What is financial wellness and how can we achieve it?
Financial wellness is the idea of being satisfied with your current financial situation which includes your:
- Financial behaviors (budgeting, spending, saving)
- Financial attitudes
- Financial knowledge
- Financial goals
It’s up to you to determine if your financial status is satisfactory. However, many will agree that the ability to pay day-to-day bills, donate to charity, have zero credit card debt and both emergency and retirement savings makes for a satisfactory financial status.
All of these goals, in combination, play an important role in achieving financial wellness—which can be quite difficult for a recent graduate or someone starting a family. But no matter which stage you’re at, achieving financial wellness should be seen as a marathon—not a sprint. It is a journey to creating good financial habits that will set you up for a comfortable future later.
Here are five steps to help you get started on your journey.
Step One: Weigh your cash flow.
It’s not enough to know your current salary or hourly wage. You should know exactly where your money comes from and where it is going. Determining areas where you can make adjustments, like restaurant or shopping expenses, are easy ways to make immediate impacts on your financial plan. This will be important in step two when you need to create a sound budget.
Apps like Wally and Mint help you identify your spending by category so that you can understand where your money goes. These apps can also send notifications if you are getting close to or are over your spending limit.
Step Two: Create a realistic budget.
Realistic is the key word here. And what I mean is, are you really going to eat Ramen noodles for a week? Probably not, and you probably shouldn’t (for dietary health reasons). Create a reasonable budget that can actually work for you.
If you’re following the 50/20/30 rule, then fixed costs—like bills and expenses that don’t tend to vary such as rent or your mortgage, cell phone bill, car note, auto and/or home insurance—should take up no more than 50% of your budget. Your savings should equate to 20% of your budget, and day-to-day expenses like gas, groceries, and entertainment expenses, should take up no more than 30% of your budget.
Learning how to live within your means can be quite the reality check for some millennials who have grown accustomed to receiving help from their parents or other family members. However, achieving financial wellness and practicing good spending habits will save you from financial turmoil in the future.
You Need a Budget (YNAB) and Budget Boss are two apps that can help you easily create a budget to reach your financial goals. Sometimes it really helps to see these things visually, and these apps do a good job of that.
Step Three: Create an emergency fund.
Many investors will agree that creating an emergency fund first may be more important than paying off student loan debt (best bet is to save for both). As a millennial myself, I will also agree. I didn’t realize how often “emergencies” pop up once you’re on your own financially.
Car repair has been my biggest expense this year—and it came as a surprise. I absolutely need my car to get to work (and to bring my spoiled dog to the park), so I had no option but to pay for $1,000 worth of work on my vehicle. I’m glad I had a rainy day fund before I graduated because the rainy day surely did come.
Most investors will agree that an emergency fund should support 3 to 6 months of your living expenses. If you’re just starting out, you should aim to quickly save $1,000 to $2,000 in emergency savings.
This online emergency savings calculator helps you figure out how much you need to put aside for an emergency fund for when these surprises pop up.
Step Four: Pay off debt.
After you have an adequate emergency fund in place, you should look to eliminate your debt. Start by paying off your credit card bills. If you don’t already do so, you should aim to pay off your credit card every month! Credit card debt can pile high—quickly—and hurt your credit score, holding you back from making larger, important purchases (like a car or home) later.
Next, you should plan to start paying off those student loan debts that once seemed like a mirage. Sadly, they aren’t a mirage and a tele-collector will remind you several times a day of this fact. Today’s average student loan debt is $37,172, which would take close to 9 years to pay off at $350 per month—a hefty note.
StudentLoanHero.com provides valuable insight into paying off student loans, and offers calculators to compute and compare repayment options.
Step Five: Plan ahead.
Saving for retirement should be top of mind—a little counter-intuitive for the recent graduate who is just starting his/her career and may be paying off student loan debt. But saving now will only help to ensure that you can financially afford retirement later. It may even help send your (future) children to college. Take advantage of your workplace’s 401(k) program, or if that is not an option, invest in an IRA or MyRA.
Remember, about 20% of your budget should be used for savings. If you’re paying off credit card debt and are required to start paying student loan debt, you may not be able to put all 20% of your income into retirement planning or other long-term investments. If that is the case, then you should look on a regular basis to increase what you put away for retirement or invest for the future.
Apps like Digit and Acorns are for inexperienced investors, like many millennials are. They make investment recommendations based on your actual spending habits and budget. Acorns will even invest your spare change into stocks or bonds—putting all of your money to good use.
Planning ahead may also mean that you wait to buy a home. Lower employment levels and smaller incomes have left millennials with less money than previous generations—which means we are putting off commitments like marriage and home ownership. That is okay. You should never make a large purchase, like a home, until it makes financial sense for you.
Achieving financial wellness takes time, and budgeting can be difficult. Here are a few other tools to help you make the most of your finances:
LearnVest – Get a strategy for everyday spending that helps you save for future goals.
LevelMoney – Calculates spendable money.
Qapital – Helps you achieve your savings goals.
Stash Invest – Investing for “real people” with as little as $5.
Wallaby – Maximize your credit card rewards.
Goodbudget – Budget software built for daily life.
While crafting your financial wellness plan, you may have trouble finding the perfect balance between your healthcare and your budget. Read our blog, How Should Your Budget Drive Your Health?, to learn more about saving money while staying healthy.