We often hear not-so-positive statistics cited about the average American’s finances, such as not having enough money to cover an emergency or leaning on credit cards to pay for household expenses and racking up debt.
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While these red flags indicate a shaky financial foundation, there are several green flags that give Americans peace of mind in knowing they’re in good financial health. Here are the signs your finances are doing better than the average American.
You Have a Sufficient Emergency Fund
One sign your finances are in good shape is if you have an emergency fund covering at least six months of expenses.
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In January 2023, Bloomberg reported that 2 in 3 Americans are unable to financially cover a $400 emergency. Mark Henry, founder and CEO of Alloy Wealth Management, said an emergency fund is essential to financial health.
“Even if you have debts or other financial issues, this is the problem you should tackle first,” Henry said. “If you pay off debts but don’t have an emergency fund, you’ll end up right back in debt as soon as an unexpected expense pops up.”
You Do Not Have Bad Debt
Those who carry bad debt, which has high interest rates of more than 7%, are more financially vulnerable than those without it. Seven percent is used as the line in the sand between good and bad debt because it represents a simple tradeoff between paying off debt and investing, said Kendall Meade, CFP at SoFi.
Before you start investing, Meade recommends focusing on aggressively paying off any bad debt. Debts with interest rates under 7% can be paid off by paying the minimum amount due over time.
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You Have a Cohesive Spending Plan
Rather than call it a budget, Henry said he likes to call it a spending plan because it reframes the process from cutting costs to financial strategizing. Those without a spending plan are less likely to track their spending and understand where their money is going which can lead to ending up in debt.
If you need help getting started with a spending plan, Henry recommends tracking your expenses for a few months. This will give you a better idea of how much money you spend on necessities and any unnecessary expenses you can cut out to save more money, pay down debts or invest.
You Have a Strong Credit Score
Those with credit scores of 800 and up are considered to have excellent credit.
If you’re not quite at this number, keep working on it. Monique White, head of community at Self Financial, said having a strong credit score is one of the most important tools to lay the groundwork for future financial success and building lasting wealth. You can keep your credit score in good standing by making all your payments on time and not misusing any credit cards.
You Understand How Retirement Accounts Work
Need a starting point for what you should be putting toward your retirement savings? Meade recommends 15% of your income as a baseline. This amount will become higher for those who start saving later in life or want to retire early.
Aside from saving, part of your retirement planning should include understanding how different retirement accounts work and how to take advantage of them. Henry said this includes maxing out contributions and taking advantage of company matches on a 401(k), opening an IRA and opening a Roth IRA to make financial contributions that grow tax-free.
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Your Retirement Plan Goes Beyond Social Security
Social Security is not designed to be anyone’s sole source of income in retirement. For those who have retired or are near retirement, your finances are in better shape than the average American’s if you have a plan for income beyond Social Security.
Henry recommends creating a personal pension plan to help maintain a regular income in retirement.
“More and more large custodians, such as Fidelity and State Street Global Advisors, are beginning to offer packages to transform your 401(k) into a pension,” Henry said. “Shop around for a plan that fits your needs and understand any fees. It’s also always a good idea to speak to a trusted financial advisor when deciding on a pension plan.”
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