What is financial health?

06/11/2020

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What is financial health?

If you ask a medical professional, “Is health (or wellness) the absence of disease?” the answer would be a resounding no.

Physical health and wellness includes not only the absence of disease, but also strength, stamina, endurance, and good vital signs, such as blood pressure, weight, pulse, and respiration.

Similarly, financial wellness is much more than just the absence of debt (though that’s a start). If you were, say, approaching retirement age without a penny saved for retirement, you could have $0 in debt and still not be financially healthy.

In honor of Men’s Health Month, here’s what it means to be financially healthy.

What is financial health and wellness?

Here’s what we believe are the four factors that measure financial health:

  1. Your overall satisfaction with your financial situation
  2. Your financial behaviors, such as budgeting, saving, debt reduction
  3. Your financial knowledge and money mindset
  4. Your ongoing plan to reach short-term and long-term financial goals

All of these essentially boil down to one core idea: Do you have an ongoing plan that balances enjoyment of life today with the ability to achieve future financial and life goals, and is that balance bringing you peace of mind?

Making your money work for you

One helpful way to think about financial wellness is to realize that your finances, and every dollar you acquire, should be working for you.

You’re the boss of your money, and every dollar is an employee. Does each one have a job that’s important to you? Is each one doing its job well?

Every time you pull out your wallet and spend some of your dollars, is the purchase worth the amount of time you had to work to earn it? Will you feel as good about that purchase five years from now as you will five minutes from now?

That doesn’t mean you can’t spend money on an occasional indulgence. But if those indulgences are making it more difficult to reach your financial goals, the process is out of balance.

Where financial attitudes come from

As the boss in your money, your management style has its roots in your experiences. Your financial attitudes, aka your money story, have the same roots.

Your money story comes from three places:

  1. Your history with money and finances, including your vision for your financial future.
  2. What you’ve learned from your community about money. Your community includes your family, friends, religion, and culture.
  3. The actions you’ve taken with your finances, whether you’ve followed the beliefs you’ve learned from your community, rebelled against them, or worked through them.

No one is born knowing how to handle their finances, or how to value money. These are learned behaviors.

Now, behaviors aren’t inevitable. You can, for example, have parents who spent rather than saved, and decide that you want to approach money differently. You might have a sibling who you think denies themselves many pleasures in life to save for the future, and decide that strategy doesn’t work for you.

But a major component of your financial wellness is knowing where your money attitudes come from, and deciding whether those attitudes are the ones you want to follow throughout your life.

Money is both real and a matter of perception.

For example, if you have $20 in your wallet, you might think nothing of it. But if you find $20 in the pocket of a coat you haven’t worn in a while, you’ll probably be surprised and delighted. You might keep the $20 in your wallet for later, but be tempted to indulge yourself with the $20 from your coat pocket. Even though you have $20 in both cases, the money from your coat feels like a windfall, while the $20 in your wallet is money you worked for.

How financial wellness affects physical and mental wellness

Your financial wellness is only part of who you are. It can have a profound effect on your physical and mental well being as well.

Multiple studies show that people who feel financially healthy have less stress, are more productive, display less absenteeism at work, and enjoy life more. Studies also show that finances are one of the leading causes of stress and that stress can contribute to a number of physical issues.

Most importantly, people who achieve financial wellness are more likely to feel confident that they’re in control of their lives.

Measuring your financial wellness

Unlike, say your credit (FICO) score, which is a single number, your financial wellness isn’t a single data point. Instead, your financial wellness is measured by your answers to these questions:

Do I understand what my attitudes about money and finances are and where those attitudes come from?

Do my attitudes about money and finances work for me, or do I want to change them?

Do I feel in control of my finances, or do I feel that my financial situation is determining my happiness?

Do I have the financial freedom to enjoy life today while planning for tomorrow?

Do I have the financial security to weather a financial shock?

Am I on track to meet my short-term and long-term financial goals?

Am I creating healthy financial habits for myself and my family?

Tracking your progress towards wellness

There are apps and other tools that can help you measure and track your financial wellness. Facet Wealth clients, for example, use a tool that tracks financial wellness by analyzing:

  • Emergency fund score (months of expenses saved)
  • Savings rate (income allocated to savings)
  • Debt score (Income going to debt payments)
  • Leverage score (Assets/Liabilities)
  • Credit Score (self-reported)
  • Net Worth

Clients can see, day by day, how their actions impact their financial wellness and how close they are to realizing their financial goals.

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