The goal of financial wellness is to remove or reduce the stress that commonly surrounds the concept of money for many people. This does not necessarily imply the existence of gratuitous wealth – someone earning a relatively small salary can still be considered “financially well” if they are consistently meeting their goals of saving, living within their means, and planning for a financially successful future.
Keep reading to learn more on the topic and get some financial wellness tips to set you up for success.
What is financial wellness?
According to the U.S. Consumer Financial Protection Bureau, financial wellbeing is “a condition wherein a person can fully meet current and ongoing financial obligations, can feel secure in their financial future, and is able to make choices that allow them to enjoy life.”
Money issues are among the top causes of stress for many individuals, which is why financial wellness should be just as much of a priority as physical or mental wellbeing. Taking steps to improve your financial situation can not only reduce stress but can reduce your predisposition to other physical and mental health issues as well.
4 key elements of financial wellness
Financial wellness can be broken down into four main factors. Let’s take a closer look and understand how you can make meaningful improvements in each.
- Budgeting
At its core, a budget is merely a plan for how you are going to spend your money, on a monthly, weekly, or even daily basis. The foundational idea of budgeting is to spend your money intentionally instead of spontaneously.
A common type of budget is a “zero-sum” budget, where every single dollar earned is allocated to a specific purpose, whether that be groceries, rent, savings, or something else. The idea is to be left with zero dollars of your paycheck unaccounted for. Zero-sum does not imply that each dollar is spent, it simply means that each dollar has a specific job to do.
To create your own budget, the first step is to plan out all of your expenses, typically on a monthly or biweekly basis depending on the cadence of your bills or paycheck. Make note of all your fixed expenses such as rent, utilities, or car/phone payments.
This should include savings goals. This could be putting aside money for anything related to your future, such as retirement,an emergency fund, house/car down payment, further education, etc. Decide how much money you would like to save each month for each of these things and mark it down.
Also consider your debt and how that is going to fit into your monthly/biweekly expenses. (More on this in the next section.) Are you carrying a balance on a credit card? Do you have student loans to pay off? Figuring out how much you want/need to pay your debts down each month will help you determine how much money you have left for things like food, drinks, or entertainment. This is considered your “discretionary spending”, or spending that you get to decide on.
There are many different tools and resources to help you get started budgeting. You can find a plethora of YouTube videos from finance channels walking viewers through the process of setting up an Excel spreadsheet with basic formulas for money coming in and out. There are also plenty of finance apps available to help users get started creating a zero-sum budget and tracking where their expenses are going.
- Debt
There are many different types of debt that apply to different people: student debt, credit card debt, medical debt, automotive debt, and more. In fact, as of the second quarter of 2023, American households held an average of $103,358 of debt according to the Motley Fool.
The key to managing debt is to tackle your highest-interest debt first. For many Americans, their high-interest debt comes in the form of credit cards, which have an average Annual Percentage Rate (APR) of 27.81% according to Forbes. In the long run, you will lose less money if you can get your high-interest debts down before tackling your lower-interest debts. This is because, as debt compounds, high-interest debt will continue to grow at an exponential rate, making it unwieldy to pay down if left alone for too long.
For some debts, like student loans, payment plans exist such as the SAVE plan introduced by the Biden administration, which lowers monthly payments on federal student loans based on household income. While your total amount of interest paid will increase, this is a popular option to make your monthly payments more manageable.
- Savings/Investments
Savings and investments are the “future” part of financial wellness. It’s important to save and invest money for the future for three reasons: retirement, unexpected expenses, and major financial goals.
The first reason is obvious – in order to retire, you need to have money set aside to live once you are no longer be earning a paycheck. The most common type of retirement investment account is a 401(k), which is provided by your employer, often with an employer match. This means that for every dollar out of your paycheck that you contribute to the plan, your employer will match with their own dollar, up until a specified threshold. This can be a great way to jumpstart your retirement savings, and many financial experts recommend maxing out your 401(k) contributions for the year before focusing on other investment vehicles.
An Individual Retirement Account (IRA) is another option to supplement a 401(k). The benefits are similar to a 401(k), but you are completely in charge of the contributions and how often you would like to make them. As with a 401(k), this account uses pre-tax dollars so any funds taken from it are taxed upon withdrawal.
A third option is a Roth IRA, which is similar to an IRA, except that your contributions are post-tax dollars instead of pre-tax (such as with a 401(k) or traditional IRA). With a Roth IRA, your money grows tax free, meaning that whatever amount you put into it – plus any dividends it accrues – is what you can take out at retirement. This account is recommended for those who believe their tax rate will be higher in retirement, in which case they ultimately save money by paying taxes on their money when they are younger.
When saving for unexpected expenses, you will want “liquid” funds that you can access quickly in the case of an emergency. While it would be nice to have your emergency fund invested in high-performing stocks, this is not rational if you want to be able to access your money immediately.
A popular choice for near-term savings (such as an emergency fund or house down payment) is a high-yield savings account, often offered by online banks. These savings accounts have higher earned interest rates than traditional savings accounts at legacy institutions, meaning that your money earns more interest as it sits in the account. This is a great way to make sure your money is working for you while also making sure that you can withdraw it at a moment’s notice.
Here is a quick checklist to get you started on your savings/investment goals:
- Check with your employer about a 401(k) and any employer contributions
- Research Traditional and/or Roth IRAs offered by different banks and pick one that matches your preferences – and start contributing what you can from your take-home pay
- Research high-yield savings accounts, pick one that matches your preferences, and start contributing a regular monthly amount until you reach your goal
- Protection/Insurance
While it isn’t necessarily exciting, having insurance is an important part of maintaining a stable financial future. Even if you are saving hundreds of dollars a month into a high-yield savings account, one uninsured trip to the hospital or a house fire could uproot it all.
In order to protect your long-term wealth (and yourself), it’s important to set some money aside for the following insurance products:
- Health, dental, and eye insurance (often subsidized through your employer)
- Car insurance
- Home/renter’s insurance
- Life insurance (if you have any dependents that rely on you financially)
Choosing the right insurance will come down to you and your goals. Many health insurance providers offer both high and low deductible plans, each with their own associated costs. (A deductible is the amount of money that you need to pay on your medical expenses for a given year before the insurance provider begins to cover your expenses.)
Typically, a high deductible plan has a lower monthly premium (the amount you pay per month out of your paycheck) because you will need to spend more of your own money before the plan activates. In contrast, a low deductible plan has a higher monthly premium because the insurance company is more likely to pay for a higher percentage of your yearly medical expenses.
High deductible plans are better for those who have fewer anticipated medical expenses, because you can rely on having a lower monthly premium without worrying about the large amount of medical payments that you would have to cover before your insurer starts contributing. Low deductible plans are better for those who expect to use their health insurance more often. While they have higher monthly premiums, they will ultimately save you money if you are seeing your doctor more often than the average person.
Solidify Your Financial Future
Like professional development, financial wellness is a key to your successful future. That’s why Denison Edge offers various courses in finance, such as our Financial Management credential that will guide you through the fundamentals of corporate finance and how it affects organizational success.
Learn more about these courses and others by visiting our program page today.