Summary: In this article, you’ll learn about financial health. Topics include: what is financial health, why is financial health important, tips for being financially healthy and more.
What is Financial Health?
Like our bodies and minds, financial health is your money’s ability to handle what life can throw at it. Exercise your money and it will work for you making you more; it will be flexible and can snap back after a stressful event. Let it sit around, it may get fat but it will get lazy, missing out on opportunities outside the window. Our money can be nourished in a good environment or exposed to hazards. What’s a good definition of financial health? In sum, financial health is the sum of our current income, expenses, assets, debts, worries and values. It’s not a number. But it is a set of principles, hierarchies and systems and personal values.
Why Financial Health is Important
Financial health is important for very human reasons. Financial instability is a source of stress. If you can’t take care of yourself, it’s likely to show up in your relationships in some obvious and not so obvious ways. If you can’t plan for the future, you have little freedom. Ultimately, that’s what financial health is about. Freedom to live your life not by the standards glamorized in movies but by your own. You may not dream of owning a Ferrari but an art studio equipped with your favorite paints? Unless capitalism disappears, passions cost money too.
The Need for Financial Health
Let’s face it—no one likes to talk about money. Whether it’s modesty or hiding family secrets, many of us grow up with the wrong ideas about money. Until recently, there’s been a culture that values appearances over transparency. That Gucci dress? Maybe it’s fake, maybe it’s bought on a credit card. That starving artist? Maybe he’s a trust-fund kid living a parody of bohemian life. Either way, there are façades at every turn, confusing some into overreaching and others into settling for less than they desire. Financial literacy in this country is playing catch up. Only recently have blogs like Refinery’s Money Diaries provided an honest look at spending habits (and not without controversy). What’s more, even our parents often neglect to teach us the basics or even let us in on where the money’s coming from.
And you wouldn’t be wrong to think personal finance advice can sound like a condescending dad—if you just bought coffee in bulk at Sam’s Club instead of $7 oat milk lattés, you’d be well off by now!
At its best, sound financial health should be empowering. Many of us have dreams beyond our current lot in life. Whether that’s to encounter other cultures or start a bee-keeping operation, solid financial planning can help us turn dreams into reality over time. It’s usually not about skimping—it’s about asking yourself what you value and what you’re willing to give up in the short term for a larger reward in the future. And sometimes it means admitting to yourself that you’d rather enjoy a thousand saffron lattés in the coming years, people watching at your neighborhood café, than splurge on an expensive Scandivian cruise.
Then there’s the fact that you’ll grow old some day. None of us like to think of it, it’s almost certain that you either won’t want to toil in your golden years, you won’t keep up with technological advancement or something may happen to leave you out of the job market. And we are living longer. Increased life expectancy may strain the medicare system. This points to a need to be financially independent, have a solid retirement plan, and find the right insurance—all aspects of sound financial health.
Achieving financial health starts with digging down deep and deciding on values. Do you value experiences over possessions? Family legacy over self-fulfillment? These aren’t easy questions. Then there’s the practical side—taking stock of your current wealth and studying your spending, or even setting up a system to track your spending in the first place.
Ultimately, it’s in finding a balance between your values and what the books say, and then finding ways large and small to have them mirror each other. And let’s face it, it involves making plenty of mistakes and forgiving ourselves along the way—who knew adopting a fox could be so expensive!
How to Achieve Financial Health
Budgeting: The Virtuous Cycle
Take a Look at the Big Picture
A solid budget begins with It begins with assessment. Take stock of your assets, weigh them against your liabilities and subtract your debts. This is easier said than done, and we wouldn’t hesitate to advise working with a professional if you have a complex portfolio. Do you like what you see? Great. Do you wince and cringe? That’s okay, too.
Find your Why
This is a good time to dig down deep and find your why. Whether it’s short term, like Save for vacation or long term, like Put my kids through college, these aren’t whys at all but merely goals. What is it about the vacation that sparks joy? Is it a trip to explore your ancestral roots? What is it about sending your kid to college that brings you meaning? Without a why, money habits just won’t budge.
Track Your Spending
Then you need to track your spending in the first place, or at least give yourself spending goals and limits. Some may go analog, using the simple envelope method. Others may opt for sophisticated apps like YNAB (You Need a Budget). Either way, knowing how you spend money will shine a light on your values versus your actions. Thought you were thrifty with groceries? Turns out you’re not. But maybe enjoying fancy cheese once a week is something you’re not going to budge on. Instead, you realize you don’t hardly watch enough TV to justify four streaming subscriptions. The fun part is you get to decide.
Set Smart Goals
Once you’ve got a tracking system in place, you’ll want to set goals. We enjoy using SMART goals—Specific, Measurable, Actionable, Realistic, Timebound. Because “make more mullah” isn’t a goal. Being specific ties it to something you care about. If you’re cutting negative spending habits, try to flip the script and frame it towards a positive. Cut $150 a month on eating out and save that up over three months for mountain getaway? Now that’s a goal.
Live and Learn
Reassess! Now, there will be countless little mistakes along the way. Certain things you decided are luxuries you can live without, you realize make you…you! Maybe you really do love handmade Swiss watches. Your grandfather gifted you one when you were 18 and you’ve been reading about advances in tourbillion mechanisms ever since. Maybe, the only difference you’ll make is to double down—instead of splurging on a watch out of the blue, you’ll save for a new watch every year.
9 Financial Health Tips
Now that we’ve gone over the budgeting app, let’s take a look at the most common ways to achieve financial health, listed in order of priority, from short-term, easy and safe to long-term, difficult and risky. The big point here is to show that there’s a hierarchy to putting your money to work, and you’ll see that as your financial health improves you’ll be able to take greater risk. You can think of risk as freedom. The better your financial health, the more confident you can be in a career change, in starting a business, or even investing in a passion project. The less you need the money, the more you can do with it!
We know—it’s a tired cliché of personal finance—spend less than you earn. But if you were just starting out with improving your financial health, this is where you might begin. Of course, you could start by assessing the frivolous purchases you make on a whim. You could dig deep and ask yourself if these impulse buys are actually contributing to your happiness. They may well be! However, all of us can find thrifty alternatives that often serve the same purpose. The classic example is cooking a fine meal at home rather than dining out.
Many young professionals struggle with what’s been coined lifestyle creep. It’s when your spending rises to match improved earnings, when you start to feel like you need that bauhaus furniture to match the bigger apartment in the nicer neighborhood, leaving you with little money for the future. It’s when you lose touch with your core values and realize you’re buying things to keep up appearances or to compensate for the stress that comes with a more demanding job. That being said, if you’re a furniture connoisseur, well, that’s one of your values. Bottom line—don’t spend a premium on things that don’t bring you joy.
Then there are more drastic actions to take. These are never easy or uncomplicated, but you could consider downsizing. Especially relevant if you’re young, want to make a big career leap or start a business, you may consider living something of a monk-like existence for a while. This isn’t for everyone, but if you have a strong why, you’d be surprised at how little you need to be happy. Consider a more affordable city or neighborhood, moving in with friends, or selling your car and opting for public transportation.
As you read on and follow the rest of these steps, your wealth will grow, meaning it’s actually easier to spend less money. Having money means you can buy in bulk, you have time and space to think through decisions, and you can buy quality goods that last rather than cheap goods that will cost you more in the long run. Again, it’s a virtuous cycle.
Of course that’s the elephant in the room. It’s naîve to write this article without mentioning it! At its worst, cutting spending amounts to shaving ice off a sculpture on The Titanic. Of course you should spend less than you earn, but why not flip the script? Earn more than you spend. And we hate to be the ones to say it but…money can make you happy—up to 70k at least! And imagine this—what if all the time you spent pinching pennies went towards improving your earning potential?
Having more than you need, even if by a little, is the key here. If you have a steady job but want a little bump, set yourself up for a raise or develop a side hustle. You could level up in your industry or pivot and cross-pollinate another. You could go solo or start consulting. If you’re freelancing, are there ways to provide a higher ticket product or service? In the end, having more revenue gives you the leverage to say no to work you loathe, stand your ground on higher fees or salary negotiations (because you know your worth) or take the leap to the work you love. It’s a virtuous cycle.
Save for a Rainy Day
We’ve all heard by now that the average American would struggle to find $400 for an unexpected expense. That’s due to many reasons, some cultural, some economical, some political. Whatever your take on that, it goes to show how ill prepared most are for financial emergencies and unexpected expenses.
Rainy day funds are best kept moderate and specific. Save or set aside 1-6 months of your comfortable, not excessive, living expenses, to be used only in the case that you (or your loved ones) lose a job, fall ill or suffer a natural disaster.
Get Real on Fixed and Hidden Expenses
What are fixed expenses? If we go beyond our relatively stable monthly bills, there are certain recurring payments and fees related to maintaining things. Some are fixed, like that yearly museum membership that always slaps you in the face. Others relate to maintenance—the inevitable decay of your possessions. If not anticipated, hidden expenses are disasters waiting to happen. You know what these are—your car with the sputtering engine or the leaky pipe over the kids’ room. Things break! You knew you’d have to get a new laptop for work eventually. You knew a free month of premium would run out. You knew you’d get a parking ticket eventually. We can’t predict what will go wrong, but we can be sure they will. The more you live and learn, the more you’ll see these coming.
Pay Down Your Debts
This can be a crucial, and also gargantuan, task for many. We’re not here to say it’s easy. But paying down your debts consistently, even over a long period of time, will be a huge weight off your chest, and will set you up for a healthier monthly income, a better credit score for future investments such as a home, and a happier life at retirement.
There are two popular methods for paying down debts: the snowball method and the avalanche method. Both involve making minimum payments on all your debts, save for one choice exception. But in the avalanche method, you chip away at higher interest debt faster, whereas with the snowball method you coax yourself by tackling the smallest debts for early wins and morale. What you decide is based on what makes you tick. But if you have the fortitude, the avalanche method will spare you the higher expense over time.
Save for the Short Term
So you’ve stabilized the financial boat, there’s less rocking and you’re certainly not going to capsize. It’s time to budget for short term savings. While counter-intuitive, treating things like vacations as inevitabilities with plenty of time to spare, can help us prioritize and even save money on such expenses. Besides, dreaming up a vacation is often better than the vacation itself. Owning the fact that travel, leisure and time with loved ones belong in your version of a life well lived, and setting that money aside, avoids a situation where you dip into savings or use a credit card when the urge overwhelms. And such savings are not limited to indulgence. For example, you may want to add an addition to your home. Say you’re planning on having kids as well as selling your home and moving to Vancouver one day. Sprucing up this asset is very likely to improve its value later on.
Ultimately, when you take this approach, you build discipline, a trait that can serve you well in all areas of financial health. Simply put, you’re learning to delay gratification, a sure sign of financial savvy.
Save for the Long Run
Speaking of delayed gratification, saving for the long run can seem abstract, especially if you’re young. But ask your parents; they will assure you that they have just as many needs and desires later in life as you do now. In fact, chances are that as you age, you’ll know yourself that much more, and you’ll want the means, however modest, to live life to the fullest. Long term savings involves planning, saving, and growing your money for retirement, paying off a mortgage or funding a child’s college tuition. Thanks to the exponential power of compounding returns, the earlier you start such funds, the better off you’ll be. That being said, it’s never too late!
Speaking of compounding returns, invest—in stocks, in yourself, in a business to call your own. But invest! This is the ultimate in financial health. Whether it’s a broad stock portfolio optimized for the long haul, further education for your career, an upgrade to take your freelance operation to the next level, or the funds to start a business, investing is where money really gets to work for you, creating a future where a strong proportion of your income no longer relies on your day-to-day labor.
As you can see, if you treat your finances with the same care as your body and mind, it will grow strong, flexible, resilient. A healthy financial outlook also means fun!
We’ve covered the need for financial health, how to come up with a solid plan, and ever-higher goals for your money to hit. If you follow this advice over a lifetime, just imagine the biggest reward of all—giving back. Imagine being able to pay an artist top dollar for an original painting. Imagine being able to share an experience with your child they will never forget. Imagine leaving a legacy behind that inspires future generations.