Examining financial health means getting a measure of someone’s current financial situation. Beyond looking at just one aspect of their finances, financial health can mean assessing overall financial stability and looking at their complete financial picture.
So, what are some key indicators to observe in determining financial health? Let’s look at a few:
A primary factor in determining eligibility for credit cards, loans, and more, the credit score is perhaps the most commonly-cited indicator of personal financial health. Credit scores range from 300 to 850 and are based on a consumer’s credit history, which includes their borrowing history, level of debt, frequency of on-time payments, and more. Credit scores are taken by lenders as an indicator of creditworthiness and can affect someone’s ability to borrow money. These scores are an excellent way to gauge personal credit use and are key to securing loans at lower rates.
Retirement accounts and investments
Credit scores are not the only thing worth looking at when assessing one’s financial health. Financially healthy households often try to plan for the future. They may do this through having solid investments, including retirement accounts. Whether someone can contribute a little or a lot to their retirement accounts, it still indicates they are saving for the future.
Simple and immediate, calculating net worth is one of the quickest ways to get a picture of a household’s finances—just add up any assets and subtract any debts. The resulting number (yes, it can be negative) offers an intuitive glance at one’s financial health, particularly when tracked over time: falling net worth can be cause for concern, while rising net worth can be good. As important as it is, net worth does not show everything. A household’s net worth will not necessarily show the growth of its assets and debts (especially when they grow at the same rate), and should therefore be examined along with these other factors.
Level of debt
Debt, while not always a bad thing, can affect the trajectory of a household’s finances. Similarly, people who manage debt well are often more resilient in the face of economic uncertainty, and tend to have more flexibility when it comes to obtaining credit. Growing or shrinking debt balances can serve as important barometers for measuring financial health. It can also be helpful for households to look at their debt-to-income ratio, or the percentage of a household’s gross monthly income that goes toward debts.
Having an emergency fund, or a sum of money saved to deal with any unexpected events, can be an indicator of financial health. The presence of an emergency fund indicates a greater ability to cope with unanticipated challenges as well as the ability to save. Additionally, just knowing they have a financial cushion can often provide individuals with peace of mind.
Having enough cash in the bank to finance recurring and predictable expenses can be a good gauge of financial health. Having the funds to pay monthly fixed expenses indicates an ability to anticipate costs and budget accurately.
There are several indicators of financial health, including credit score, cash savings, net worth, and retirement planning. Even for individuals who haven’t checked all these boxes, it’s never too late to get on track. What’s important is having a financial goal, staying flexible, and continuing to plan for the future.
Source: Northwestern Mutual
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