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In theory, financial wellness is something we all want. But it also sounds a little vague and potentially complex. What exactly does it mean? And, how do you achieve it?
Simply put, financial wellness is the ability to lead a successful financial life. It’s being able to meet your basic needs and manage your money for both the short- and long-term. You can enhance your financial wellness by improving various aspects of your personal finances, including budgeting, saving, investing, managing debt, and planning for the future.
Surprisingly, achieving financial wellness isn’t just about having a substantial income; it’s about how effectively you manage and utilize your resources to build a secure financial future. That means anyone can get there, no matter where they are in their financial journey or how much money they have (or don’t). Read on for a closer look at financial wellness, including what it is, why it matters, and how to apply the basic elements of financial wellness to your own life.
Key Points
• Financial wellness refers to the ability to lead a successful financial life, meeting basic needs and managing money for the shortand long-term.
• It involves improving various aspects of personal finances, including budgeting, saving, investing, managing debt, and planning for the future.
• Financial wellness is not solely dependent on income but on effectively managing and utilizing resources for a secure financial future.
• It encompasses being able to manage current bills, pay debts, handle unexpected financial emergencies, and plan for long-term goals.
• By addressing budgeting, savings, debt management, and investing, individuals can take proactive steps towards achieving financial wellness.
What Is Financial Wellness?
Financial wellness describes a condition in which you can manage your current bills and expenses, pay your debts, weather unexpected financial emergencies, and plan for long-term financial goals like saving for retirement and a child’s education. As defined by the Consumer Financial Protection Bureau, financial well-being (another term for financial wellness) is a condition in which “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.”
Just like overall “wellness” requires adopting practices — like exercising more and eating healthier foods — to help you live a better life, financial wellness is about adopting everyday money habits — like budgeting and saving — to secure your financial stability and freedom. Also like overall wellness, financial wellness is not an end state or final destination but, rather, a way to live day to day.
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The Four Elements of Financial Wellness
Financial wellness is often broken down into four key areas of your personal finances. While these elements can overlap, and one can affect another, you can achieve greater results by bringing each under control. By addressing each of these pillars of financial wellness, you can start improving your financial well-being.
1. Budgeting and Financial Planning
Creating a budget that aligns with your income, expenses, and financial goals lays the foundation for financial wellness. Budgeting enables you to allocate resources efficiently, prioritize expenses, and plan for short- and long-term financial goals.
2. Savings and Emergency Funds
Establishing a habit of creating and maintaining an emergency fund to cover unforeseen expenses allows you to build financial security. Having savings acts as a safety net during emergencies and ensures financial stability, since you won’t have to rely on high-interest credit cards or loans in the event of a financial set-back.
3. Debt Management
Effectively managing long-term debt, and eliminating high-interest consumer debt, are vital components of achieving financial well-being. This frees up funds that can then go towards savings and investing and, in turn, help reach your financial goals.
4. Investing for the Future
Investing is a key underpinning of financial wellness because it allows for wealth-building and long-term financial stability. When it comes to reaching your retirement goal, saving as much as possible and starting as early as possible can be keys to success.
7 Tips to Improving Your Financial Wellness
Maybe you don’t meet the definition of financial wellness right now. But that doesn’t mean you can’t get there. What follows are seven relatively simple steps that can help you improve your current and long-term financial health and security.
1. Set Clear Financial Goals
Building financial wellness requires coming up with systems for spending, savings and investing. But before you can focus on specific habits and strategies, it helps to have a sense of what your financial life is like now, and where you want it to be months and years down the road.
You may want to jot down some specific and realistic objectives, such as going on a vacation in three months, buying a house in two years, and being able to one day retire. Having clear short-, mid-, and long-term objectives can help you create a roadmap towards achieving them.
2. Create and Stick to a Budget
To achieve your goals, you’ll need to develop a realistic budget that considers your monthly income and expenses and also allows you to put some money towards savings and debt repayments (beyond the minimum) each month.
A budget is simply a plan for how you’ll direct funds toward all areas of your financial life, such as necessary expenses, discretionary (“fun”) purchases, debt payments, personal savings goals, and investing for retirement.
There are all different ways to budget — the best approach is the one you’ll stick with. One simple and popular budgeting framework is the 50/30/20 rule, in which you divide your monthly take-home income into three categories, spending 50% on needs, 30% on wants, and 20% on savings and extra debt payments.
Recommended: Input your monthly income to find out how much to spend on essentials, desires, and savings with our 50/30/20 Budget Calculator.
3. Pay Yourself First
A simple way to make sure you achieve your monthly savings goal is to automatically transfer a set amount of money into a savings account each time you get paid — in other words, pay yourself first. If you wait to see what’s leftover after you pay your bills and do your shopping, you may not have much — or anything — to set aside.
To get started with saving, you may want to open a dedicated savings account then set up a recurring transfer from your checking account into that account on a set day each month (ideally, right after you get paid). You can base the transfer amount on the savings goal you set out in your budget.
If you want to earn a high rate and pay the lowest fees on your savings, consider storing your savings in an online account. Without the added expenses of large branch networks, online banks are typically able to offer more favorable returns than national brick-and-mortar banks.
4. Build an Emergency Fund
If you don’t have one already, you’ll want to build an emergency savings fund that covers at least three to six months’ worth of living expenses. (If you’re self-employed or work irregularly, you may want to aim for six to 12 months’ worth of expenses.) This gives you a cushion should you lose your job or get hit with a large, unexpected expense — like a medical bill or major car or home repair.
Ideally, you’ll want to keep this money separate from your spending and other savings in an account that is accessible but pays a competitive yield, such as an online high-yield savings account.
Recommended: Take the guesswork out of saving for emergencies with our user-friendly emergency fund calculator.
5. Protect Your Assets
While the emergency fund provides you with some protection, insurance provides more security in other situations. You’ll want to make sure you have adequate coverage when it comes to health, home, and auto insurance. This can offset large, sudden and unexpected expenses and losses, and reduce the possibility of going into debt.
You may get your health insurance through your employer. But with home and auto insurance, it often pays to shop around to find the best deal.
Recommended: Which Insurance Types Do Your Really Need?
6. Pay Off High-Interest Debts
If you’re paying only the minimum on your credit card balances, you may be spending thousands on interest. That leaves you with a lot less money to put into savings or investments to grow your wealth. Coming up with a plan to knock down — and eventually eliminate — high-interest consumer debt will help you save money in the long term and improve your overall financial health.
There are a number of strategies for reducing debt. One is the debt avalanche method, which prioritizes paying down your debts in order of the one with the highest interest rate to the one with the lowest, while still making the minimum payment on the other each month. Another approach is the debt snowball method, which involves paying down your debts in order from largest to smallest, while continuing to pay the minimum on the others each month.
7. Start Investing
The key to building a nest egg large enough to live on in retirement is to start investing regularly as early as you can. Even if you have a low salary and can only afford to put a small amount into your retirement account each paycheck, that money will go a lot further if you start now. That’s thanks, in part, to the power of compound interest, which is the interest your interest accumulates.
If your company has a 401(k) or other retirement savings plan, consider contributing a portion of each paycheck into that account. If your employer matches a portion of your contributions, even better — that’s free money toward your future.
What’s the Difference Between Financial Wellness vs. Financial Literacy?
Financial wellness and financial literacy are interconnected concepts, but they are not the same thing.
Financial wellness involves the overall state of a person’s financial health, encompassing their behaviors, attitudes, and actions towards money management. It includes actions like budgeting, saving, investing, and debt management. Achieving financial wellness requires applying financial knowledge effectively to attain financial stability and security.
Financial literacy, on the other hand, refers to possessing knowledge and understanding of financial concepts and principles, such as budgeting, investing, loans, and credit management. While financial literacy is essential, achieving financial wellness involves not only understanding these concepts but also implementing them effectively to manage finances and achieve financial goals.
The Takeaway
Financial wellness is about more than just the numbers in a bank account — it’s a holistic approach to managing your money that encompasses various elements of personal finance. People who are financially well can comfortably pay their bills and manage their monthly expenses, without living paycheck to paycheck. They can also set money aside for emergencies, as well as short- and long-term goals. They’re quick to bounce back from any financial setbacks because they have the right resources and strategies in place.
By integrating budgeting, saving, debt management, and investing into your overall financial strategy, you can take proactive steps towards financial wellness, paving the way for a more peace of mind now, and a more secure financial future.
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.
FAQ
What is an example of financial wellness?
An example of financial wellness is an individual who consistently lives within their means, has minimal debt, regularly contributes to savings and retirement accounts, and has a well-thought-out financial plan to achieve their financial goals.
What’s the difference between financial wellness and financial well-being?
The terms financial wellness and financial well-being generally refer to the same thing — your ability to live within your means and manage your money in a way that gives you both satisfaction and peace of mind. It includes balancing your income and expenses, staying out of debt, and saving for the future.
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