There are lots of different ways to look at your personal financial situation – the balance in your checking account, your annual salary, monthly expenses, the value of your home, net worth, etc.
But how do you really know where you stand financially when so many numbers are out there?
Gross income doesn’t give an accurate picture of whether or not you’re financially stable. And while cash flow or net worth provides some insight into your financial situation, they don’t paint the complete picture.
There isn’t one definitive way to measure an individual’s financial situation. But these, and some other general indicators, can help you figure out whether you’re doing okay financially.
Like Your Physical Health, Your Fiscal Health is Important
Your financial health is essential because it affects everything else. If you’re not financially healthy, you won’t be able to pay bills, save money, invest wisely, or take care of yourself.
And if you’re not taking care of yourself, you’ll eventually suffer physically, emotionally, mentally, and spiritually.
Good financial health can be defined as having enough money or income sources to meet all your basic needs (food, shelter, clothing), debt obligations, and some discretionary spending while also saving and investing for future financial goals.
It also means having a good credit score and an emergency fund available to cover unexpected expenses from a car accident or serious medical condition or in the event of a job loss.
Signs of Good Financial Health
There’s no single amount of money at which someone is considered financially secure. Still, those with a good understanding of their current financial position and long-term goals are usually better off than others.
You’re in good financial shape when:
1. You Know Where Your Money Is
There isn’t just one right way to keep track of your finances. You could create a personal finance management system using tools like Mint, Tiller or Personal Capital; you could create a budgeting spreadsheet in Excel or Google Sheets, or you could go old school and use a pencil and notebook.
You don’t need to choose one specific method for checking in on your finances. Nor does it matter how fancy your system is for understanding all your financial affairs – i.e., your income, regular expenses, debt payments, investments, retirement funds, etc.
It just needs to work for you so that you can budget for living expenses, track your spending, manage your debts, save for your financial goals, and keep an eye on your savings and investment account balances.
You must ensure your money meets your current financial needs while building up wealth for the future. And to know if your savings and investments will pay off, you need to keep an eye on how they’re doing.
2. You Plan for Tomorrow
Those with sound financial health spend time thinking about the future – planning and saving for big purchases, potential emergencies, and retirement.
Some even write a financial mission statement to give themselves greater direction and focus.
If you’re setting up short-term savings goals and long-term investment targets, you’re doing things correctly.
To help stay future-focused, you can:
- Create a financial plan with 3, 5, 10, and 20-year goals.
- Ensure your future goals are not only SMART but also based on your core values
- Maintain a sufficient emergency fund (6-12 months of expenses)
- Save up for something like a vacation or home repair by setting aside money instead of using high-interest credit
- Increase contributions to your retirement account up to maximum annual limits
- Invest for long-term wealth outside of your 401(k) and IRAs through a brokerage account or by investing in real estate
You don’t need to do all these things at once, but small steps forward are essential.
3. You Keep Learning
Those with sound financial health realize that you can never really be sure about anything, so you must stay diligent.
Still, you don’t need to be an expert at money management to have a financially secure future; you just need to stay informed and increase your knowledge over time.
You could also schedule an appointment with a Certified Financial Planner to address any concerns you have about your financial future.
4. You Find Balance
Some people sacrifice today to save for tomorrow, and some live for today like there will be no tomorrow.
Both types of people spend or save in ways that can cause emotional stress or financial strain.
If you’re always thinking about money for the future, you’re probably not living your best life today. And spending money as fast (or faster) then it comes in will leave you with little to no financial security for your later years.
Financially healthy people figure out the right balance between enjoying life now and setting themselves up to play later.
When you understand that personal finance is not about money and numbers alone but also involves emotions and psychology, you can find the happy medium between meeting today’s needs and wants with those of tomorrow.
A values based approach to spending and saving/investing for financial goals is key.
Financial health is much like physical health, both are equally important, and neither should be ignored.
If your financial health is good today, work to keep it that way by continuing to monitor your numbers, planning and adjusting goals for your future, learning more, and maintaining balance.
If you’re not feeling healthy financially, don’t despair, as it’s never too late to take control of your finances and improve your overall well-being.
Start today by taking stock of where you stand financially and understanding your spending patterns. Then work toward making better financial decisions and creating positive financial habits to build a solid foundation of healthy finances.