Why is Financial Wellness Important? Benefits and Tips
Is there anything more crucial than health and wellness? We don’t think so – a healthy body and mind are keys to happiness and success. But while everyone knows the importance of physical wellness from a young age, you may not know why financial wellness is important. Just as you want to maintain physical health for your comfort and longevity, it’s just as crucial to prioritize your financial wellness for the same reasons.
Luckily, financial wellness doesn’t have to be complicated – and it’s not too tough to practice with the right mindset, tools, and planning techniques. Today, we’ll look closely at financial wellness, what it means, and how you can better guarantee your own, whether you’re a new student, established professional, or almost-retiree!
What is financial wellness?
On the surface, financial wellness is what it sounds like – being “well” or “healthy” in your current and future financial position. However, financial wellness also goes beyond this basic definition. Specifically, it's the ability to live within your means and manage your money so that you enjoy peace of mind instead of financial stress.
When you practice financial wellness, you live a comfortable lifestyle, make discretionary purchases, cover surprise costs that come up, and support your friends and family members as needed.
Regardless of what financial wellness means to you, it’s always a good idea to pursue it as early as possible.
Effective financial wellness tips
Financial wellness indeed looks different to every person. However, the benefits of financial wellness are good for anyone, no matter your needs. So, you can apply these ideas and money management strategies to your life no matter where you are or what your current financial situation might be. Here’s how we recommend you begin.
Keep track of where your money goes
It’s tough – impossible, actually – to manage your money effectively if you don't know where it's spent. That might sound strange; after all, if you spend most or all of your money, you should “know” where it ends up.
In reality, money can slip through the cracks easier than you might think. Subscriptions for services you no longer use, increases in fees on those subscriptions you do use, unplanned purchases of items on sale or offered through social media ads, and a last-minute gift for a family member are all easy examples of things you might spend money on without thinking about it. Then, when you look at your bank statement the next week, your account balances are a little lower than you would like.
Therefore, one of the best financial wellness tips for improvement is to take steps to track your money and its movements more regularly. Track your spending on your financial institution’s website, payment portal, or mobile app. These are essential tools for general budgeting and making sure you know where every dollar you make goes each month.
Follow the 50-30-20 rule
The 50-30-20 rule is a gold standard for many financially well people, and there's a reason for that. The 50-30-20 rule lets you spend money on what you need, save money for the future, and use plenty more on fun things.
In a nutshell, this rule suggests that you spend 50% of your income on necessities, 30% on your “wants” or discretionary expenses, and tuck away 20% into savings.
The 50-30-20 rule is aspirational – that is, don't worry too much if you can't use your money exactly according to these proportions just yet. The idea is to budget your finances so you eventually reach this goal, then have enough cash left after bills and savings that you can still have a great time in your day-to-day life. After all, improving financial wellness doesn't mean just saving every penny. It means using your money for fun responsibly, too.
Build an emergency fund
Saving makes up a pretty big proportion of the 50-30-20 rule since you never know when that proverbial rainy day might show up. One of the hallmarks of financial wellness is having an emergency fund ready to go if a tire pops, you need to visit the doctor, or something else happens that could take a big bite out of your budget.
There’s no set amount you need to save up for your emergency fund, although a few grand stashed in savings won’t ever be a bad thing. One recommendation is to have at least three to six months’ worth of expenses saved in your emergency fund. Having that safety net will provide you with not just financial wellness but mental wellness, too.
Save early for retirement
Saving for retirement is also important. The sooner you start saving for your golden years, the better, especially if you use common instruments like individual retirement accounts (IRAs) and 401(k)s.
What if you haven't begun to save or invest for retirement yet? No problem – the best time to start saving for retirement is today. There are retirement strategies for every age and financial bracket. And like the 50-30-20 rule, starting is the important part and working towards establishing your optimal retirement savings strategy.
Avoid unnecessary debt
Debt isn’t something to be avoided. It's a very useful financial tool that can expand your opportunities and help you buy things that would be practically impossible to afford otherwise. Taking out a responsible mortgage with a great rate or taking out a new car loan if you can't afford a vehicle outright are both good examples of acceptable debt.
It’s unnecessary debt that can impact your financial wellness. Credit cards you don't need, loans you can't afford, and other unnecessary debt can penalize your credit score and quickly send your finances into a downward spiral.
Excellent financial wellness means using debt wisely and only when you need to. For example, if you can save up to buy something pricey over a few months, do that instead of opening a new line of credit. Smart debt use will keep your finances under control and impress the credit bureaus, raising your credit score and unlocking new loan options with the best possible rates.
Pay all bills and debts on time
Paying your bills, paying off your loans, and keeping your credit card balances at $0 will also help your credit score and boost your financial wellness. On-time payments are key for earning the trust of lenders and credit bureaus and for keeping you from having to pay extra late fees.
Keep track of all your bills and necessary payments (all the things that would go into the 50% portion of the 50-30-20 budgeting rule). Then, practice paying those bills on time each month. Like all good habits, this might take a little while to become second nature. When it does, your finances will be healthier for it.
Automate savings and bill payments
Fortunately, banks, credit unions, and lenders almost always have automated payment tools you can and should use to your advantage. That way:
You can do the same thing with contributions to retirement or other savings accounts. Instead of choosing between saving and spending, automatically set aside some extra funds to make the decision easier. It's infinitely easier when the decision happens without your input.
Automated transaction tools are stress-relievers and finance-enhancers. Use them!
Monitor your credit
Since your credit score directly affects the loans you can take out and other financial opportunities, it's common sense to keep track of it regularly. The credit bureaus are obligated to give you one free credit report per year, so download your reports annually to check for mistakes or score changes. While this annual report doesn’t show your fluctuating score, it does list major creditors, late payments, soft and hard inquiries, and more that shape your creditworthiness. Your financial institution may also offer more frequent credit score reporting through their online banking portals.
Most of the time, your credit score will be accurate, though credit furnishers (the companies that report information to the credit bureaus) can occasionally make mistakes. Checking your credit score is the best way to practice financial wellness and immediately be alerted to errors you can contest and correct.
Set SMART financial goals
Say you want to save up to buy a new car or house, or maybe you want to hit a certain savings benchmark for your upcoming retirement. No matter what goal you want to pursue, make it a “SMART” goal:
An example of a “SMART” goal could be saving $640 for a new computer by the end of December. It’s a specific and time-bound goal with a relevant result, and with four months to save, you’d need to put aside a measurable average of $160 each month. This could be achieved through a side job or cuts to your discretionary expenses – smart!
Financial wellness is an ongoing journey, a project that only you can practice for yourself. Wherever you're starting, remember that financial wellness is very much worth it right now and for your financial future! When it comes to financial education, you need resources you can trust. Sharonview Credit Union can help guide you with online financial coaching and tools to address your individual needs. Contact Sharonview today as you seek to improve your financial wellness.