Table of Contents
What Is Financial Wellness?
Financial Wellness refers to the state of your financial situation and encompasses your financial life's overall health and well-being. Several elements typically define financial wellness:
- Understanding Money: Understanding basic financial concepts, like how to save, spend wisely, and not get into too much debt.
- Good Money Habits: Being smart with your money, such as setting aside emergency funds, regular savings, managing debts, and living within one's means.
- Feeling Safe: Being comfortable with how much money you have now and knowing you can handle unexpected costs.
- Freedom to Choose: Having enough money to make choices that allow you to enjoy life, including travel, leisure, and other desired experiences.
- Being Ready: Setting aside money for the unexpected such as sudden expenses, job loss, or health crises.
- Planning Ahead: Thinking about what you want in the future, like going to college or buying something big, and starting to save for it.
- Not Stressed About Money: Feeling relaxed and not worried about your money situation.
Financial Wellness is all about understanding money, making wise choices, and feeling good about where you stand with your money.
Why Is Financial Wellness Important?
Financial health and wellness is important because it affects many aspects of your life. Here are a few important reasons why financial health is essential:
Can reduce worry
Money problems are a significant source of stress for many people. When you have a solid plan for your money and feel confident you are in charge of your finances, you have financial habits that can lower anxiety and stress about money.
Help you find peace of mind
Achieving good financial health means being ready for the unexpected, like losing your job or having a medical emergency. An emergency fund and insurance can give you and your family a safety net and ensure you are cared for during challenging financial times.
Promotes better quality of life
Being financially healthy lets you make good decisions for your overall financial well-being. This could mean taking up a hobby, going on a trip, or spending time with your family and friends without worrying about money.
Helps you achieve your goals
Financial wellness lets you establish and work toward personal and financial goals, like getting a house, starting a business, or even saving up for retirement. You can reach these goals and enjoy the rewards of your hard work if you know how to handle your money well.
Enables financial independence
Being financially well means making choices based on your values and priorities, not what you can afford. When financially independent, you can make decisions that help you reach your goals and fulfill your dreams.
Encourages better money management
Knowing how important it is to be financially healthy makes you more likely to get into good money habits. These include making and following a budget, saving money, and spending responsibly, all of which will help you in the long run.
What Are The Key Components of Financial Wellness?
Financial wellness doesn't happen automatically; it requires focus, planning, diligence, and education. The key components of financial wellness include financial literacy, planning, budgeting, saving strategies, debt reduction, and investment basics.
Financial planning
Financial planning doesn't have to be overwhelming. Some people are more comfortable managing their finances than others. If you feel unsure about your overall financial direction, contacting a knowledgeable financial professional may help you identify strategies that can help strengthen your financial well-being. And these personal finance planning tips and guidelines can offer you some simple and practical steps to help you get started.
Budgeting
No matter where you are on the income scale, it's important to maintain a budget to stay within your means. If you live paycheck to paycheck, now may be a good time to assess your monthly income and expenses to see where your money is going. This budgeting and savings guide introduces some helpful tips and strategies to help you achieve your finances and short- and long-term financial goals.
Saving strategies
Your saving strategies will depend on your short- and long-term financial goals. Saving for a memorable European vacation over several years is much different than saving for retirement over several decades.
Whether your savings and investment vehicles include savings accounts, certificates of deposit (CDs), money market accounts, zero-coupon bonds, or reinvestments from stocks and mutual funds, they can earn you compound interest. Use our compound interest calculator to see how you can accelerate wealth accumulation and evaluate your current saving strategies.
Debt reduction
While a mortgage can be considered "good debt," revolving credit card balances and other high-interest debt can become a barrier between you and your financial goals. If your credit cards are becoming a problem, eliminate most of them and develop a game plan to pay down your debt.
You may want to consider a debt consolidation loan, which allows you to combine your high-interest debts into a single payment. Our debt calculator can help you determine how much debt is too much and determine what next steps could improve your financial situation.
Investment basics
Learning where to start may feel intimidating if you are new to investing. But don't worry: our investing 101 guide offers a place to find straightforward answers to your investment questions. Explore this guide to learn about basic investment terms, the different types of investments, the differences between long-term and short-term investments, how compound interest works, how to create a diversified portfolio, and the impact of inflation on your savings and investments.
Understanding the basics of investing can help you make more informed decisions about where to direct your money and help you feel more confident about your financial future.
Tips & Strategies for Achieving Financial Wellness
There are many paths to follow in economic life to achieve financial freedom and wellness. Here are some helpful tips and strategies: setting financial goals, building an emergency fund, having insurance, improving your credit score, effectively managing it, planning for retirement, and staying financially informed.
Setting financial goals
Buying a new home or paying for your kid's college tuition are expensive propositions, but they don't have to be stress-inducers. A savings plan and sticking to it can help you stay in good standing and meet those longer-term goals.
Building an emergency fund
A good rule of thumb is to have an emergency fund that can cover three to six months' worth of expenses, but even that may not be enough to handle worst-case scenarios. Many financial experts suggest setting aside enough money to cover nine to 12 months of expenses.
Use our emergency fund calculator to evaluate your financial situation and help determine how much you may want to save in an emergency fund and where to keep your money. Hence, it's liquid and accessible when you need it.
Having insurance
Having insurance is another key component of financial security and wellness. Carrying health insurance means you may not worry as much about unforeseen accidents or illnesses. And if you have dependents, taking out disability and life insurance policies can help to ensure that your loved ones are taken care of if something should happen to you.
Improving your credit score
Your FICO credit score is calculated by using your credit data from five different categories, with the following weights: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%).
Experian explains how to improve your credit score by suggesting you build up your credit file, pay your bills on time, catch up on past-due accounts, pay down any revolving account balances, and limit how often you submit new credit applications.1
Planning for retirement
The size of your retirement savings account will depend on when you leave the workforce and what lifestyle you plan to lead afterward. Our retirement planning guide covers a spectrum of topics to help you plan accordingly: how to prepare for retirement, how much you may need to retire, how to save for retirement, IRA and 401(k) basics, understanding annuities, estate planning, and aging and senior care. Remember that if you're a late starter in your retirement plan or hope to retire early, you might want to kick in a bit more to your 401(k) or IRA.
Staying financially informed
Our education doesn't end at graduation; the same is true with financial life about the need for continuous financial education. There is always more to know to stay financially well. To help you on your way, our personal finance guide is an excellent resource of financial information on various topics, including personal finance planning, managing debt, budgeting and saving, handling money, and small business planning.
You also may want to enroll in financial wellness programs at work, which an increasing number of employers now offer. These courses typically help workers develop positive spending habits, such as maintaining a budget, paying down harmful debt, and teaching them how to save for retirement and other long-term needs.
Common Financial Challenges & Solutions
Below are eight common challenges that may create obstacles in your path toward financial wellness, along with some practical solutions to help you address them and your financial habits to help you get your financial priorities back on track.
Challenge #1: Overspending
Without financial discipline, overspending — especially by buying too much on your credit cards — can quickly get out of hand.
Helpful steps to take:
- Create a realistic budget for your income, essential expenses, savings, and discretionary spending.
- Track your spending regularly to ensure you stick to the budget and adjust it as needed.
Challenge #2: High levels of debt
Your debt-to-income ratio (calculated by dividing your total monthly debt payments by your gross monthly income) is an excellent financial measure to help you determine if you have too much debt.
Helpful steps to take:
- Prioritize paying off high-interest debts first, such as credit card debt.
- Make a plan to pay more than the minimum payment each month and avoid taking on new debt until existing debts are under control.
Challenge #3: Lack of savings
Remember the saying: "Always pay yourself first." Getting into the habit of saving part of your income first before spending any of it can help prevent a lack of savings in the future.
Helpful steps to take:
- Set up an automatic savings plan to transfer a portion of your income into a separate savings account each month.
- Start small and gradually increase the amount saved as you become more comfortable with your budget.
Challenge #4: Limited financial knowledge
You don't have to be a financial advisor or certified public accountant to achieve a healthy state of financial wellness. Still, educating yourself on basic financial subjects and consulting with a financial advisor or professionals when you need additional guidance or investment advice is essential.
Helpful steps to take:
- Invest time educating yourself about personal finance topics, such as budgeting, saving, investing, and retirement planning.
- Read books, attend workshops, or take online courses to improve financial literacy.
Challenge #5: No clear financial goals
Before leaving for a trip, you must determine where you want to go. The same is true for your financial wellness. Setting goals and tracking your progress is critical.
Helpful steps to take:
- Set short-term and long-term financial goals that align with your values and priorities.
- Break down larger goals into smaller, achievable steps and monitor your progress regularly.
Challenge #6: Unexpected financial emergencies
Squirrels store nuts for the winter to ensure they have enough to eat when the weather changes. Likewise, being financially prepared for emergencies is critical to responsible and effective financial planning.
Helpful steps to take:
- Build an emergency fund with at least three to six months' living expenses.
- Establish your fund so that it can be easily accessible and used only for genuine emergencies, such as job loss, medical expenses, or urgent home repairs.
Challenge #7: Inadequate retirement planning
How do you envision managing your future finances in retirement years? The earlier you start your retirement planning, the more time your money has to grow to support the lifestyle you want after you leave the workforce.
Helpful steps to take:
- Start planning for retirement early by contributing to a retirement account, such as a 401(k), 403(b), or IRA.
- Take advantage of employer-matching contributions and make regular, consistent investments over time.
Challenge #8: Poor credit score
A poor FICO score (between 300 and 579) indicates to lenders that you are a risky borrower, so obtaining loans can be problematic.
Helpful steps to take:
- Regularly review your credit report for errors or inaccuracies and contact the top three U.S. credit bureaus — Equifax, Experian, and TransUnion — to make any necessary corrections and adjustments.2,3,4
- Improve your credit score by making on-time payments, reducing your credit utilization, and avoiding new debt.
Conclusion
Money may not be able to buy happiness, but there's a growing body of evidence that it may help. The National Institutes of Health's National Library of Medicine documents the relationship between financial worries and psychological distress among U.S. adults — so be aware that financial wellness can play an essential role in your overall psychological health.5
Maintaining financial wellness can help you reduce worry, increase your peace of mind, promote a better quality of life, achieve your goals, enable financial independence, and encourage better money management. Don't let yourself be derailed by common financial challenges like overspending or high levels of debt, which can be addressed by taking a few practical steps to resolve. Only you can make the goal of financial wellness a reality.
Increasing your financial literacy and periodically measuring your progress will make you closer to a happier, more confident tomorrow. Maintaining financial wellness may help ensure you're in good standing in the future but also may help provide peace of mind for today.
Sources
- How to Improve Your Credit Score. https://www.experian.com/blogs/ask-experian/credit-education/improving-credit/improve-credit-score/.
- Equifax. https://www.equifax.com/.
- Experian. https://www.experian.com.
- Transunion. https://www.transunion.com/.
- The Relationship Between Financial Worries and Psychological Distress Among U.S. Adults. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8806009/.
