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The financial health of a person refers to the state of his or her financial affairs. People with good financial health typically have a high credit score, pay their bills on time, minimize debt, maximize income and plan for the future. The analogy is derived from a comparison with a person’s physical health.
Credit scores can seemingly make or break an individual financially. There are several credit reporting agencies which collect data on a person’s financial transactions. These companies analyze the data and report a rating based on a person’s financial health. A person’s credit score is a composite of these different agencies and usually accurately reflects the credit risk of a person.
Someone with a high credit score is a low risk to lenders, and receives lower interest rates for loans. In contrast, a person with a low credit score is a high risk to lenders, and receives higher interest rates for loans or is declined altogether. So the first piece of information in determining a person’s financial health is to look at his or her credit score.
A person with good financial health is usually a planner. Not only does that person plan for self-sustainable retirement, but might even plan to create a family legacy with his or her own foundation. That type of wealth typically requires an inheritance or a lifetime of good planning.
Good financial health requires bills be paid on time and that no massive, unnecessary debts are acquired. Credit card misuse is a massive drain on a person’s financial health. If the bill is not paid in full every month, interest accrues and a person winds up paying much more for items charged than originally thought. The best way to minimize debt is to begin paying off those loans which have the highest interest rate.
Not only does a person need to monitor and reduce debt, but assets must be well-managed. Assets can be cash, property or land. Cash should be invested wisely and allowed to accrue compound interest. Property or land that appreciates rapidly is subject to large capital gains taxes under the US tax code, and so must be sold with forethought. A certified public accountant can help a person know how to pay the least amount in federal and state income taxes in order to preserve and maintain wealth.
The term financial health can also apply to a company in addition to an individual or family. A company’s financial health is best seen in financial accounting reports such as a profit and loss sheet or balance sheet. These reports can show a company’s financial health at a glance.