Financial health is a term that is widely associated with credit score. However, it has a much broader scope and covers many more aspects of your financial life than just credit score. It is a measure of your ability to handle financial issues and efficiently reach your short-term and long-term goals. Your debt to income ratio, credit score, insurance, savings and emergency funds together make up a good financial health. You can check your free credit score and opt for the right credit products at financial marketplaces like Paisabazaar.com. At the same time, there are other platforms where you can create your budget and invest in stocks or mutual funds.
While online financial marketplaces and aggregators could assist you with one or more aspect of your finances, improving overall financial health needs continuous efforts. Here are a few things that you need to take care of when aiming at good financial health.
- Pay down high-cost debts
Debt is an important part of your financial life and hence sound debt management is equally important. When your earnings are not sufficient to cover your debts, it means you have come too far and need to pay down some of your balances in order to stay afloat. You must begin with high-interest debts like credit cards, as a major portion of your earnings would be going towards interest payment. Also, since the free credit period on credit cards becomes invalid when you revolve balance, new purchases would continue to add to your overall debt burden. This is why paying off credit card overdues should be your first priority.
If you have overdue balance on a single card, you can consider transferring the balance to another card at a lower cost. You can choose to consolidate multiple credit card debts by taking a personal loan that covers the balance of all your credit cards.
- Improve your debt to income ratio
The debt-to-income ratio shows the percentage of your income that is already being used to pay off debts. When you apply for a new loan, lenders look at your debt-to-income ratio to understand whether you are capable of handling addition debts. Lenders prefer a low debt-to-income ratio hence lower the ratio the better it is. You can work on lowering your DTI ratio by reducing your monthly recurring debt or by increasing your monthly income.
An important point to note here is that DTI ratio does not affect your credit score but your credit utilization ratio does. This is because credit bureaus do not have information about your income and prepare the report based only on your debts.
- Build and maintain a good credit score
Credit score is the first thing that lenders look at, when you apply for a new loan or a new credit card. Credit bureaus calculate your credit score on the basis of your payment history, credit utilization ratio, credit age, credit mix, etc. Since payment history is given the highest weightage, a regular payment pattern helps you build and maintain a good credit score. Moreover, you should avoid maxing out your credit cards regularly as it is considered a credit-hungry behaviour and might put a negative impact on your profile.
- Save up for emergencies
In addition to managing your debts efficiently, you should also focus on saving for a financial emergency. When you are unprepared, even a minor financial setback can lead to debt spirals, which are difficult to get out of. You should start with smaller goals by putting a small percentage of your income towards the emergency fund. As you become more confident with managing your expenses using the remaining funds, you can consider increasing the amount that you put away for emergencies. As a rule of thumb, the emergency fund should be equivalent to 6 months of your salary. However, you need not reach this goal by compromising on debt repayment or essential expenses. Start small and steady.
- Invest and grow your money
Another important thing that defines a good financial health is investment. Funds lying idle in a bank account can be used to invest in the right avenues- where your money can grow manifolds. However, you should understand that investments come with risks. Those with lesser risk usually give lower returns and vice versa. You must assess your risk-taking capacity and invest accordingly.
Attaining good financial health is not a one-time job. For many, it is a journey that lasts a lifetime. What you need to focus on is progression and gradual success. The first step is to build foundations. The earlier you start the better it is. This, however, does not mean that you cannot start from scratch at a comparatively later stage. Start by building your credit score and finding the right balance between debt and income.
As you grow, you can start working on reaching financial stability. Get sufficient insurance covers, create assets and work on reducing your liabilities. At the same time, consider your retirement and save accordingly.
Remember, everyone’s financial journey is different. Do not compare your wins and losses with others. Find out what works the best for you and work towards it.