How to Measure Your Financial Health

Trisha Miller
Measuring Your Financial Health

Looking at your monthly bank statement each month might not give you a lot of insight into your actual financial well being. Simply having a steady income does not necessarily make you financially healthy, although it puts you one step closer. Why is it important to strive for financial “health,” and what does financial health even mean?

Financially healthy individuals are prepared for any financial situation that comes their way. They have money in the bank, assets saved for the future, up to date lines of credit, and a reliably high credit score. More than that, they know what their level of risk is, how much they owe, and what they can afford not just in cash, but in strategic debt as well. Essentially, they have all of their ducks in a row in order to make their financial dreams come true. Let’s go over the four main ways to measure and improve your financial health.

Table of Contents

Smart Saving, Spending, & Budgeting

Most of us know that putting away a part of our income into a savings account is a good idea. However, do you know what you’re saving for, or exactly why you should be doing it? Smart saving, or saving with a purpose, is much more productive to your financial health than saving just because you think you should. The goal in achieving financial health is to secure a comfortable position in all financial areas of your life. Let’s look at how to start on the path to smart saving.

Do What You Can Handle

The amount you save is completely up to you. If you feel that your money is tight right now, just do what you can without making things too difficult on yourself. If you find yourself spending all of your cash on non-essentials, it’s time to start putting that money to good use. A great starter goal is about ten percent of every paycheck. If you can do more than that, I definitely suggest doing it, but any savings plan starts with a budget. Once you know how much you have to spend every month, you can start to look for ways to cut spending, increase saving, and critically looking at your money habits.

Start Matching Your Income

First things first, a great initial savings goal is to match six months’ worth of your income into your savings account. Take a look at your paychecks and work towards saving about half a year (or more if you feel able and so inclined) of income into your account. Planning a monthly budget that fits your needs will help you to meet this goal. As you’re examining your paychecks and your bank statement, you’ll be able to see where you could possibly cut back on spending here and there. Once you have a monthly budget goal, you can start optimizing your saving and plan to save about six months worth of income. This would, of course, be helpful if for some reason you suddenly became unemployed, but it can also help you to form smart savings habits and save for important purchases down the road.

Having Savings Goals & Working Toward Them

Save for a Down Payment

Starting lifelong smart savings habits now is essential to living and spending in a financially healthy way. Imagine never having to worry about a small gap in paychecks or changing jobs. What’s more, if you save in this manner, you’ll always be prepared with a down payment when/if you decide to make a large purchase, like a car or even a new home. When you take some money out, you don’t have to stress, because you’ve already formed smart saving habits and are continuously putting money back into your account.

Planning for Retirement

In the same vein as a smart savings account, is your retirement fund. If you don’t have a 401k or other type of retirement plan going already, get to it! Take advantage of any retirement fund that your employer offers. If you decide against a company retirement plan, you’re giving away your chance to have some free money. Most employers will match your contributions to your retirement fund up until a certain percentage. For example, if you decide to drop five percent of your paycheck into your account, your employer may also add in five percent or their cutoff might be a little lower, like two or three percent matching. Either way, they’re giving you some free money, so you should definitely take it.

Depending on your age, your rates at which you can contribute to your retirement fund may increase. It’s important to be cognizant of what your contribution limits are and if you’re exploring your full retirement saving potential. For another example, you might be capped out at contributing five percent of your paycheck, or you might be able to go up to ten percent or more if you’re getting a little bit closer to retirement age. No matter what your limit is, my suggestion to you is to get as close to capping out that limit as you possibly can without stretching your finances too thinly.

Knowing Your Credit Score & How to Maintain It

Having a solid credit score is the basis for acquiring significant assets in the future. If you have a solid income, but a less than ideal credit score, you’re still going to have a hard time getting approved for a loan when you really need it. Remember that having a good credit score isn’t everything. You should be measuring all aspects that we are talking about here in order to be completely financially healthy. Chances are, if you’re confident in your smart spending, smart saving, and strategic debt, your credit score will just fall into place. Your goal should be to be able to apply for a new line of credit when you feel that you’ve reached that milestone in your life. For example, if you’ve rented an apartment for years, you’ve saved up, and you’re ready to take plunge and buy a home, your credit score should be there to back you up.

How to Know if You Have a Good Credit Score

Luckily, many facets of financial health go hand in hand. Having open lines of credit means that you do have a credit score, period. If you’re not certain of your current credit score, you can check it for free with each of the three credit bureaus once per year. Now, if you know the current status of each of those loans and you’re able to keep track of the balance and make all of the payments on time, you should be able to confidently say that your credit score is doing pretty well. However, if you’ve had a few late payments or other credit mistakes, you might know that it could take some time, hard work, and patience to get your credit score back where it needs to be.

How to Apply Good Credit Score Knowledge to Your Finances

The great thing about understanding how a credit score works, is that you can apply these same principles to the rest of your financial well being. Making payments on time, keeping your balance low, smart saving, and keeping your finances manageable all work together. Thinking about your credit score in a healthy way means that you’re taking a detailed look at each area of your financial health. You understand where you’re at, where you can make improvements, and what your goals are for the future.

For more information on your credit score, how to improve it, and what to do with it, visit our credit score resource and learning center.

Understanding Debt & How to Use It Safely

As I said before, most of us already know that saving in general and for retirement is something that all of us need to do. However, it’s important to emphasize it, just in case your smart savings plan or retirement fund needs a bit of a refresher. Every now and then it’s good to take a look at your current status and see if it needs revamping. We all get a bit off track sometimes. It’s completely natural, which is why it’s important to continuously check in with your financial health.

Loans and Debt are Not Bad Words

The next piece of the financially healthy pie has to do with your loans. Loans and debt often sound scary to many of us. They sound like something we don’t want and something that can be holding us back from increasing assets and overall wealth. In reality, though, that’s not true. Having strategic debt is imperative to creating a solid credit score from the ground up. If the credit bureaus see that you’re able to handle all of your current lines of credit, your credit score probably looks pretty good.

When Does Something Become a Liability?

In addition, let’s talk about what credit cards mean to you. Credit cards are a wonderful way to build up your credit score, but can quickly turn into a liability if they’re used incorrectly. Maxed out credit cards, late payments on credit cards, and too many credit cards to keep track of does not look good for your financial health. Credit cards should be there to work for you and should offer support if you need to use them sparingly. Your balance should always stay low and be a manageable amount that never feels like a liability to you.

Investments Should Benefit You For a Long Time

Similarly, everything that you buy (like a car or home) with loans is now an asset. You own that property and can use it as leverage for the future in whatever way you’d like. You may decide to sell your assets later on or keep them with you and start a new venture. Either way, they’re worth something and as long as you are paying them off on time, these items can be viewed as assets. They only become a liability when you get in over your head. If you’ve collected more debt than you can handle and your payments are coming in late, your assets have turned into liabilities that are simply holding back your financial health. Remember, your plan should be to build strategic debt. In that case, it’s time to put a hold on any new loans and work solely on getting your assets in order.

When we talk about being financially healthy, we’re referring to all of these aspects of your financial identity. You have a collection of assets at your disposal and it’s completely up to you how you choose to treat your finances. If you have a few prickly areas within your financial profile, now is a great time to start working on turning liabilities into more assets. Keep in mind, that everyone’s financial goals will differ and that’s why it’s important for you to sit down and make your own plans within each of these sections. Don’t be discouraged if your financial health isn’t quite at 100 percent, these types of things take time. However, if you set a plan and stick to it, your financial health can only go up from here.

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