Financial Health

Financial health summary:

• Financial health refers to the overall state of your financial situation.

• Debt levels, savings and investments, insurance coverage, and financial goals can all impact your overall financial health.

• No matter your current financial health, you can take steps to improve or maintain it.

Financial health definition and meaning

Financial health is an expression of your entire financial situation. Your finances don't have to be perfect to enjoy good financial health. 

For example, you may not have enough in an emergency savings account (yet!) to cover three to six months' worth of bills, but you’re managing your finances well enough in other areas. You could be financially healthy even if you haven’t hit all your targets yet. As you strive for financial health, you work toward achieving certain benchmarks, such as saving for retirement, minimizing debt, and building a strong credit history.

Key concept: Financial health is a measure of your overall financial condition.

More about financial health

It's possible to go through all stages of financial health throughout your life, and that's a good thing. You have the chance to improve the health of your finances, even if you find yourself in a difficult spot today.

Improving your financial health typically involves:

• Creating a realistic budget that works for you

• Minimizing debt (but not necessarily overnight)

• Saving and investing for the future

• Planning for short-term and long-term financial goals

Once you develop a plan to improve or maintain good financial health, you can tweak it as often as necessary. 

Financial health: a comprehensive breakdown

As long as you have an idea of what you want to accomplish and you’re working toward those goals, you can watch your financial situation improve month by month.

Here are some of the key factors that make up financial health:

• Income: Even if you don't earn a small fortune, a regular, dependable income could help you build a secure financial base.

• Expenses: Have you ever heard of a wealthy celebrity going broke? Those stories remind us that the amount of money you have is less important than how you use it. No matter how much you earn, living below your means by controlling expenses goes a long way toward financial health.  

• Debt: By the same token, controlling debt is vital for anyone working on their financial health. That means paying down high-interest debt and being cautious with any new financial obligations.

• Savings: You don't have to put huge chunks of money away, but by steadily saving, you could build the funds you need to cover short-term goals (like taking a trip to the Badlands) and long-term goals (like going back to school or starting a business).

• Investments: Most of us would like to imagine a time when we have plenty of money coming in, without having to work for it. That's where investments come in. Investments not only fund your shorter-term goals, but they can also help fund your retirement. 

• Insurance: Insurance coverage—including auto, renters, and homeowners—helps protect you financially when the unexpected happens. And the unexpected happens to us all.

• Emergency fund: An emergency fund allows you to cover expenses as they arise by paying in cash rather than going into debt. For example, if your basement floods and you need someone to come in and repair the foundation, paying with money from your emergency fund means you pay interest on top of the cost of the repair. 

Financial health isn't a measure of how smart you are or how good a person you are. It's strictly a measure of how you're doing financially at this moment. If your financial situation isn't as healthy as you'd like, it's possible to improve.