What is 'Financial Health'

Financial health is a term used to describe the state of one's personal financial situation. There are many dimensions to financial health, including the amount of savings you have, how much you are setting away for retirement and how much of your income you are spending on fixed or non-discretionary expenses.

BREAKING DOWN 'Financial Health'

Financial experts have devised rough guidelines for each indicator of financial health, but each person's situation is different. For this reason, it is worthwhile to spend time developing your own financial plan to ensure that you are on track to reach your goals, and that you are not putting yourself at undue financial risk if the unexpected occurs.

How Financial Health is Determined

An individual’s financial health may be measured by a variety of metrics. A person’s savings and overall net worth represent the monetary resources at their disposal for current or future use. These can be affected by debt, such as credit cards, mortgages, and auto and student loans. Financial health is not a static figure as it changes dependent on not only the individual’s liquidity and assets, but the fluctuation and inflation of prices of goods and services over time.

For example, an individual’s salary might remain constant while the costs for gasoline, food, mortgages, and college tuition increase. Despite their initial financial health, the individual may lose ground and lapse into fiscal decline if they do not keep pace with rising costs of commodities.

Typical signs of strong financial health include a steady flow of income, rare changes in expenses, strong profitability ratios on investments that have been made, and a cash balance that is growing and is on track to continue to grow.

The financial health of businesses may also be gauged by comparable factors to assess the viability of a company as a going concern. For instance, if a company has revenue coming in and cash in the bank, yet is expending its resources on new investments in production equipment, officer space, new hires, and other business services, it may raise questions about the long-term financial health and survivability of the company. If more money is spent that does not contribute to the overall stability and potential to growth of the business, it can lead to a decline that makes it difficult to pay regular expenses such as utilities and employee salaries. This may force businesses to freeze or cut salaries in order to give the company the fiscal allowance to continue its operations.

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