What does good financial health mean? The key metrics for a check up
From debts and pensions to savings and insurance, the personal finance questions to address as we go into a new year
As we wave goodbye to 2024 and start a new year, now is a sensible time to take stock of our finances. Becoming financially healthy may be a popular New Year’s resolution, but before we can take steps to make this happen it’s important to clarify what this means in practice.
Ultimately, you want to ensure you are earning enough income to maintain your standard of living and also save and prepare for the future. But experts warn money isn’t the ultimate goal – it is a means to an end if you want to be financially healthy.
Ranald Mitchell, director of Charwin Mortgages, says: “Financial health isn’t about wealth, it’s about balance, resilience, and creating the security needed to thrive in the present while preparing for the future.”
To make things simple, here are the six questions to ask yourself to ascertain whether you are financially healthy – and where you may need to do some work in 2025.
Are your debts manageable?
There isn’t necessarily anything wrong with having debt, so long as it is manageable.
Most people’s largest debt is their mortgage but you may also have a personal loan or credit card. The important thing is to ensure you can afford the repayments and don’t borrow too much or overstretch yourself.
Scott Gallacher, director at financial advisory firm Rowley Turton, says your monthly debt repayments should ideally stay below 30pc of your income. He advises: “Spend less than you earn.
“Living within your means is the foundation of financial success. Consistently overspending leads to debt and financial stress.”
Are you protected?
You can’t predict the future but you can prepare for the unexpected through insurance.
Products such as life insurance, income protection and critical illness cover can help cover you and your family if you lose your income. Life insurance will provide a payout to your loved ones if you die that can help cover the mortgage or other daily bills.
Income protection and critical illness can also provide protection while you are alive.
For example, if you lose your job or can’t work for a short period, income protection can cover your monthly salary or expenses, while critical illness will provide a one-off payout if you have a serious illness or injury that prevents you from working.
Gallacher adds: “Income protection insurance are essential safeguards for you and your family against unforeseen events.”
How stable are your savings?
Building a savings pot can help pay for major milestones such as a mortgage deposit or even just your annual summer holiday fund. Experts also suggest putting money aside for emergency expenses such as boiler breakdowns or leaks at home or if you lose your job.
Bradley Lay, founder of Peak Capital Group, suggests building an emergency savings pot equal to at least six months of regular expenses. You can even keep it in an easy access savings account to earn interest.
He adds: “Make sure your savings rate is at least higher than inflation, otherwise you are losing money,
Are you prepared for retirement?
Saving for retirement with a pension can help ensure you generate a decent income if you decide to stop working in your older years.
The earlier you start saving for retirement, the more time you have to build a substantial pot and ride out any stock market volatility.
Additionally, your contributions benefit from pension tax relief. Everyone who contributes to a pension gets an extra 20 per cent added by HMRC for each contribution to boost their savings. Higher and additional rate taxpayers can claim for another 20 per cent or 25 per cent. This is essentially the government refunding tax you already paid on the money before it went into your pension.
Gallacher says: “Ensure you’re on track to maintain your lifestyle after retiring.
“The good news is you’ll likely need less than your current income if your mortgage is paid off and your children are financially independent.”
Can you beat the benchmark?
Make sure your savings and investments are working hard enough for you.
Saving and investing is always beneficial but if you are not beating inflation then you are technically losing money as you are spending more than you are earning in interest.
Additionally, if your investment fund is lagging benchmarks such as a stock index or other funds over the long-term for no clear reason then it may be worth moving your money.
David Belle, founder at Fink Money, said: “For some a benchmark might be to beat the return on a basket of government bonds.
“For others, it might be trying to beat the S&P500.
“At the end of the day, the only benchmark that matters in finance is how much risk you are taking on for what reward and the extent to which that gives you a higher balance in your bank account.”
Are you financially engaged?
Engagement is half the battle when it comes to financial health, says Daniel Wiltshire, independent financial adviser for Wilshire Wealth.
He adds: “This means knowing your income and expenses, setting clear goals, and regularly checking your progress.
“By tracking spending, managing debt, and building savings, you stay in control and reduce stress. Asking questions, seeking advice, and adjusting to changes keep you on track.
“Unfortunately, too many people choose to bury their heads in the sand, ignoring their finances until it’s too late.”
When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.