What is Financial Health?

Your Financial Health refers to the soundness of your finances. In other words, what kind of financial shape you are in overall.

If you are in good financial health, you are thriving financially. It is a comprehensive measure that includes understanding how well you are managing your economic life.

Good financial health is not simply a question of having wealth; it is about managing and utilizing the money you have efficiently and wisely. It measures your ability to withstand or handle financial stressors and reach your short-, medium-, and long-term financial goals.

The Corporate Financial Institute says the following about the term “financial health”:

“Financial health is a basic measure of the soundness of an individual’s finances – essentially, it’s about what kind of financial shape you’re in overall. You may also view it as a reflection of your level of financial security.”

Financial health and balance

Essentially, financial health is about balance. It encompasses your income, expenses, debt, savings, and investments. It is also about having financial literacy, that is, understanding how money works in your life, being capable of making informed and effective decisions with all of your financial resources.

If you have good financial health, you manage these elements to ensure that you are spending within your means, that is, not spending more than you earn. You can handle unforeseen expenses, are not overburdened by debt, and are saving for future needs.

Showing the elements that encompass financial health plus its definition.
Image created by Market Business News.
  • Income vs. Expenses

If your income exceeds your expenses, you have a positive cash flow. Positive cash flow is a primary indicator of financial health.

With your surplus, you can save or invest. People who are healthy financially have a cushion to protect them against unexpected events, such as job loss, medical emergencies, and major home repairs.

  • Debt Management

Most of us have to borrow money, it is often unavoidable. Managing debt properly is a crucial part of financial health. Apart of keeping debt levels manageable, you must also understand the cost of borrowing and prioritizing the repayment of high-interest debts.

  • Emergency Fund

An emergency fund is a dedicated amount of money that is easily accessible for emergencies. If a financial surprise emerges, you can cover the costs without needing to incur debt.

Saving wisely means regularly setting aside money for future goals such as retirement. Investing means getting your money to work for you – growing your wealth over time. Financially healthy people strive to build up their savings and investments.

  • Understanding Your Financial Picture

Financial health means knowing about and understanding your financial situation. You should be regularly checking your account balances and tracking your spending. You should also know what your credit score is and what can boost and harm it.

  • Financial Planning

Do you set short- and long-term financial goals and create a plan to achieve them? People who enjoy financial health are proactive in managing their financial future.

Financial health of companies and countries

  • Companies

We can also use the term to describe the state of finances of a company. When applied to businesses, it involves examining key factors such as liquidity, solvency, profitability, operational efficiency, and capacity for growth.

  • Countries

For countries, financial health is assessed through such indicators as GDP growth rates, national debt levels, credit rating, fiscal policies, unemployment rates, and the ability to finance operations and meet obligations.