Budgeting What Is Financial Health? By Cassidy Horton Updated on October 4, 2022 Fact checked by J.R. Duren In This Article View All In This Article How Financial Health Works How To Measure Your Financial Health Frequently Asked Questions (FAQs) Photo: Tim Robberts / Getty Images Definition Financial health is a term often used to describe your overall fiscal well-being. It takes into account factors such as your income, debts, expenses, and savings, and provides a snapshot of your financial situation. Key Takeaways Financial health is the state of your financial well-being.Financial health is important because it lowers your stress and frees up energy for you to focus on other things, such as your relationships, health, and career.You can improve your financial health by building an emergency fund, paying off debt, and saving for retirement.Financial health is something that takes time and effort to achieve, but it’s worth it in the long run. How Financial Health Works More than 60% of Americans feel anxious about their finances—and this is why good financial health is so important. It often includes things such as having enough money to cover your basic needs, carrying little to no debt, and having some savings set aside for emergencies. When you have good financial health, you have peace of mind around your finances and may live a more stress-free life. Instead of panicking about how you’ll make ends meet or cover an unexpected bill, solid financial health gives you the power to: Cover an unexpected bill using your emergency fundLeave an abusive relationship without fear of having no moneyChase opportunities that align with your passions versus what will pay the billsInvest in a housecleaner or meal-prep service to free up more timeQuit a job you don’t like and pull from savings until you can find a new one Note Financial health allows the freedom to make choices that let you live a more stress-free, value-aligned life. It’s about making sure your money is working for you. However, if you’re struggling with low-paying jobs or making ends meet, the traditional definition of “good” financial health may not be possible. For example, more than 1 out of 10 people live in poverty, and more than 10 states have a minimum wage below $8. In these situations, maintaining good financial health isn’t always about saving money or building net worth. It could mean keeping a consistent budget, finding sources of financial help, and avoiding expensive funding such as payday loans. Example of Financial Health The term “financial health” can be pretty vague. Here are some concrete examples of good financial health: You can handle a major unexpected expense because you have money set aside for emergencies. You feel secure in your financial future. You feel like you can afford the things you want in life—even if you have to save up for them. The way you manage your money allows you to enjoy life. You don’t feel financial strain when you buy someone a gift for a wedding, birthday, or baby shower. You have money left at the end of the month. You control your finances, rather than having your finances control you. On the flip side, your financial health could be in bad shape if: You feel saddled with high-interest debt. You spend all your paycheck as soon as you get it. You lose sleep at night thinking about your financial situation. Money stresses you out. You're frequently worried about being able to make ends meet. Note Just like physical health, it's important to take steps to protect your financial health and make sure you're on track to meet your long-term goals. How To Measure Your Financial Health There are a few key indicators you can use to measure your financial health. Savings Rate Your savings rate is a good indicator of your financial health because it tells you how much of your income you save each month. A 10% savings rate means you save 10% of your paychecks. In general, the higher your savings rate, the quicker you can reach your financial goals. For example, if you want to buy a car to improve your chances of getting a better-paying job, saving 10% a month can help you store up enough money to cover the cost of owning a car. Debt-to-Income Ratio Your debt-to-income ratio measures how much of your monthly income goes toward paying off debts. Generally speaking, a good debt-to-income ratio is anything below 36%. Any higher than this, and you could struggle to make your payments or get approved for new loans. If you make $4,000 a month and $1,000 of your paycheck goes toward debt, then your debt-to-income ratio is 25%. Credit Score A high credit score means you're managing your debt well, and you’re more likely to get approved for lower interest rates in the future. If your credit score is low, it means you’ll end up paying more in interest over the long run. Note You can check your credit score through a variety of free credit report sites. Net Worth Your net worth is the value of your assets (car, house, savings account, stock, etc.) minus the amount of money you owe. Positive net worth may be a good sign of financial health—it means your assets are more than your debt. For example, if you have $250,000 in assets and $100,000 in debt, then your net worth is $150,000. Negative net worth means you owe more money than what you have in assets—owing $100,000 while having assets worth $25,000 means your net worth is -$75,000. Frequently Asked Questions (FAQs) Why is financial health important? Financial health is important because it impacts every aspect of your life. It affects your ability to buy a home, provide for your family, retire comfortably, and more. Financial health is also linked to physical and mental health; studies have shown that people with financial stress are more likely to experience anxiety and depression. How do you improve your financial health? Improving your financial health is a process that takes time and effort. But there are a few key things you can do to get started:Set financial goals so you know what you want to achieveSpend less than you earnCreate a budget to track your spendingAvoid unnecessary debtImprove your credit scoreTrack your net worthWork on changing your financial mindset What are the signs of good financial health? You're on your way to good financial health if you:Have an emergency fundHave little to no high-interest debtCan pay your bills and still have money left over to fund your goalsHave a budget and you're good at sticking to itRarely stress about moneyFeel confident and in control of your finances Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. PR Newswire. “Nearly Two-Thirds of Americans Feel Anxious About Their Finances in 2022.” Department of Labor. “State Minimum Wage Laws.” U.S. Census Bureau. “Income and Poverty in the United States: 2020.” Purdue University. “Mental Well-Being Inherently Connected to Financial Wellness.”