What is good financial health?

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Let’s talk about good physical health first.

To know his state of physical health, it is enough to take his height, his sex, his age, and his blood pressure. This data is then compared with that of the Health Canada charts. A person who wishes to have more precise results will have to establish their objectives, and take into account their eating habits, the frequency of their physical activities, and their medical history. The portrait obtained will then be much more accurate, and it will allow you to know exactly what points it is important to address in order to improve your physiological situation and tend towards greater personal satisfaction. It should be noted that not everyone has the same definition of good physical health.

Now let’s transpose the exercise to finance.

If we take an individual’s age, gross annual income, marital status, balance sheet, and budget, we get a general picture of the situation. According to some specialists, we can then know if this person is financially fit. On the other hand, if you want to know your financial health more precisely, you will have to look at other aspects, such as:

  • his life goals, and ensure that each of the different financial spheres is linked to them;
  • his personal and family situation;
  • the protection of his heritage, both during his lifetime and after his death;
  • his retirement;
  • Taxation;
  • his investments.

 

Thanks to this global portrait, it is easy to know what are the points on which the person must work to move towards the desired financial situation. Here again, it should be emphasized that each individual has their own definition of what good health is.

ESTABLISH YOUR STATE OF HEALTH

Here are three points that help to establish whether, in general, a person is in good financial health:

1st point: net worth

Net worth = age X gross annual income

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This equation is based on a mathematical formula from the authors of the bestselling book The millionaire next door, Thomas Stanley and William Danko. It allows an individual to compare himself to himself. If we are a couple, we average the ages and add the income. This formula increases net worth by 10% per year. After all, it is based on the golden rule in finance: “save 10% of your income to be healthy”.

The balance sheet: assets – liabilities = net worth

This net value is to be compared with that of the previous equation. If the result is below, we should save more. If it is above, we have good management of our personal finances.

2nd point: the budget

The budget: income – expenditure = surplus or deficit

Is the budget positive? Have all the financial leaks inside it been uncovered? Even if a budget is positive, if we are unable to confirm the absence of leaks, a red light should come on!

3rd point: the comparison

It’s important to compare years one and two to see if its financial performance is improving or deteriorating. Stagnation or depreciation are bad signs: something has to be done.

In finance, as in all other fields, it is possible to know, in general, the state of one’s situation. But the specialists are of great use in guiding and popularizing the various states of health of a person.

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