Financial health describes the state of a person’s personal financial situation. Its dimensions include savings, retirement planning, and the income spent on fixed or non-discretionary expenses. 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.

Though financial experts have designed guidelines for each indicator of financial health, the situation differs with each individual. It is recommended that each individual develops his own financial plan to ensure that his life goals are achieved.

Understanding Financial Health

Although financial professionals have developed basic standards for each sign of financial wellness, each individual’s situation is unique. As a result, it’s important to take the time to create your own financial plan to ensure that you’re on track to meet your objectives and that you’re not putting yourself in too much financial danger if something unexpected happens.

Steps to take to improve your Financial Health

Step 1 – Recognize your existing financial situation:

Your net worth is a basic indicator of your financial health. It’s just the sum of all your assets (cash on hand, savings, investments, car, property, and so on) less the money you owe (such as your mortgage loan and total credit card debt).

Calculate your current net worth by adding and subtracting. Then, year after year, set a goal for yourself to enhance your net worth.

Step 2 – Create a Budget to Manage your Finances

Living without a budget for your finances and hoping to achieve good financial health is kind of like hoping to arrive at a far-off, desired destination without a map. In other words, it’s not likely that you’ll get where you want to go.

Step 3 – Plan for Your Financial Future

Perhaps the biggest step you can take toward significantly improving your financial health is that of establishing financial goals and creating a financial plan to achieve them.

It’s a good idea to consult a financial advisor to help you with handling this aspect of your financial life, but if that sounds too expensive, you can usually get affordable basic financial advice, which are now commonly available through investment firms or from your personal banker.

Measure your Financial Health

To get a better grasp of your financial health, it might help to ask yourself a few key questions—consider this a self-assessment of your financial health:

  1. How prepared are you for unexpected events? Do you have an emergency fund?
  2. What is your net worth? Is it positive or negative?
  3. Do you have the things you need in life? How about the things you want?
  4. What percent of your debt would you consider high interest, such as credit cards? Is it more than 50%?
  5. Are you actively saving for retirement? Do you feel you’re on track to meet your long-term goal? 
  6. Do you have enough insurance coverage whether it is health or life?

How to Determining Financial Health?

  1. Savings and overall net worth sum up to state the money at their disposal for current or future use.
  2. Debt, such as credit cards, mortgages, and student loans, affect the money at hand for future use.
  3. Financial health is not static and varies based on an individual’s liquidity and assets.
  4. Fluctuation in the price of goods and services also affects the financial health.
  5. Strong financial health can be proclaimed with a steady flow of income, rare variation in expenses, definitive returns on investments, and a growing cash balance.

Rules and Tips for Financial Health

Here are a few quick rules and tips that you can follow to either improve or keep you in good financial health.

9 Habits to Help Ensure Financial Health In 2021

1. Make a Budget and stick to it

It may seem tedious but you will thank yourself later. There is power in knowing your financial standing rather than being in the dark with your incoming and outgoing finances. Try not to over-complicate it and you’ll have yourself a pretty good monthly budget that covers your groceries, bills, debt repayments and a little buffer allowance for any emergency payments as well. As long as you balance your incoming with 90% outgoing expenses and 10% for savings, you’ll be on track for a healthy spending routine.

2. Save Money

The most straightforward strategy to save money is to spend less than you make, which is easier said than done. Here’s how to get started:

3. Create an Emergency Fund

As life is unpredictable and emergencies can occur without warning. In order to be financially prepared for emergencies, you must create an adequately large emergency fund. The size of this fund should be between 9 to 12 months’ expenses and you should make a habit of adding to the emergency fund as your monthly expenses and financial responsibilities increase over time.

The emergency fund not only creates a safety net but also ensures your long-term financial goals don’t get compromised. Here is how. Since you have enough money to take care of an emergency, you won’t have to redeem your investments you are making for your long-term goals. An emergency fund ensures the compounding journey of your investments doesn’t get derailed by life’s uncertainties.

4. Keep Tabs on Your Spending

Think of your early years of handling money: the time you started your career and kept a close watch on your spending habits. Well, now you’re a few years in and you may have lost the habit. Here’s how you can keep things in check:  

1) If you don’t know what is essential and what isn’t, the best way to find out is by starting to track your expenses. This is a lot easier now since Indians are slowly adopting payments made electronically. Of course, don’t get obsessed about it; it’s okay to check your expenses even just once a month. 

2) If you’re having trouble doing this proactively, you can use an app. There are many that can track your expenses and send you transaction messages and emails. 

 5. Set up Automatic Savings

You can never invest too little or too late into your savings. A little goes a long way and you’ll be surprised at how much can add up over time. Once you get into a comfortable position with your finances you can start increasing the amount you stash away in your savings, soon enough it will be increasing at an exponential rate.

6. Keep track of your Credit Ratings

It’s always good to know where you stand with financial institutions. Your credit rating is an important factor when it comes to securing a new loan and establishing your trust with the loan providers. This little investigation of finding out your credit score can give you an idea about whether you need to be more proactive with paying back your debts or not.

7. Pay Off Your Debts and Loans

You can’t start fresh when you’re carrying financial luggage that’s holding you back. Like people, not all debts are created equal. A high-interest debt, like a credit card debt, is not the same as low-interest debt, like student loans: 

1) Keep a track of how much you owe at any given time and make your payments on time. 

2) If you’re in debt, always pay off the debts with the highest interest rates first. 

3) See if you have excess liquidity and clear off loans. Nothing is better than a debt-free life.

8. Be Disciplined with your Investments

While the necessity of making investments cannot be overstated, having financial discipline when investing your money is also equally important. One way to ensure good financial discipline is by making your investments using Systematic Investment Plans (SIPs).

The key benefit of making investments through SIP is that of Rupee Cost Averaging. At its core SIP involves investing a specific amount into a specific Mutual Fund. So using SIP you are able to purchase more units when the price of units is low during market corrections and fewer units are purchased when the price of units is higher during market bull runs.

9. Ignore Short Term Volatility and Stay Invested for the Long Term

As an investor, you have to accept the reality – Investments especially Equity investments are prone to short-term volatility. This is why you might see your portfolio witness ups and downs depending on prevailing market conditions. But historically, this volatility has always been temporary and the long-term capital appreciation provided by Equity investments has been unmatched.

This is why you need to ignore the short-term volatility in your portfolio and ensure that you stay invested in the long term to maximize the potential returns from your investments. This way you will be able to benefit from time spent in the market which is the key to reaching your investment goals.

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