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When you think about your health, your mind likely goes first to your physical health and then maybe your mental and emotional health. But there is another key component to your overall well-being, and that’s your financial health.

While you may never discuss it with your doctor —- and may go months or years ignoring it —- your financial wellness has a significant impact on your daily life, as well as your future. What’s more, having poor financial health can in turn affect your physical and mental health.

But what exactly is financial health? How do you measure it? And, more importantly, how do you achieve it? Read on to learn all about financial health, from how to assess it to how to improve it.

Understanding Financial Health

Financial health is defined as the current state of your monetary situation, such as your credit, debt, savings, investments, and income. Being financially healthy means you can meet your monthly financial obligations, are on track to achieve your financial goals, and have enough cash in the bank to be able to absorb a financial setback.

Indications of Financial Health

Below are six signs that your finances are in good health:

•   You make enough money to cover your monthly expenses

•   You pay all of your bills on time

•   You have no debt or have debt that is manageable and being repaid on schedule

•   You’re saving enough to meet your short- and long-term goals

•   Your credit score is strong enough to help you qualify for whatever loans you might need at low rates

•   You feel comfortable with your financial situation

Metrics and Measurements

There are several core components of financial health. Here’s a look at how to measure the current state of your finances and discover areas where you may need improvement.

•   Your debt-to-income ratio: Carrying too much debt can be harmful to your financial health. Lenders use a calculation called debt-to-income ratio (DTI) that compares a person’s monthly debt payments to their monthly gross income to determine how manageable someone’s debt load is. Lower is generally better. Lenders often like to see DTI ratios of 36% or less.

•   Your credit score: Having a strong credit score is an indicator of good financial health. Factors that impact your score include amounts you owe on your debt accounts, repayment history, your credit mix, and the length of credit history. FICO® Scores range from 300 to 850. Having a score above 700 is generally considered good credit, while above 800 is considered excellent.

•   Your emergency fund: A key measure of financial health is having enough cash in the bank to weather unexpected setbacks like a medical emergency, car breakdown, or job loss. Experts generally agree that you should have an emergency fund with three to six months’ worth of living expenses saved.

•   Your retirement savings: Because there are so many variables, it’s hard to know exactly how much you need to save for retirement. One rule of thumb is to aim to save at least 1x your salary by 30, 3x by 40, 6x by 50, 8x by 60, and 10x by 67. Check how your savings compares to ideal retirement savings by age to know if you’re on track or if you need to catch up.

Improving Financial Health

You might feel that achieving optimal financial health is a long way off. Don’t get discouraged. The good news is that implementing just a few good financial habits — such as tracking your spending and saving at least something each month -– can boost your financial well-being right away, and even more so over time.

Below are seven practical tips to help you move forward.

1. Get on a Budget

When it comes to money in and money out each month, many of us leave it to chance — and hope that the numbers work out. Taking some time to actually crunch the numbers and set up a monthly budget, however, can help ensure that you are living within your means, spending in line with your priorities, and working towards your future goals.

A simple way to get started is to collect the last few months of financial statements and calculate the average amount coming in (after taxes) each month, and average amount going out each month. Subtract the latter from the former and see what you get. If you’re spending more than you are bringing in, or it’s so close there is little left over for saving, you may want to take a closer look at your spending.

There are many different types of budget but one simple guideline you might consider is the 50/30/20 budget. With the approach, you divide your monthly take-home income into three categories: 50% goes to needs (essentials), 30% goes to wants (nonessentials), and 20% to savings and debt repayment (beyond the minimum payment).

2. Track Your Spending

Keeping tabs on how much you are spending each month, and on what, is crucial to financial wellness. Indeed, tracking spending can be both eye-opening and motivating. You might notice, for example, that you’re spending more than you think for certain things, or that your spending is out of line with your priorities. You might also spot some immediate areas for improvement.

One easy way to track spending is to put a budgeting app on your phone (many are free for the basic service). Budgeting apps typically connect with your financial accounts (including bank accounts, credit cards, and investment accounts), track spending, and categorize expenses so you can pinpoint exactly where your money is going.

3. Create a Plan for Debt

Credit cards and similar high-interest consumer loans can drag down your financial health by making it harder to meet your monthly expenses — and even harder to save for future goals. Paying off high-interest debt is an important investment in your financial future.

If you have multiple balances racking up high interest charges, here are two popular strategies that can help you whittle them down to zero.

The snowball method: With the snowball method, you list your debts by size then put an extra monthly payment towards the loan with the smallest balance, while continuing to pay the minimum on the others. Once the smallest debt is paid, you put your extra payment towards the next smallest balance, and so on.

The avalanche method: Using the avalanche method, you list your debts in order of interest rate then focus extra payments towards the debt with the highest interest rate, while continuing to pay the minimum on the others. Once that debt is paid off, you put your extra payments to the debt with the next-highest interest rate, and so on.

4. Look for Ways to Cut Expenses

Trimming back your expenses helps you increase your disposable income, giving you more money to put toward your goals. It also makes it easier to stick with your budget and avoid going into debt.

You might comb through your expenses to look for some easy ways to cut back. While you may assume your “needs” costs are fixed, it may be possible to shop around for a better price on certain monthly essentials, like insurance or a phone plan. Or, maybe you don’t need to drive to work but could spend less by taking public transportation or carpooling with a coworker.

It’s often even easier to find places to cut back in your nonessential sending. For example, you might decide to get take-out less often and cook more nights a week, get rid of streaming services you rarely watch, and/or jog outside instead of going to a gym. Every dollar you save is one more you can put towards saving and debt repayment.

5. Automate Saving

Tackling financial health can feel overwhelming, and it’s not likely something you want to be thinking about all the time. Fortunately, it’s easy to put one of the best financial health-boosters — saving at least something each month — on autopilot.

There are two ways to do this: One is to have a portion of your direct deposit go right into a savings account. The other is to set up a recurring transfer from your checking to your savings on the same day each month (ideally, right after you get paid). You can’t spend what you don’t see. And, chances are, you won’t even miss it.

To help your savings grow faster, consider putting this money in an online savings account. Since online institutions generally have lower overhead than traditional brick-and-mortar banks, they tend to offer better rates and low (or no) fees.

Build Your Emergency Fund

Without an emergency cash cushion, an unexpected expense (like a car repair or large medical bill) or loss of income can quickly derail your finances. You may be forced to rack up expensive credit card debt. This can put you in a debt spiral that can be difficult to get out of, and take a long-term toll on your financial health.

Even if you do have an emergency fund, it’s wise to periodically check in to make sure it’s sufficient. A good rule of thumb is to keep at least three- to six-months’ worth of living expenses in the bank. (If you’re self-employed or work seasonally, you may want to aim for six- to 12-months worth of expenses.) Ideally you want to keep this money in a savings account that earns a competitive rate but allows you to easily access your money when you need it.

Invest More of Your Income

If you’re putting just a small percentage of your paycheck into your 401(k), or other retirement fund, consider stepping it by 1% or 2% right now. While 1% is a small percentage of your annual earnings today, after 20 or 30 years it can make a big difference in your account balance when you retire. That’s because the longer you give your money a chance to grow, the better.

You might also ask your employer to automatically increase your contribution by a set percentage each year. As your income increases, those extra percentage points of income likely won’t be missed — but they’ll have a big impact on your retirement savings. Your future self will thank you.

Recommended: When Should You Start Saving for Retirement?

The Takeaway

Just as with your physical health, establishing and maintaining good habits is key to achieving good financial health.

Some habits that can significantly boost financial wellness include setting up a simple budget, tracking spending, automating savings, building an emergency cash reserve, paying down expensive debt, and investing more of your earnings.

No matter what your income or current state of financial health, putting some smart money habits into place now can go a long way toward boosting your financial security, reducing stress, and building wealth over time.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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A bond’s coupon rate represents the annual interest rate paid by the issuer, as determined by current market interest rates and based on the bond’s face value. Bond issuers typically pay coupon rates on a semiannual basis.

The coupon rate of a bond can tell an investor how much interest they can expect to collect on a yearly basis. The bond coupon rate is not the same as the bond yield, which investors who buy bonds on the secondary market use to estimate the total rate of return at maturity.

Investment-quality bonds can help with diversification in a portfolio while providing a consistent stream of interest income. Understanding the coupon rate and what it means is important when choosing bonds for your portfolio.

What Is the Coupon Rate?

Bonds represent a debt where the bond issuer borrows money from investors and agrees to pay interest at regular intervals in exchange for the use of their capital. Both governments and non-government entities, like corporations, may issue bonds to raise capital to fund various endeavors.

The coupon rate of a bond is usually a fixed interest rate, typically paid out twice per year. That said, there are some variable-rate bonds, as well as zero-coupon bonds (more on those below). Investors often use the term “coupon rate” when discussing fixed-income securities, including bonds and notes.

Recommended: How Does the Bond Market Work

The Role of Coupon Rates in Bond Investments

Investors can buy individual bonds, bond funds, or bond options, which are derivatives similar to stock options.

The coupon interest rate tells you what percentage of the bond’s face value, or par value, you’ll receive yearly. The rate won’t change during the life of the bond, which is why some bonds are worth more than others on the secondary market.

Coupon rates are typically lower for investment-grade bonds and higher for junk bonds, due to their higher risk.

Example of a Bond’s Coupon Rate

Assume you purchase a bond with a face value of $1,000. The bond has a coupon rate of 4%. This means that for each year you hold the bond until maturity, you’d receive $40, regardless of what you paid for the bond.

If you buy a bond on the secondary market, the story changes somewhat. That’s because bonds trade either at a premium to the par value (higher than the face value), or at a discount to par (lower than the face value). Because the coupon rate of the bond stays the same until maturity, it may represent a higher or lower percentage of the par value — this is called the yield.

History of the Term Coupon

Bond holders used to get literal coupons as a way of collecting their interest payments. This is no longer the case, as interest is paid on a set schedule to the investor directly.


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Calculating the Coupon Rate

The bond coupon rate formula is fairly simple:

Bond coupon rate = Total annual coupon payment/Face or par value of the bond x 100

To apply the coupon rate formula you’d need to know the face or par value of the bond and the annual interest or coupon payment. To find this payment, you’d multiply the amount of interest paid by the number of periodic payments made for the year. You’d then divide that by the par value and divide the result by 100.

Recommended: How to Buy Bonds: A Guide for Beginners

Step-by-Step Calculation of the Coupon Rate

Say you have a bond with a face value of $1,000, which pays $25 in interest to you twice per year.

•   To find the annual coupon payment you’d multiply $25 by two to get $50.

•   You’d then divide the $50 annual coupon payment by the $1,000 par value of the bond. 50 / 1000 = 0.05

•   Then multiply the result by 100 (0.05 x 100) to find that your bond has a coupon rate of 5%.

The Impact of Market Interest Rates on Coupon Rates

How is the coupon rate determined? This is where current market interest rates come into play.

How Interest Rate Fluctuations Affect Bonds

Interest rates can influence coupon rates. An interest rate is the rate a lender charges a borrower. Individual lenders determine interest rates, often based on movements in an underlying benchmark rate. When discussing bond coupon rates and interest rates, it’s typically in the context of changes to the federal funds rate. This is the rate at which commercial banks lend to one another overnight.

Movements in the federal funds rate directly influence other types of interest rates, including coupon rates and bond prices on the secondary market.

When interest rates rise, based on changes to the federal funds rate, that can cause bond prices to fall. When interest rates decline, bond prices typically rise. When bond prices change that doesn’t impact the coupon rate, which stays the same. But a bond’s price is an important consideration for investors who trade on the secondary market because it impacts the yield to maturity.

Strategies for Investors in a Changing Rate Environment

Bond prices can move up or down based on the coupon rate, relative to movements in interest rates.

When interest rates are higher than the bond’s coupon rate, that bond’s price may fall in order to offset a less attractive yield. If interest rates drop below the bond’s coupon rate, the bond’s price may rise if it becomes a more attractive investment opportunity.

When comparing coupon rates and bond prices, it’s important to understand the relationship between the bond’s face value and what it trades for on the secondary market. If a bond is trading at a price above its face value, that means it’s trading at a premium to par. Conversely, if a bond is trading at a price below its face value, that means it’s trading at a discount to par.

An investor who purchases a bond with the intent to hold it until it reaches maturity does not need to worry about bond price movements. Their end goal is to collect the annual interest payments and recover their principal on the assigned maturity date, making it a relatively safe investment as long as the issuer fulfills their obligation.

Investors looking to buy bonds and resell them before they mature, however, may pay attention to which way bond prices are moving relative to the coupon rate to determine whether selling would yield a profit or loss.

Understanding Coupon Rate vs. Yield

Coupon rate tells investors how much interest a bond will pay yearly until maturity. But there are other metrics for evaluating bonds, including yield to maturity and interest rates. Understanding the differences in what they measure matters when determining whether bond investments are a good fit and what rate of return to expect.

Coupon Rate vs. Yield to Maturity

A bond’s yield to maturity or current yield reflects the interest rate earned by an investor who purchases a bond at market price and holds on to it until it reaches maturity. A bond’s maturity date represents the date at which the bond issuer agrees to repay the investor’s principal investment. Longer maturity dates may present greater risk, as they leave more room for the bond issuer to run into complications that could make it difficult to repay the principal.

When evaluating yield to maturity of a bond, you’re looking at the discount rate at which the sum of all future cash flows is equal to the price of the bond. Yield to maturity can be quoted as an annual rate that’s different from the bond coupon rate. In figuring yield to maturity, there’s an assumption that the bond issuer will make coupon and principal payments to investors on time.

The coupon rate is the annual interest earned while yield to maturity reflects the total rate of return produced by the bond when all interest and principal payments are made.

Coupon Rate vs Interest Rate

While coupon rate and interest rate seem similar, they are distinct. The coupon rate is set by the issuer of the bond, and the amount paid to the bondholder is tied to the face value.

But the prevailing interest rate set by the government is what determines the coupon rate. If the central bank, i.e. the Federal Reserve, sets the interest rate at 6%, that will influence what lenders are willing to accept in the form of the coupon rate.

Also, the price of a bond on the secondary market hinges on the coupon rate. A higher-coupon bond is more desirable than a lower-coupon bond, so its price will be higher.


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Variable-Rate and Zero-Coupon Bonds

Not all coupon rates are fixed. Investors can also consider whether buying variable-rate bonds or zero-coupon bonds might make sense.

Fixed vs. Variable Coupon Rates and Investment Impact

Although bonds typically offer fixed-income payments, some bonds do offer coupon rates that adjust periodically. For that reason these bonds are sometimes called floating-rate or adjustable-rate bonds.

In these cases, the coupon rate adjusts according to a formula that’s linked to an interest rate index such as the SOFR (Secured Overnight Financing Rate), the new benchmark in the U.S. that has largely replaced the LIBOR (London Interbank Offered Rate).

Although these are income-producing bonds, and there is always the possibility that they could offer a higher yield under the right conditions, they are not technically fixed-income instruments, which is something for investors to bear in mind. In addition they come with the risk of default.

Zero-Coupon Bonds Explained

Some bonds, called zero-coupon bonds, don’t pay interest at all during the life of the bond. The upside of choosing zero bonds is that by forgoing annual interest payments, it’s possible to purchase the bonds at a deep discount to par value. This means that when the bond matures, the issuer pays the investor more than the purchase price.

Zero-coupon bonds typically have longer maturity dates, which may make them suitable when investing for long-term goals. This type of bond may experience more price fluctuations compared to other types of bonds sold on the secondary market. Investors may still have to pay taxes on the imputed interest generated by the bond, though it’s possible to avoid that by investing in zero-coupon municipal bonds or other tax-exempt zero-coupon bond options.

The Takeaway

Investing in bonds can help you create a well-rounded portfolio alongside stocks, and other securities, which is why knowing the coupon rate of a bond is important. The coupon rate is the interest rate paid by the issuer, and it’s fixed for the life of the bond — which makes it possible to create a predictable income stream, whether you buy the bond at issuance or on the secondary market.

As you get closer to retirement, bonds can be an important part of your income and risk management strategy, whether you’re investing through an IRA, a 401(k), or a brokerage account.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.