Financial Health: What It Is and Why It’s Important

Financial Health: What It Is and Why It’s Important

Are your finances healthy? When was the last time you did a personal finance health checkup? What does financial health even mean?

Just like physical and mental health, your finances require ongoing care.

Keep reading to learn more about financial health and get some tips on making your finances healthier.

What is Financial Health?

Your financial health is simply the current state of your finances. This includes all aspects of your money—from income and investments to credit and savings.

You can think of your financial health as similar to your physical health.

Let’s say your body is in an overall healthy condition. You eat a balanced diet, focus on self-care and stay active. A healthy financial situation might mean you balance your spending, maintain healthy savings and actively pay off debt.

Now let’s say you’re having trouble sleeping because of stress. You remedy this by watching your daily anxiety levels and taking time to meditate.

In a financial example, you might be in debt because of overspending. You get out of debt by cutting unnecessary spending and paying more than the minimum on your debt.

Why is Financial Health Important?

Maintaining a healthy financial lifestyle is just as important as maintaining your physical or mental health. In fact, your financial situation can actually affect your physical and mental health, as well.

When you have good financial well-being, you have financial security. With financial security comes lower stress. By lowering your stress related to money, you reduce your chance of having physical or mental problems related to stress.

5 Tips for Improving Your Financial Wellness

Want to improve your overall financial health, but not sure where to start? Follow these tips for improving your financial wellness.

1. Get a Financial Checkup

You go to the doctor for a health checkup. You can do the same for your finances and you don’t even need health insurance or a special finance doctor.

To get an idea of your current financial wellbeing, ask yourself these questions:

• Do I have at least three months of living expenses in a savings account?
• How much debt do I have? Am I on track to pay it off? Do I know my due dates and minimum payments?
• Do I have realistic financial goals?
• Am I spending more than I earn?
• Is my credit report accurate? Am I happy with my credit score?
• Am I planning for the future with retirement or education savings?

2. Set Financial Goals

Setting goals in your financial life is an important part of financial planning. Realistic, achievable goals help keep you motivated to pay off debt and save more money. Plan to set both short-term and long-term financial goals for yourself.

Short-Term Goals

Your short-term money goals should be achievable within approximately six months to one year. Reaching these smaller goals is a great way to feel rewarded as you work toward longer goals.

Some short-term goal examples include:

• Building an emergency fund
• Opening necessary accounts at a financial institution, such as a new bank account
• Improving cash flow by reducing spending
• Saving for a goal, such as a vacation or a new cell phone

Long-Term Goals

Long-term financial goals generally require more commitment to reach than short-term goals. They’re usually big-picture ideas of your long-term financial future.

For example, your long-term goals might include:

• Maximizing retirement accounts
• Improving credit score and eligibility for new credit accounts
• Saving for home ownership
• Retirement planning such as funding IRAs or a 401(k)

3. Create a Budget

A budget is an important financial tool. It helps you see where your money’s going each month. This can help you decide where to cut expenses or whether you’re on track with your savings goals.

To make a budget, simply add up all of your income and expenses. Subtract your income from your expenses. This shows you if you’re spending more than you earn.

Once you know how much you’re spending each month, you can go into your expenses and make adjustments. Maybe you want to increase the amount you put toward savings, so you cancel a streaming service you rarely use.

Possible Tip: Budgets don’t have to be rigid. You should plan to reevaluate your budget every couple of months to make sure it still works for you.

4. Save for Emergencies

A big part of financial resilience is having cash to cover emergency expenses. If you have a health emergency fund, you won’t be blindsided by a sudden medical bill or car repair.

Most experts recommend saving at least three months of living expenses, but having six months is even better. Depending on your job or lifestyle, you may want to save even more.

For example, you work a job with seasonal highs and lows like lawn care. You may want to save closer to nine months of living expenses in case an emergency happens in the winter when work is slow.

That leaves enough leftover in your emergency fund for a second unexpected expense until work picks back up in the summer.

5. Make a Plan for Debt

Whether you have student loans, credit card debt or medical debt, it’s a smart idea to make a repayment plan.

Start by listing out all of your debt, including the minimum debt payment, balance owed and interest rate. Seeing your debt in one place can make it more manageable—and help you stay on top of payments.

There are several methods to help you pay off debt, such as the debt avalanche or debt snowball methods:

• The avalanche method focuses on paying off debts with higher interest rates first. You allocate any extra funds you have to your account with the highest interest rate. Once it’s paid off, you move on to the second-highest interest rate.
• A debt snowball works by paying off debts with the smallest balances first. You’ll feel good about getting rid of a debt, which encourages you to keep going. After paying off the smallest balance, you’ll work your way up.

Just be sure to make at least the minimum payments on all of your other debt to stay current and avoid late fees.

Healthy Finances: A Marathon, Not a Sprint

Remember, everyone makes mistakes. No one can be perfectly healthy all of the time—whether it’s financially, mentally, or physically.

If you get off track, step back and determine what financial decisions will help you get back into financial shape.

You can’t completely fix your financial health overnight. Creating healthy financial habits and sticking to them is the best way to reach your financial goals and live a financially healthy life.

Published at Mon, 27 Jun 2022 19:44:00 -0500

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By ZSP Nr 2 on 2022-06-20 17:21:26