Why Your Financial Health Is Important

By Eric Rosenberg
Reviewed by: Lauren Bringle, AFC®
Published on: 04/21/2020

Like physical health, financial health is important for leading a happy and successful life. Creating a sound financial base does more than alleviate current stress – it lays the foundation for a stable and secure financial future.

While there’s no specific number or score that measures your financial health, people with good financial health pay close attention to credit, debt, savings, retirement planning, and insurance.

Here’s an in-depth look at what makes up your financial health, why your financial health is important and some ways to get it in shape (if it’s not already).

In this article, we’ll break down:

What’s financial health and why does it matter?

Basically, financial health measures your ability to meet your financial needs and prepare for unexpected financial emergencies.

For example, can you cover your financial needs if you experience an unexpected expense or loss of income? People with good financial health have financial resiliency and don’t have to worry about their money on a day-to-day basis.

But that’s far less common than it should be.

Poor financial health, which includes symptoms like low credit scores and little to no savings, can be bad for your physical and mental health. It can also put you and those who rely on you at risk. See our related article about emergency savings accounts.

Financial stress is very common. According to a 2017 study by CareerBuilder[1], 78% of Americans live paycheck-to-paycheck. That means nearly four in five U.S. households couldn’t cover the bills after an unexpected job loss.

The 2020 coronavirus crisis and economic downturn highlight the need for people to focus on their financial health. If you want to focus on your financial health in 2020 and beyond, the next section outlines some important places to start when improving your financial health.

What does it mean to be financially healthy?

While there is no single number that measures your financial health, you can look at the numbers of your financial life to assess where you stand. With good financial health, you’re able to relax and put much of your financial life on autopilot.

Here are some different areas of your financial life that make up your overall financial health:

  • Credit
  • Debt
  • Savings
  • Retirement
  • Insurance

Let’s take a closer look at each.


Those with great financial health pay attention to their credit. Good credit gives you the ability to borrow when you want or need to. It can help you get quickly approved for new credit cards and other loans with the best interest rates available.

Your credit report and credit score are good measures of your credit health. Learn how to read your credit report.


It’s easy to take advantage of high credit card limits and rack up tons of debt buying new TVs, clothes, and gadgets.

However, borrowing more than you can afford is a sign of lifestyle inflation and can lead to a growing spiral of debt payments that can consume your entire income.

A low relative portion of your monthly income going to debt, measured by your debt-to-income ratio, is a good measure of your debt health.


Households with good financial health have both emergency savings and long-term savings for important financial goals.

Emergency funds should cover a minimum of three to six months of expenses if you have a stable job. Self-employed and contract workers should double that to at least six to 12 months of expenses in savings.


Few people want to work forever. A good retirement plan gives you a targeted date to stop working and live the retirement of your dreams.

Most financial experts suggest you save at least 10% to 15% of your pre-tax income for retirement to maintain the same standard of living during your golden years.


Insurance is a financial backup plan for the unexpected. Major medical expenses, car accidents, or fires at home would bankrupt many people without good insurance.

Popular and important insurance includes health, auto, home or renters, and life insurance.

What are some signs you’re financially healthy?

Few people have so much money they can treat it with a carefree attitude, but people with good financial health don’t have to worry about their money regularly. They pay attention to different parts of their finances and make sure needs are met with room to spare.

In a 2019 report, the Federal Reserve[2] found that 39% of adults couldn’t cover a $400 financial emergency from savings.

After millions lost their jobs in March 2020 and the following months due to COVID-19, this number almost certainly grew.

If your car broke down during your morning commute or your furnace gave out on a cold Saturday night, could you afford the expense?

If you were one of the tens of millions of unemployed Americans who lost their jobs in the COVID-19 economic downturn, you would likely need a lot more than $400 saved.

In a real emergency, you could also look to credit. But that’s only an option if you have a good credit history and a good credit score, also indications of good financial health.

If you have confidence you can meet financial uncertainty and are on track to meet your long-term financial goals, you are financially healthy.

What are some red flags you might need to work on your financial health?

If financial stress is dragging down your physical or mental health, it could be a sign you don’t have good financial health.

Here are some red flags you should work on improving your financial health:

  • You can’t afford a common financial emergency from savings.
  • You have high credit card balances you can’t afford to pay off in full.
  • You’ve been turned down for a credit application, rental home, or job because of your credit report or credit score.
  • You worry or stress about money several times per week.
  • You’ve been forced to use expensive financial products like payday loans or check-cashing shops.
  • You don’t know how much you spend each month and don’t have a budget.

These are just a few ways poor financial health might rear its head. But nobody is stuck with a bad financial situation forever.

You can take steps to improve your financial wellbeing and feel empowered to upgrade your finances over time. For examples, see our article about ways to save money.

How can you measure your current financial health?

There is no single measurement that shows your financial health, but here are some good indicators to consider:

How many months of expenses you have saved for emergencies

Your budget should tell you how much you typically spend per month. Compare that to your emergency fund to find how many months of savings you have on hand. Strive to save a minimum of three months of expenses.

Ultimately though, start with saving whatever you can.

Your debt-to-income ratio

Look at your credit report to see how much you owe each month in debt payments. Compare that to your monthly income to calculate your debt-to-income (DTI) ratio.

One popular rule says you should never have a DTI higher than 36%, but lower is always better.

Your credit score

Your credit score is a number ranging between 300 and 850 that tells lenders how likely you are to pay back a loan or credit card balance. Good credit scores start at 650, above average scores start at 750, and excellent scores start at 800.

How many years of income you have saved for retirement

Young professionals likely have scant retirement savings while people closer to 65 or 70 should have more saved up. This Nerdwallet calculator can give you a high-level view of whether or not you’re on track.

Total life insurance coverage

In a worst-case scenario where you’re no longer around, would your family be able to stay in your home and pay the bills?

While one estimate for life insurance coverage recommends 10 times your annual income, how much you need really depends on several factors – like whether you have dependents, a spouse who works, etc.

For example, someone who is young and single might have very different life insurance needs than someone with a stay-at-home spouse and 3 young kids.

If you’re doing well on all of these categories, congratulations! You’re doing a great job of planning for the future and managing your finances. If you’re short of where you want to be, follow the steps in the next section to level up your finances.

How can you take better care of your financial self?

Most people wish they had an extra zero or two at the end of their bank account balance, but the lottery isn’t a solid retirement plan.

Instead of gambling your future, try one of these strategies to improve your financial health:

Pay off high-interest debt

High levels of credit card debt and other debt with high interest rates can eat up a big portion of your income. Pay off these types of debt and avoid them if you can. Learn more about the high cost of bad credit.

Improve your credit score

Paying your credit cards and other debt on time every month is the biggest factor in your credit, followed by your credit balances.

If a focus on these areas doesn’t improve your score enough (or fast enough), consider a credit builder loan or secured credit card as other tools to help build your credit.

Automate your savings

It’s hard to remember to move money from checking to savings every payday. Instead, set up an automatic recurring transfer or split your direct deposit from work between two accounts to fund your savings without thinking about it.

Increase retirement savings

If you can afford to, save at least 10% or 15% of your income in a 401(k), IRA, or another retirement account. If you get an employer retirement plan match, always take full advantage.

Grow your income

Getting a promotion at work is one of the most common ways for people to grow their income. You can also consider a side hustle like delivery driving, rideshare driving, or selling a product online as a way to increase what you bring home every month.

Anyone can achieve financial health

You don’t have to be rich to be financially healthy. You don’t need a six-figure income or C-suite job for a stable financial future.

But your finances won’t fix themselves if you don’t pay attention. A consistent focus on your budget and other financial matters is essential, particularly if you are trying to turn around financial struggles.

Here are some more statistics on how the average American household is faring with their finances:

Ways we are failing at financial health

Sadly, the average American’s financial status has fallen ill these days - with more than half of the U.S. population struggling financially. (And that was pre-COVID).

The Great Recession may have ended years ago, but most households still face stagnant wages and increasing debt. Many Americans are actually considered to be poorer than they were a decade ago.

Why might that be?

It could be because, according to the 2015 Stress in America Report[3] by the American Psychological Association,18% of adults say money is a taboo subject in their family and 36% say talking about money makes them uncomfortable.

On top of this, the 2016 Money Matter on Campus report[4] found that from 2012 to 2015, college students showed a significant and steady decrease in nearly all fiscally responsible actions.

From following a budget to building an emergency fund to paying credit card bills on time, the incoming rush of new grads was concerning.

Couple an awkward topic with what we can only assume is a lack of personal finance education for our youth - it’s no wonder adults aren’t taking their financial futures more seriously.

Here are 6 ways Americans are failing at financial health.

1 - More than half the U.S. population is struggling financially.

According to the Center for Financial Services Innovation 2015 Understanding and Improving Consumer Financial Services in America report[5], 57% of American adults struggle financially.

Worse yet, this challenge primarily affects those who have the greatest impact on our economy. While 64% of all Americans report money as a very significant source of stress, those stats raise sharply when looking at:

  • Parents (77%)
  • Millennials (75%)
  • Gen Xers (76%)

2 - 72% of Americans are experiencing financial stress at least some of the time.

Regardless of economic climate, money and finances have consistently topped American’s list of stressors since 2007.

In some cases, people are even putting their health care needs on hold because of financial concerns.

While in 2007, stress levels were universal regardless of income, today, lower-income households report higher overall stress. In fact, lower-income households are twice as likely as higher-income households to feel financial stress all or most of the time (36% vs. 18%).

The top sources of financial stress reported include:

  • Paying for unexpected expenses (54%)
  • Paying for essentials (44%)
  • Saving for retirement (44%).

3 - More than half of adults (54%) say they have “just enough” or not enough money to make ends meet at the end of the month.

Sadly, many American adults barely scrape by each month - and if you’re a young female, the odds are even worse.

Nearly 49% of women and 57% of millennials say that paying for essentials is a significant source of stress (only 38% for men).

While this applies to both lower-income and higher-income households, 30% of adults who make less than $50,000 a year report that they don’t have enough money to pay their bills at the end of the month, compared with 11% of adults who make over $50,000.

Even more scary is that parents make up the majority of this category with a whopping 71% reporting they have “just enough” or not enough money to make ends meet.

More than half of parents (58%) say that paying for essentials is a significant source of stress.

4 - Nearly one-third of Americans (32%) say their finances prevent them from living a healthy lifestyle.

There are lots of tips and tricks for living healthy on a budget, however, 55% of adults in lower-income households say they handle stress through sedentary or unhealthy habits such as watching TV, drinking alcohol, smoking, and stress eating.

People who report having extreme financial stress are also more than twice as likely to rate their health as fair or poor than those who report low financial stress (44% vs. 17%).

5 - One-third of college students say financial stressors have negatively impacted their academic performance or progress.

With almost 64% of college students using loans to help them pay for college, it’s no surprise that the estimated student loan debt in America is around $1.2 trillion.

The average Class of 2016 graduate racked up $37,172 in student loan debt, up 6% from the previous year.

Thankfully, according to the National Student Financial Wellness Study by Ohio State University, more than three-quarters of students still think college is a good investment for their financial future.

Of the students surveyed:

  • 32% reported neglecting their studies at least sometimes because of the money they owed.
  • 3 out of 10 students had to reduce the number of classes they took
  • 16% had to take time off and 13% had to transfer to another school because of the money they owed.

While this may not seem like a huge amount, only 40% of college students finish their bachelor’s degree in four years according to the National Center for Education Statistics.

The cost of taking one extra year to finish a degree is:

  • At a public college: $18,600.
  • Two extra years at a public college total $37,500.
  • At a private college: $54,000.

When NerdWallet ran their analysis[6] - students who take six years to finish a bachelor’s degree, for example, can miss out on six figures of lifetime retirement savings.

6 - Nearly 1 in 5 Americans say they either considered skipping or skipped going to the doctor because of financial concerns.

As we said before - physical health and financial health are fundamentally key to living a happy and successful life.

However, nearly 3 in 10 lower-income adults have either skipped (20%) or considered skipping (9%) necessary doctor visits because of finances.

When looking at financial health, 44% of lower-income Americans cite out-of-pocket healthcare costs as a significant source of stress, as opposed to only 34% of higher-income adults.

Couple this with 29% of lower-income adults reporting a sense of loneliness and isolation in the past month due to stress (vs. 21 in higher-income adults) and you’ve got a recipe for a whole host of health concerns.

So why is financial health so important?

Your financial health impacts nearly every facet of your life - from affording a yoga class after work to how long you’ll need to keep working before retirement.

While many people have taken steps to live more economically and improve their financial health, there’s still more to be done.

As with any exercise, financial health isn’t something you can achieve through a one-time intensive workout. You must cultivate your present financial health and consistently look to the future in order to persist through times of economic hardship.

By managing day-to-day finances as well as seizing opportunities for financial security, you’ll be able to create resilient and lasting strategies to carry you through the ups, downs and everything in between.


2015 Stress in America Report, from the American Psychological Association

Money Matters on Campus, from EverFi

2 Extra Years in College Could Cost You Nearly $300,000,from Nerd Wallet

Graduation Rates, from the National Center for Education Statistics


  1. "Living Paycheck to Paycheck is a Way of Life for Majority of U.S. Workers" on CareerBuilder.com
  2. "Report on the Economic Well-Being of U.S. Households in 2018" from the Federal Reserve
  3. "Stress in America: Paying with our Health" by the American Psychological Association
  4. "Money Matters on Campus" on Lumina Foundation
  5. "Consumer Financial Health Study
    Understanding and Improving Consumer Financial Health in America" by Financial Health Network
  6. "Gap Year: The Real Cost of Taking a Year Off" by NerdWallet

About the author

Eric Rosenberg is a former bank manager and corporate finance worker with a Bachelor’s degree and MBA in finance. His work is featured at Business Insider, Credit Karma, The Balance, Investopedia, and many other websites and publications. See Eric's profile on LinkedIn.

About the reviewer

Lauren Bringle is an Accredited Financial Counselor® with Self Financial – a financial technology company with a mission to help people build credit and savings. See Lauren's profile on LinkedIn.

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Written on April 21, 2020
Self is a venture-backed startup that helps people build credit and savings.

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