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According to recent data from the National Financial Educators Council, the average adult could stand to lose nearly $2,000 a year due to lack of financial literacy¹. For about 15% of adults, that number increases to as much as $10,000. With micro-transactions and automatic subscription renewals adding onto the temptation of unnecessary spending, it is truly difficult to maintain financial wellness in our current climate.
However, backed by the right tools, you can achieve financial wellness in your personal and economic life. Come along with us as we explore what it means to practice financial wellness and provide strategies to help you figure out your own unique financial plan.
Financial wellness is the state of having a healthy and secure financial situation. It involves managing your money effectively, making sound financial decisions, and planning for the future. Financial wellness is an important aspect of overall wellness because it can lead to greater financial security, reduced stress levels, and the ability to achieve your financial goals.
Believe it or not, financial stress often shows itself in the form of physical symptoms, including feelings of anxiety, headaches, sleep loss, muscle tension, digestive issues, and more². Clearly, financial wellness is an important piece of any holistic wellness routine, as poor financial management could cause enough stress to damage our physical or emotional health.
Assessing your current financial situation is the first step towards financial wellness. This often involves practices like tracking your income and expenses, calculating your net worth, and evaluating your debt and savings. By understanding where you currently stand financially, you can make informed decisions for the future and identify areas for improvement.
Financial health doesn't simply mean earning more money. Oftentimes, financial literacy requires taking a closer look at your day to day or month to month finances to gain a better understanding of your unique financial situation. Only then can you make decisions about your long term financial goals and take steps to reduce your financial stress.
We have compiled a list of basic strategies that should help you take a holistic approach to your financial education and start saving wisely.
Sorting through your financial priorities and setting goals is crucial for achieving financial wellness. These goals help you stay focused and motivated and give you a clear direction for your financial journey.
When setting financial goals, it's important to consider both short-term and long-term goals. What sorts of investments do you want to be financially prepared to handle at different moments in your life? Short-term goals may include things like saving for a vacation or paying off a credit card, while long-term goals may be larger investments like buying a house or retiring comfortably. Striking a balance between your short-term and long-term missions provides a solid foundation for financial stability.
Defining and sticking to a budget is vital for effectively managing your finances. A budget helps you allocate your money by prioritizing spending in the right places and avoiding unnecessary debt when possible.
Remember that the same budget plan will not work for everyone. In order to build a budget that works for you, you need to gain understanding of your income and expenses, identify areas for saving and cutting expenses, and track and adjust your spending regularly. Maintaining your budget should be an ongoing process, especially as your lifestyle, circumstances, and goals evolve over time.
Building an emergency fund is an important aspect of budgeting. An emergency fund provides a safety net for unexpected expenses and financial emergencies like health care costs or property damage. Strategies for building an emergency fund include setting aside a portion of your income each month, automating your savings, and cutting back on unnecessary expenses.
It is recommended to have at least three to six months' worth of living expenses saved in an emergency fund. The Consumer Financial Protection Bureau recommends evaluating past emergency expenses to see which type you most commonly experience and use that as an estimate for how much you would like to set aside³.
Another important strategy for achieving financial wellness is managing debt. It is important to prioritize your debt and develop a repayment strategy in order to ensure that you build or maintain good credit.
Different types of debt, such as credit card debt, student loans, and mortgages, may require different approaches. Common examples of strategies for paying off debt at an accelerated rate include⁴:
The Snowball Method: Starting with the smallest debt and working your way up.
The Avalanche Method: Starting with the debt with the highest interest rate.
Consolidation and refinancing options may also be worth considering. Debt consolidation involves combining multiple debts into a single loan with a lower interest rate. Refinancing, on the other hand, allows you to replace an existing loan with a new loan that has better terms. These options can help simplify your debt repayment and potentially save money on interest.
Investing is also an important aspect of financial wellness as it helps you grow your wealth over time and may make creating a retirement plan easier. Making informed investment decisions requires knowledge of different investment options such as stocks, bonds, mutual funds, and real estate. It is important to consider your risk tolerance and diversify your investments to mitigate risk.
Financial advisors offer valuable guidance and expertise when navigating the complex world of investing, especially for those who are just starting out. A financial advisor provides investment advice and helps you develop an investment strategy based on your goals, risk tolerance, and time horizon. They can also show you how to stay on track and adjust your investment plan as needed.
Protecting your financial future should be a top priority, especially in our current climate. The Federal Trade Commission reported earlier this year that consumers lost more than $8 billion to fraud in 2022, an increase of 30% compared to 2021⁵. Financial protection has become a necessity, and having the right insurance coverage, engaging in estate planning, and taking steps to prevent identity theft and fraud can put a security net in place that protects the financial security of both you and your loved ones.
Insurance provides protection against unexpected events, such as accidents, illnesses, and natural disasters, while estate planning ensures the future stability of your loved ones by creating a plan for the distribution of your assets after your death. Strategies for identity theft and fraud prevention safeguard your financial well-being. Examples of these strategies include being cautious with your personal information, regularly monitoring your financial accounts, and using secure online platforms for transactions.
The most important strategy for long-term financial wellness may be building healthy financial habits. You may choose to develop a savings mindset, prioritizing saving whenever possible and making it a regular habit. Automating your finances, such as setting up automatic transfers to your savings and investment accounts, can help you stay on track with these efforts and avoid the temptation to spend unnecessarily.
Regularly reviewing and adjusting your financial plan is also important. Financial situations and goals can change over time, so it is essential to periodically assess your progress and make necessary adjustments. This ensures that your financial plan remains aligned with your current circumstances and short-term savings just as much as it does with your long-term goals.
If you need help maintaining these habits on a regular basis, you may find financial wellness programs to be useful tools. They can offer guidance on everything from bills to retirement planning, allowing you to feel confident handling your money.
Practicing financial wellness is a journey that requires discipline, knowledge, and ongoing effort. By following these tips, you can manage your resources, take control of your financial future, and enjoy life more by achieving greater stability and peace of mind.
Remember, financial wellness is not about perfection, but rather about making continuous progress, staying committed to your goals, and giving yourself a sense of financial freedom. Start today and create your very own healthy and secure financial future.
(1) National Financial Educators Council (2022) Financial Illiteracy Cost Americans $1,819 in 2022
(2) Purdue University (January 2020) A surprising connection: Financial wellness and your overall health
(3) Consumer Financial Protection Bureau (2023) An essential guide to building an emergency fund
(4) Eneriz, Ashley (May 2023) Debt Avalanche vs. Debt Snowball: What's the Difference?
(5) Federal Trade Commission (February 2023) New FTC Data Show Consumers Reported Losing Nearly $8.8 Billion to Scams in 2022