Understanding Financial Health: Definition, Measurement, and Improvement Strategies

What is financial health?

Financial health describes how strong your financial position is at a given point in time. An analysis of your financial health takes into account factors like your income streams and expenses, your savings and investments, your debts and liabilities, and your credit score.

The aim is to get a sense of whether you could be handling your money better, and if so, how to improve how you handle it.

When you're in good financial health, you're better placed to secure a future in which you live comfortably and happily, and you're more able to handle financial shocks.

How to measure your financial health

Unlike your physical health, which can be measured through simple numbers like blood pressure, cholesterol levels and resting heart rate, your financial health is more loosely defined and is therefore more difficult to quantify.

This is because some people can live comfortably on a far lower income than others. A high-flying professional in the CBD and a retiree living a quiet life in a rural area will have very different definitions of financial health.

That said, a few general questions can give you a sense of the health of your financial situation:

• Could you handle a significant unexpected expense?
• Is your net worth positive or negative? (Savings/investments vs debts/liabilities.) 
• Can you afford all the things you need? Can you afford all the things you want?
• How much high-interest debt (e.g. credit cards, payday loans) do you have?
• Are you actively saving for retirement?
• Are you working towards long-term financial goals?
• Do you have income or life insurance?

One way to gain insight into your financial health is to check your credit score, which tells lenders how worthy you are of credit, based on your history of borrowing. This only represents a narrow slice of your broader financial health, however.

How can you improve your financial health?

There are many ways to improve your financial health. Let's take a look at a few of the most effective.

Debt

The first and most important step to improving your financial health is to pay down as much debt as you can, as quickly as you can. Debt is money that you have to pay for (in the form of interest), so the sooner you pay it off, the more money you can keep for yourself.

Pay debt off whenever you have extra cash. Prioritise high-interest rate debt, like credit card debt. Long-term, lower-interest debt, like your mortgage, isn't quite as pressing, but should still be paid off as quickly as possible.

Personal loans

If you're stretched in your ability to meet debt repayments across multiple loans, consider consolidating high-interest loans together within a single, lower-interest personal loan.

This simplifies repayments and can reduce the total repayment amount by converting payday, credit card and other high-interest loan types into a relatively low-interest personal loan - particularly if you choose a proven, trusted personal loan provider like Instant Finance.

Budgeting

Good financial health is about spending within your means. Budgeting is absolutely key to this effort. A good budget will ensure that you comfortably cover all your needs, that you put money aside to work towards your goals, and that you still have a little bit left over to spend on yourself.

To budget effectively, get a sense of your expenses and identify exactly how much money you have coming in. Most banks now break transactions down into categories within their apps, which can be helpful. Analysing your expenses can give you a sense of areas of potential overspending, and how much you need to set aside for needs like housing, bills, food and clothing.

When it comes to building your budget, you can choose from several different strategies:

• Setting specific amounts for different categories of spend
• Devoting percentages of your income to needs, wants and savings (e.g. the 50-30-20 budget)
• Setting aside the money for needs and savings as soon as your pay comes in, then using the rest for discretionary spend

Emergency fund

One of the key indicators of your financial health is your ability to deal with unexpected expenses. An emergency fund helps you do just that - you set money aside every pay, putting it somewhere easy to access and ideally earning you a bit of interest.

Enhance your financial health by consolidating your debt

At Instant Finance we've spent over 50 years helping Kiwis enhance their financial health by consolidating high-interest debt into customisable personal loans with lower rates and fairer terms.

Apply online to consolidate your debt today.

FAQs

What are the 4 pillars of financial health?

The four pillars of financial health are:

• Plan: Think of your long-term financial goals - buying a home, having a family, starting a business, saving for retirement - then create a plan to get there.
• Spend: Spending within your means is critical to your financial health. Forming a household budget is a simple way to ensure you spend responsibly.
• Save: Everyone should aim to save a portion of their income to meet larger, long-term financial goals. Aim to set aside whatever you can afford and treat those savings as untouchable - earmarked for that specific goal, and nothing else.
• Borrow: Pay down high-interest debt. Borrow responsibly: avoid payday loans and credit card overspending, as these are very expensive forms of debt. Consolidate high-interest debt into a lower-interest personal loan.