Traditional financial literacy efforts haven't been a rousing success. Research from
That's why many experts concerned about Americans' money habits — including regulators such as the
“Financial literacy is really what you know. Financial health is the outcome,” says
The concept of financial health also acknowledges the forces beyond our control. Just as physical health is a combination of behavior, genes and access to good medical care, financial health is a result of personal decisions and abilities, the economy and access to good, unbiased financial services and advice.
“There is an element of personal responsibility, but it's more than that,” Schneider says.
Definitions of financial health typically have three factors in common:
— You can manage your day-to-day financial life
— You can absorb a financial shock
— You're on track to meet your financial goals
How do you get there? These eight behaviors can help:
—YOU SPEND LESS THAN YOU EARN. This is the foundation for financial health. You can't get out of debt or save for the future if your expenses eat up all your available income.
—YOU PAY BILLS ON TIME. You manage your cash flow and meet your regular financial obligations. Missing payments costs you money in late fees, hurts your credit and causes stress.
—YOU HAVE A DECENT EMERGENCY FUND. “Decent” varies according to your circumstances.
—YOU'RE ON TRACK WITH RETIREMENT SAVINGS. How much you need will vary by age and circumstance, but you've done the calculations and are setting aside money regularly to get there. If you have other goals, such as buying a home, you should be saving toward those as well.
—YOUR DEBT LOAD IS SUSTAINABLE.
—YOU DON'T ROUTINELY CARRY CREDIT CARD OR OTHER HIGH-RATE DEBT. Mortgages pay for homes that can increase in value, and student loans provide an education that can help increase your income. That's why they're often described as “good” debt, when used in moderation. There's typically nothing good about credit card debt, which often leaves you paying for items long after you've used them up.
—YOU HAVE GOOD CREDIT SCORES. Some people treat credit scores as a proxy for financial health. They really measure only how well you repay debt. But good credit is a safety net when you need it. It's also a money-saver even if you're not planning to borrow; bad credit can increase your insurance premiums, prevent you from getting an apartment and force you to pay larger deposits for utilities.
—YOU'RE APPROPRIATELY INSURED. You want to be protected against financial shocks that could wipe you out, including medical bills, lawsuits, natural disasters or the death of a family member. Health insurance is a must, and so is homeowners or renters insurance. If you have a vehicle, you need auto insurance with liability limits at least equal to your net worth. If anyone is dependent on your income or services — we're looking at you, too, stay-at-home parents — you likely need life and disability insurance.
Anyone who can tick these eight financial health boxes is making the most of what they have.
This column was provided to The Associated Press by the personal finance website