Financial Health: Definition And Tips To Improve Your Own

Money is an important part of our lives, so it pays (literally) to get it right. Having sound financial health can help you achieve many goals, whether it’s to go on a vacation with your family, buy a home or have enough money for retirement.

What Is Financial Health?

Financial health is a term used to evaluate the current state of your personal finances. It measures the amount of money you spend, save, borrow and invest. Sound financial health means you feel financially secure and prepared to cover any future expenses.

Signs you have good financial health include:

• You follow a budget
• You don’t have debt, or you make regular debt payments on time and in full
• You save for retirement
• You have a robust emergency fund

Indicators To Measure Your Financial Health

There are several different ways to measure your financial health, including income, credit score and net worth.

Personal Or Household Income

The more income you have individually or within your household, the more financially sound you tend to be. In other words, more income can help you reach your financial goals and be able to afford the necessities. Some ways people tend to boost their income include searching for a job that pays more or taking on a side hustle.

Credit Score

Your credit score is an indicator of your borrowing behavior. The higher your score, the more it appears to lenders you are responsible with loans. Meaning, lenders are more willing to approve you for debt and at more competitive interest rates. If you plan on taking on new debt, it’s a smart idea to take steps to improve your credit score.

Debt-To-Income Ratio (DTI)

Your debt-to-income ratio, or DTI, measures the percentage of income you use toward debt. To calculate your DTI, divide your total monthly debt payments by your gross monthly income. The lower the DTI, the less likely you are dependent on debt. It also means you’re not stretched too thin financially. Ways to lower your DTI include paying down existing debt and not taking out new loans or increasing your income.

Net Worth

Your net worth is your financial assets (what you own), minus your financial liabilities (what you owe). It offers a snapshot of your financial stability – the more assets you have, the more financial cushion you have. As in, the more likely you’ll be able to carry yourself through unemployment or be able to afford to retire, among other financial goals.

You can calculate your net worth manually or use tools like the Rocket Money^℠ app to track and grow your net worth.

Retirement Savings

Having enough retirement savings allows you to live out your golden years comfortably. Otherwise, you may have to work longer or live a much lower standard of living. You can start saving for retirement by opening accounts such as a 401(k) or individual retirement account (IRA).

Emergency Savings

An emergency fund is money you set aside in savings you can access when you experience unexpected emergencies, such as a surprise medical bill or when you need repairs after a car accident. Most experts recommend having at least 3 – 6 months’ worth of expenses set aside in an emergency fund. The more you have set aside, the less likely you’ll need to rely on debt to pay for emergencies.

5 Ways To Improve Your Financial Health

There are many best practices to improve your financial situation, including automating your finances, paying down debt and investing for retirement.

1. Use A Budgeting Technique

Creating and sticking to a budget fit for you can help improve your financial health because you’ll better understand where your money goes. It can also help you to identify areas where you can improve, such as ways to spend less and put money toward other financial goals like debt. Since creating a personal budget depends on how you best handle money, consider trying out common budgeting strategies to land on the right fit.

Some of these budgeting methods include:

• 50/30/20 rule: This is where you allocate 50% of your income to spending on necessities, 30% on wants (like entertainment costs) and the remaining 20% on savings and debt payments.
• Half-payment method: The half-payment method is where you divide your current monthly bills in half and set aside this amount each time you get paid (biweekly or bimonthly). That way, by the time each monthly due date rolls around, you'll have enough to pay your bills.
• Cash envelope system: The cash envelope system involves using cash divided into physical or digital envelopes. These envelopes are spending categories and you take money out as you spend it, and you have to wait until the next month to refill these envelopes with money.

2. Automate Your Finances

Automating finances means scheduling payments to pay your recurring monthly bills or to go toward savings. Doing so helps to ensure your bills are paid on time, and that you’re saving consistently toward your goals.

3. Pay Off Credit Card Debt

It’s important to make timely credit card payments every month so you’re not risking late fees and other consequences like a negative impact on your credit score. While you can pay the minimum amount, you’ll be paying more in interest versus if you were to make a higher payment amount or your entire balance in full.

4. Negotiate Bill Payments

Negotiating bill payments can help you lower the amount you pay, saving money you could allocate elsewhere. Different bills you may be able to negotiate include car insurance, homeowners insurance, internet or cable.

If you’re nervous about negotiating, consider using the bill negotiation feature on the Rocket Money app. The app can also help you lower your monthly bills by scanning your bills and finding opportunities for savings.

5. Consider Short- And Long-Term Investments

Investing can help you improve your overall financial health since it can help you increase your net worth and grow wealth toward retirement. You can consider different types of short- and long-term investments such as high-yield savings accounts, brokerage accounts or employer-sponsored retirement plans.

The Bottom Line: Financial Improvement Takes Time, But It’s Worth It

Bettering your financial health will take time and effort, but the result is worth it. Think about how much better you’ll feel knowing you’ve got enough savings to weather an emergency, raise your credit score and get approved for a mortgage, or have the ability to retire. Take advantage of free tools like the Rocket Money app to help keep an eye on your finances, such as tracking your spending, net worth and more.