Financial health refers to a person’s financial state, including credit score, debt management, income maximization, and future planning. Credit scores are crucial, as they determine loan interest rates and risk. Good financial health requires timely bill payment, debt reduction, and asset management. It also applies to businesses, as seen in financial accounting reports.
A person’s financial health refers to the state of their financial affairs. People in good financial health generally have a high credit score, pay their bills on time, minimize debt, maximize their income, and plan for the future. The analogy is derived from a comparison to a person’s physical health.
Credit scores can seemingly make or break an individual financially. There are several credit reporting agencies that collect data about a person’s financial transactions. These companies analyze the data and report a score based on a person’s financial health. A person’s credit score is a composite of these different agencies and generally accurately reflects a person’s credit risk.
Someone with a high credit score is low risk to lenders and receives lower interest rates on 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 rejected altogether. So the first piece of information to determine a person’s financial health is to look at their credit score.
A person in good financial health is usually a planner. That person is not only planning a self-sustaining retirement, but could even plan to create a family legacy with his own foundation. That kind of wealth usually requires an inheritance or a lifetime of good planning.
Good financial health requires bills to be paid on time and massive and unnecessary debt not incurred. Credit card misuse is a massive loss to a person’s financial health. If the bill is not paid in full each month, interest accrues and a person ends up paying much more for the collected items than originally thought. The best way to minimize debt is to start paying off the loans that have the highest interest rate.
Not only does a person need to monitor and reduce debt, but assets need to be well managed. Assets can be cash, property, or land. Cash must be invested wisely and allowed to accumulate interest. Property or land that appreciates quickly is subject to large capital gains taxes under the US tax code, so it must be sold early. A certified public accountant can help a person learn how to pay the least amount of federal and state taxes to preserve and maintain wealth.
The term financial health can also apply to a business as well as an individual or family. The financial health of a company is best seen in financial accounting reports, such as the profit and loss statement or balance sheet. These reports can show the financial health of a company at a glance.
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