Key Elements of Financial Health
The term “financial health” refers to the state of a person’s finances when all factors, such as their income, investments, and spending patterns, are considered.1 Financially healthy people enjoy obvious economic benefits, but they experience other positive effects as well, including:
- Better mental health. Your money and mental health are closely connected, particularly in our post-2020 world where inflation and global uncertainty are significant sources of stress.2 Knowing that your finances are in order and you’re prepared for anything can help keep worrying under control.
- Improved physical health. Experts at the health insurance provider Anthem say that “ongoing or severe financial stress” can cause a variety of physical ailments, including headaches, unhealthy weight gain or loss, and a weakened immune system.3 On the other hand, getting and staying financially healthy can help reduce these symptoms.
- Stronger interpersonal relationships. Many couples overlook the importance of “financial intimacy,” or the ability to talk openly and comfortably about money with your partner. But in a world where money may be one of the biggest stressors for couples, being able to discuss your finances - even if it involves difficult things like being in debt or having poor credit - is a critical relationship skill. The more financially healthy you are, the easier and less awkward these conversations might be.
Here are some of the elements that create the overall picture of your financial health.
Your Income
Your income acts as your financial bedrock, as it determines how much money you have to work with in your day-to-day life. Additionally, many organizations and institutions (e.g. credit providers, landlords) use your income to help determine whether to approve you for their services. Importantly, while your income includes the money you bring home from regular employment, it might also include any alimony, child support, or government assistance you receive.
Your Spending
Financial health isn’t just a matter of making money. How you spend it matters too! One habit financially healthy people share is the ability to live within their means; they spend less than they earn, don’t shop impulsively, avoid taking on unnecessary debt, and manage their spending with a budget. A budget can help you save money, prepare for emergencies, and avoid using credit cards too frequently, all of which can set the stage for better financial health. You may also carry less debt and have a healthier credit utilization ratio, which often leads to a better credit score.
A Rewards Checking account through Upgrade can help you make the most of your spending with 2% cash back on qualifying everyday purchases and 1% cash back on everything else. Click here to open an account! And for quick budgeting help, check out our guide to setting a quick-start budget.
Your Savings
Life can be unpredictable, and financial disruptions from the relatively small and temporary (e.g. unexpected expenses, a missed paycheck) to the large and long-lasting (e.g. losing your job, taking a pay cut) can happen at any time. The more you have saved, the more of a buffer- often called an “emergency fund” - there is between you and financial calamity when these events occur. If you need help kick-starting your savings, check out our guide to building an emergency fund!
A Premier Savings account through Upgrade can help you build savings fast. We’re proud to offer a great Annual Percentage Yield (APY) on balances of $1,000 or more. Click here to open an account in a few quick steps.
Your Credit Score
Your credit score doesn’t just represent how you use credit. Many organizations and businesses, from banks and car dealerships to landlords and utility providers, use it to determine whether to do business with you. A good credit score (i.e. a score of 658 or above on a scale of 300 to 850) can increase your chances of being approved for credit, as well as position you to get the best financing offers. A lower credit score, on the other hand, may result in you getting declined for credit and/or receiving less favorable borrowing terms.
Especially in turbulent economic times when good credit can be harder to maintain, it’s important to monitor your score and make adjustments where needed to improve it. Our Credit Health monitoring tool gives you everything you need to take control of your credit, including free alerts and credit-boosting recommendations. Sign up here!
Your Overall Net Worth
In a personal finance context, your “net worth” is the amount left over when you add all your assets (e.g. bank accounts, investments, vehicles, real estate) and then subtract all of your debts (e.g. credit card balances, student loans, mortgages.) It is arguably the most complete indicator of your overall financial health, as the more you own and the less you owe, the greater your wealth is and the fewer financial liabilities you have.4
The Bottom Line
Still unsure about how the different aspects of financial health work together? We’ve put together this handy chart for you!
| Income | Spending | Savings | Credit Score | Overall Net Worth |
|---|---|---|---|---|
| Determines how much money you can save, spend, and invest | Affects how much money you're regularly able to save and invest | Protects you from financial harm when unexpected events or financial emergencies arise | Represents how you use credit and helps organizations and businesses decide whether to do business with you | Describes your total assets (e.g. bank accounts, investments, vehicles, real estate) minus your debts |
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