money. Try to notice them when they come up, without judgment.
- Find out where these beliefs come from. Money and our feelings can be linked to a past experience or event. Maybe you saw your parents arguing over finances when you were young, or perhaps you didn’t get everything you wanted as a child. Now, you’re trying hard to make up for it with purchases as an adult. Understanding where your beliefs about money come from can help you change how you think about it.
- Realize that feeling stressed isn’t productive. For example, if you feel anxious about saving or investing, stop and recognize that those negative emotions aren’t serving you. Instead, take deep breaths until your body feels more regulated before taking the next step.
When you’re confident about your finances, you can relax and enjoy life more fully. You can focus on what you want and make progress toward building wealth and achieving other important goals in your life.
A positive mindset doesn’t mean that nothing bad happens or that there aren’t any challenges to deal with; it just means that you approach those challenges in a positive way instead of getting overwhelmed.
Remember Your Value
Our last piece of advice: remember your value. Remember that your value as a person is not tied to the amount of money you have in your bank account nor the amount of money you’ve borrowed. Instead, you bring enough value to the world by simply existing.
Now, we’ve discussed the 8 dimensions of financial health and have linked to resources that should help you get a grip on them. From improving your credit score to paying off debt, understanding the 8 dimensions of financial health is an important first step towards your overall financial well-being.
To take the next step, share BrightUp with your employer! As an emotionally intelligent financial wellness benefits provider, we help workers and their loved ones grow their net-worth and improve their self-worth. We offer a full suite of services that have been designed to help employees improve their financial health through financial education, financial planning tools, financial coaching, and more.
A BrightUp Rep is ready to answer any questions your company may have! Submit the inquiry form on our contact page, and a BrightUp Rep will be in touch shortly.
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