We often hear that Americans need to save more money or plan better for retirement, but what does it mean to be financially healthy? Personal finance can be a difficult subject to discuss since everybody’s financial situation is different — hence the word “personal.” However, new research shows that there is just a handful of elements needed to establish your financial well-being.
Let’s take a look at the four most important elements of your financial health in detail.
1. Feeling in control
People typically like control over their own lives. Those who have high levels on financial health feel in control of their daily and monthly finances. This means they have enough money to pay their bills on time, and generally do not have to worry about having enough money to get by. Interestingly, this is not necessarily about having a lot of money, but rather managing the money you already have in an efficient manner.
2. Capacity to absorb financial shocks
Life is full of expensive surprises. The ability to absorb the monetary shock of an unexpected mechanic bill or job layoff is a crucial element of your financial health. Americans possessing this trait typical have a safety net of savings, insurance, or at least family members to help stop a financial shock from turning into a longer-lasting setback. Unfortunately, many Americans do not have their own rainy-day fund.
3. On track to meet goals
Consumers who set goals and remain on track to accomplish them have a higher sense of financial health. Whether these goals were part of a formal financial plan was irrelevant. Simply having a goal to work toward boasts financial well-being. Think of this as moving toward financial freedom and rewarding your future self. Failure to plan leads to a lack of savings. If you need help creating a financial plan, there is no shame in seeking professional assistance from a qualified adviser you trust.
4. Flexibility to make choices
Consumers with high levels of well-being have the financial freedom to make choices that allow them to enjoy life, whatever that means to them. While the best things in life are often free, having a large amount of debt can restrict your flexibility. After all, borrowing today represents a loan from your future production. More debt means more interest payments, which translates to more work and less freedom to do what you really want. When you face a financial choice or task, consider how your actions might affect financial security and financial freedom, today and in the future.