What is financial health?

Financial health is a term we hear often, but what does it really mean? It’s about more than just your bank balance — it offers insights into how well you manage money, handle financial challenges, and prepare for the future. Here, we’ll explore what financial health is, how it’s measured, and how understanding it can lead to smarter money habits.

There’s no one-size-fits-all definition of financial health. It’s essentially a broad measure of your financial situation, broken down into four main areas related to spending, saving, borrowing, and planning. Put simply, it provides insights into your ability to meet your basic needs while saving and growing your assets.

While key indicators can vary, the Consumer Financial Protection Bureau (CFPB) defines financial health through a questionnaire focusing on:

1. Control over daily finances: How well are you managing your everyday expenses without stress?
2. Capacity to absorb financial shocks: Are you prepared for unexpected costs, and do you have a financial safety net?
3. Progress toward financial goals: Are you working toward your financial milestones?
4. Freedom to enjoy life: How much flexibility do you have to make choices that enhance your quality of life?

Being financially healthy basically means you’re not just getting by and living paycheck to paycheck — you’re thriving. You’re making your money work for you and enjoying life without constant worry about bills and financial issues.

So what is financial health actually measuring, and what does it indicate? Well, because poor financial health often impacts basic needs like housing, food, and utilities, it can provide broader insights into a nation’s economic security. When many people face financial struggles, organizations often adjust their support services in response.

To get a clearer picture of financial health, experts talk about four key areas: Spend, Save, Borrow, and Plan. These can be considered the building blocks of a strong financial foundation. Actively working on improving all four can set you up for long-term financial well-being.

At its core, this pillar is about living within your means. Are you spending less than you earn, paying your bills on time, and managing your household expenses? If you find yourself struggling to cover basic needs, it might be a sign that your spending habits need a closer look.

Learning how to budget your money can help with this. Budgeting involves prioritizing your needs over wants to keep working toward your goals. You start by listing your monthly income and fixed expenses. Ideally, you should have some money left over for saving, investing, or paying off debt. If you’re consistently running short, your financial health will suffer and you may have to look for areas where you can cut expenses.

The second pillar of financial health focuses on your ability to build enough savings to cover both short-term and long-term needs. If you’re unsure how much you should be saving each month, some experts suggest aiming for 10% of your monthly income. But if that target seems out of reach, even 5% or less can bring you further toward your goals.

For everyday expenses like bills or groceries, it can be helpful to have liquid savings — money you can easily access in a checking or high-yield savings account. The same goes for your emergency fund. The idea is that you avoid debt or dipping into retirement savings when a crisis hits.

Then, there’s long-term savings, which are more about setting yourself up for the future. This could include retirement accounts, investments, or even a CD account that locks in your money for bigger goals down the line. Funds in these types of accounts are generally untouchable, but in return, you usually earn a higher rate.

With Raisin, saving is easy. After a one-time registration, you’ll gain access to a range of savings products with competitive interest rates. Explore our savings options to help you take control of your financial health.

When it comes to borrowing, the goal is to make it work for you, not against you. This means keeping your debt at a level you can handle and only taking out what you truly need. Borrowing more than you can realistically repay can lead to financial strain, especially if debt payments make up a significant portion of your income.

Your credit score plays a big role in how borrowing impacts your financial health. This score shows how well you are able to repay borrowed money, such as from credit cards, personal loans, or mortgages. Making timely payments, keeping balances low, and avoiding unnecessary debt can help you maintain a healthy credit score. In turn, this can open doors to better loan terms and lower interest rates, making your borrowing more affordable.

The final pillar of financial health measures your ability to set financial goals for the future. Think about your long-term dreams — whether it’s buying a home, supporting a child’s college education, or preparing for retirement. These goals will likely have an impact on your spending and saving strategies.

Planning can also keep you motivated, making it easier to work through any challenges that come your way. If you find it overwhelming to figure it out on your own, you can consult a financial planner for personalized guidance.

Understanding financial health involves looking at a few key factors. The most common method is measuring net worth, which is the total value of everything you own — like your house and car — minus any debts you owe, such as credit card balances, mortgages, or student loans. Any returns you make on savings or investments are also taken into account.

Another method is to use financial ratios. For example, the net worth to assets ratio shows how much of your assets are debt-free. A higher ratio means you have more of your assets under your own control.

It’s worth noting that financial health isn’t something you measure once; it can change with your financial situation and the cost of living. Even if your salary stays the same, rising costs for expenses like gas and groceries will naturally impact your financial well-being.

You might now be asking yourself, “how am I doing financially?”. Just as you’d use a medical checkup to understand your health, a financial health score gives you insights into your financial situation. Typically, you answer a series of questions, and your responses are analyzed to generate a score. This score reflects your ability to manage your money based on the four key pillars mentioned above.

The Financial Health Network is an organization that uses this score to categorize people into three groups: financially healthy, financially coping, or financially vulnerable. If you’re financially healthy, you’re managing expenses, prepared for surprises, and making progress toward goals. The financially coping group faces some challenges, while the financially vulnerable are struggling with most areas of their finances.

There are a variety of online tools that can give you a similar score, though the actual results might vary slightly. For instance, the CFPB offers a simple tool with ten questions to help you assess your financial health. But these scores aren’t just for individuals; companies may use them too to get an idea of how well their customers and employees are faring financially.

Having good financial health ultimately means you’re in control and ready to get more from your cash. Knowing what your financial situation looks like from different angles can help you pinpoint areas to improve and make sensible decisions about your future.

Imagine being in a position where you are keeping debt in check, you have an emergency fund, and are saving for retirement. You know exactly how much you owe, what your assets are worth, and your regular and variable expenses. This kind of clarity can make handling money a lot less stressful.

A definition of financial health wouldn’t be complete without knowing what you can do to improve yours. Depending on which “pillar” you may have identified as in need of improvement, there are a number of different steps you could take.

Starting an emergency fund is often one of the first steps recommended by experts. Without it, a major financial setback could wipe out all your hard-earned savings and investments.

You could start by setting a realistic goal for your emergency fund. Many people find it helpful to set up automatic transfers to make saving more effortless. Once you reach your initial target, try to continue adding to your fund whenever possible. And if you receive any unexpected extra money, like a bonus at work, consider funneling it into your emergency savings.

While opinions vary on whether it’s better to pay off debt or save, if your debt begins to feel overwhelming, the general consensus is to prioritize paying it off.

You could start by taking a close look at all your accounts and reviewing your credit report to get a clear picture of what you owe. Simplifying your debt through consolidation might make it easier to manage.

Once you have a good understanding, you could follow a budgeting approach that includes extra payments towards your debt. With the 50/30/20 method, for example, 20% of your monthly income goes to either savings or debt repayment. This structured approach can help you make better progress.

Setting financial goals can be a useful way to boost your financial health over time, because it gives you direction and helps you stay focused. Start by listing what you want to achieve (both in the short term and further in the future), and figuring out what’s most important. The “SMART” technique can help with this. Here, you make sure each goal is Specific, Measurable, Achievable, Relevant, and Time-bound.

Next, try linking each goal to something that really motivates you — maybe saving for a dream vacation or paying off debt to relieve stress. With clear goals in mind, you can make more informed decisions and feel more confident about what’s to come.

Optimizing your savings is a key part of maintaining strong financial health. Raisin makes it easy by offering a single platform where you can access a range of high-yield savings accounts, CDs, and more from a network of federally regulated banks and credit unions. Start by exploring your options, choose an account that suits you, then register for free and deposit your money — it’s that simple.

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.