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Financial education 18 Jun 2018

Financial health: Eight indicators to measure it

Having a good financial health means having both enough money to cover expenses and savings to face unexpected future events.  To know how to analyze it, the Center for Financial Services Innovation (CFSI) has identified, in a study published in the Center for Education and Financial Capabilities of BBVA, eight indicators that measure the state of people’s financial health.

Spend less than income

This indicator, as the study points out, is pivotal because it indicates the individual’s ability to successfully manage cash flow. Spend less than income directly affects the ability to build savings and be resilient in the face of unexpected events.  To improve this indicator, it is advisable to collect the total amount of income and expenses over the past twelve months, and analyze them on a monthly basis, to curb superfluous expenses.

Pay bills on time and in full

There are two types of bills: high priority bills, that is, hose that have less flexibility and more severe consequences if left unpaid, such as mortgage payments, and low priority bills, which are more flexible and more lenient with late payments, such as subscriptions or cable bills.  The extent to which individuals are keep up with their bill payments, both high and low priority, sheds light on how well they are able to manage their cash flow and day-to-day financial commitments.

Have sufficient living expenses in liquid savings

At one point or another of our financial lives, we all have to face unexpected expenses: repairs, medical treatments, a fall in income … It is advisable to have enough savings to face them and, thus, keep from taking on unsustainable debt. The report recommends periodically and automatically transferring a specific amount of money to the corresponding savings product. Saving enough capital cover six months or more of living expenses with no income is one of the benchmarks of financial health. 

Have sufficient long-term savings or assets

Having the short and medium term covered is positive for finances, but having sufficient long-term savings is necessary to achieve financial security and take advantage of opportunities such as investing in a home or a child’s education, or facing retirement in a comfortable position. In the case of retirement, it is convenient to take into account the replacement rate in order to have the greatest possible purchasing power when it is time to retire.

Have a sustainable debt load

Individuals that know how to manage their debts lead a quieter financial life, and will not be consumed by late fees or become over-indebted. One of the factors in which the CFSI study emphasizes is the credit card usage: Paying credit cards on time and in full is a sign of good financial health.

Have a prime credit score

According to the study, people with a ‘super prime’ or ‘good prime’ profile – i.e., individuals with an excellent credit score, who lenders or creditors consider virtually risk-free customers – have better financial health.

Have appropriate insurance

Low quality insurance may give users a false sense of protection.  It is advisable to buy these products taking into account variables such as family size and the required coverage level. Lack of sufficient coverage may become a financial problem when dealing with, for example, a medical emergency.   

Plan ahead for expenses

People who plan for their finances (making budgets, transferring money to saving products, etc.) and know how to deal with the financial challenges of the future, are those that show better financial health.  Healthy financial habits are essential to have access to better opportunities and lead a comfortable financial life.

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