Good Financial Health or Trouble Ahead?
Achieving and maintaining good financial health is an important goal in life. Being aware of the indicators of financial health and recognizing warning signs can help us make informed decisions and avoid potential financial pitfalls. In this blog, we will explore the key indicators of financial well-being, and some of the warning signs of potential financial trouble.
Signs of financial health
Consistent income and cash flow
A stable and consistent income is one of the most important features of financial health. A healthy financial situation is characterized by regular inflows of cash, which allow you cover expenses and save for the future. Steady cash flow creates stability and flexibility and allows you to meet financial obligations promptly. For some individuals, such as those who are self-employed, income may be inconsistent, but the ‘ups and downs’ can be smoothed out with some diligent budgeting and expense management.
Positive net worth
Calculating your net worth can help gauge your financial health. Your net worth is the difference between the value of the things you own – your assets (vehicles, real estate, savings, and investments) and the amount of your liabilities (debts). If you have a positive net worth, the value of your assets exceeds that of your liabilities – suggesting a healthy financial position and the ability to fully cover financial obligations.
Emergency fund
A well-prepared individual has an emergency fund in place – which acts as a ‘safety net’ during unexpected events such as a car repair, family emergency, illness, or job loss. An emergency fund should contain enough funds to cover three to six months of your normal living expenses. The emergency fund protects you against financial hardship and gives you peace of mind.
Debt management
Managing debt responsibly is a key sign of financial health. It involves keeping your debt levels under control, making timely payments, and not relying solely on credit cards or loans for day-to-day expenses. A reasonable debt-to-income ratio and a proactive approach to debt repayment (not simply servicing the interest but aiming to pay off the debt entirely) are other signs of good financial health.
Planning for the future
Having savings and investments demonstrates your commitment to long-term financial well-being. Inevitably, our ability to work to earn income will diminish due to age or health. Having your money work for you will help make up the difference. Getting advice from an accredited investment advisor will help you invest and manage your money to achieve good growth with limited risk.
Warning signs of financial trouble
Late payments and mounting debt
Excessive debt and a pattern of missed or late payments are warning signs of financial trouble. If your debt burden is increasing, and payments are consistently delayed, it can indicate a lack of financial control. This situation can lead to higher interest rates, damaged credit scores, and a potential financial crisis if not addressed promptly.
Insufficient or no savings
Inadequate or nonexistent savings is a red flag. Struggling to save money and living paycheck to paycheck without any safety net signifies a precarious financial position. Without savings, unexpected expenses can quickly spiral into overwhelming debt causing severe financial strain.
Excessive dependence on credit
Reliance on credit cards or short-term (e.g., ‘payday’) loans to cover daily expenses or make ends meet can indicate financial instability. If your credit limits are continually maxed-out or credit card balances are not paid in full each month, it suggests a lack of control over spending habits and potential trouble meeting financial obligations.
Regularly living beyond means
Spending more than your income is a clear warning sign of financial distress. If you consistently struggle to meet financial obligations and resort to borrowing or using credit to sustain a certain lifestyle, it indicates an unsustainable financial path.
Lack of financial planning
Neglecting financial planning and overlooking regular budgeting and expense tracking can be detrimental. It reflects a lack of awareness and control over financial matters, increasing the chances of financial instability through uninformed or poor decision-making. This includes overlooking tax obligations inherent in earning self-employed income – spending all the money received and failing to set up a plan to set aside sufficient funds to pay the taxes when they are due.
Personal issues
Making sound financial decisions is more difficult if you’re going through a relationship breakup, you or a family member is struggling with health or addiction issues, or you’re experiencing ongoing job instability. You will need to take steps to resolve these issues before you can fully return to good financial health.
If you recognize signs of financial health in relation to your own finances, you are on the right path. There are always improvements that can be made, and it’s important to review your financial picture regularly to ensure that everything is still in order.
If you recognized some of the warning signs of financial trouble, take comfort in knowing that there are ways of turning things around. Sometimes, it can be as simple as making some lifestyle changes, becoming more proficient at budgeting, or refinancing the debt you have to benefit from a lower interest rate or reduced monthly payments.
If you find yourself overwhelmed and cannot see any way of dealing with your debts, there are solutions available to help you get back on track. It's important to seek help early from a Licensed Insolvency Trustee to find the right solution for your unique situation. Contact us for a free, no obligation, confidential consultation to discuss your options and find a Life-Changing Debt Solution that best fits your needs.
Wes Cowan is a Licensed Insolvency Trustee with MNP Ltd., serving the Kitchener, Ontario area.
