Financial Health Definition & Meaning
Financial health summary:
Good financial health means you have financial security and financial freedom.
Your financial health can ebb and flow as you go through life's ups and downs.
You can improve your financial health through effective money management and good financial literacy.
What Is Financial Health?
Financial health describes your ability to pay bills, manage debt, and withstand unexpected expenses. It's similar to your overall health, which describes your body's ability to maintain everyday functions and deal with sickness.
In other words, most of us have to constantly make an effort to stay financially healthy, just like we work to stay physically healthy.
Financial health can be measured in different ways, but good financial health typically means you can comfortably pay your expenses, absorb a financial shock, and meet financial goals that allow you to enjoy life.
Financial Health: A Comprehensive Breakdown
The first step in improving your financial health is getting a complete picture of your overall finances. You can do this yourself or use an online assessment tool. Either way, examine these key financial factors:
Income and expenses. Does your income meet or exceed your necessary expenses?
Debt-to-income ratio. Do you have expensive high-interest debt that takes up a lot of your income?
Emergency savings. Could you handle an unexpected financial emergency without going into debt?
Long-term savings and investments. Are you saving for retirement and growing your wealth?
Total net worth. Is your total net worth positive and in line with your financial goals?
Wants and needs. Do you feel financially secure and able to purchase things that improve your quality of life?
Your financial health could change as your life evolves, so it's a good idea to reassess your financial health at least once a year or after any big event like a marriage or divorce, large purchase or new job.
You're not stuck with poor financial health just because you've had some bumps in the road. Like diet and exercise for your physical fitness, you can do quite a few things to help improve your financial health.
Build a budget
The first step in getting a good grip on your finances is to build a budget that includes all your income and expenses. A budget shows you where your money is going and how you can manage it to better meet your financial goals.
Pay off debt
A root financial health problem for many people is debt, especially expensive, high-interest debt like credit cards. Paying off that debt can go a long way toward improving your financial health.
Set up an emergency fund
Having an emergency fund helps you handle unexpected expenses without taking on debt, which could give you a bit of financial security and peace of mind.
Increase your financial literacy
We often make mistakes simply because we don't know any better. Take advantage of reputable resources to learn about money management, using credit and building wealth so you can make smart financial choices that lead to better financial health for the future.
Financial Health FAQs
Yes, if you’re willing to do the research to find it.
Contact a nonprofit credit and debt counselor through NFCC. They can evaluate your situation to determine whether you’re eligible for a debt management plan. With this method, you pay the counseling organization monthly. The counseling agency distributes the money among your creditors. The agency charges a small fee but you could apply for a fee waiver if you have a hardship.
Find an Accredited Financial Counselor through the AFCPE®. Some are willing to offer pro bono (free) counseling.
Check with your bank or credit union to find out if they offer free financial education or counseling to their customers.
Trying to do it by yourself. Don't let negative emotions or shame cause you to avoid getting help. Help is available. Get a free debt evaluation today from Freedom Debt Relief to find out if you’re a candidate for debt forgiveness.
Living without a budget. You need to be clear about the money coming in and the money going out. With a budget, you make an informed choice about every dollar you spend. Without a budget, you're stuck with guesswork.
Using credit cards. If you keep using your credit cards, repaying your debt could take longer. The best plan is to avoid any new charges, except in true emergencies.
First, stop spending more than you earn and increase your balances.
Second, look for ways to pay down your balances faster:
Consolidate debts to a lower interest rate.
Request an interest rate reduction and put more into reducing your balance.
Take on more hours at work or a side gig to earn more.
Sell unused things and use them to reduce your balances.
Take a look at your budget and focus on ways to spend less, like canceling services you don’t need and finding cheaper options for those you do.
Choose one or more “wants” to give up until your debt is paid off or your DTI reaches a target. Put the savings toward your debt.
Related Articles
A lower debt-to-income ratio could make it easier to qualify for loans and manage your bills. Here’s how to reduce yours.
A budget, an emergency fund, and healthy credit habits all shape your financial health. Get simple steps to build good habits today.
Save $500 to $1,000 to start, then grow from there. Learn how to build an emergency fund step by step, even on a tight budget.
A lower debt-to-income ratio could make it easier to qualify for loans and manage your bills. Here’s how to reduce yours.
A budget, an emergency fund, and healthy credit habits all shape your financial health. Get simple steps to build good habits today.
Save $500 to $1,000 to start, then grow from there. Learn how to build an emergency fund step by step, even on a tight budget.