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What Is Financial Health?

Kathy Heydasch
Kathy Heydasch

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.

People with good financial health typically pay their bills on time.
People with good financial health typically pay their bills on time.

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.

People with poor financial health may have to borrow money from relatives.
People with poor financial health may have to borrow money from relatives.

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.

A company's financial health is best seen in financial accounting reports.
A company's financial health is best seen in financial accounting reports.

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.

People might examine their financial health when considering major life changes.
People might examine their financial health when considering major life changes.

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.

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    • People with good financial health typically pay their bills on time.
      By: WavebreakMediaMicro
      People with good financial health typically pay their bills on time.
    • People with poor financial health may have to borrow money from relatives.
      By: Digital_Zombie
      People with poor financial health may have to borrow money from relatives.
    • A company's financial health is best seen in financial accounting reports.
      By: pfpgroup
      A company's financial health is best seen in financial accounting reports.
    • People might examine their financial health when considering major life changes.
      By: Africa Studio
      People might examine their financial health when considering major life changes.
    • The number of dependents a person has can impact their financial health.
      By: Marzanna Syncerz
      The number of dependents a person has can impact their financial health.
    • Someone with good financial health can easily cover surprise expenses, such as paying for repairs to a vehicle.
      By: il-fede
      Someone with good financial health can easily cover surprise expenses, such as paying for repairs to a vehicle.