What is Financial Wellness?

You may consider joining a gym or taking the stairs at work when you want to improve your physical health. For a medical issue, you talk to a doctor. But one essential part of wellness commonly overlooked is financial health. The state of your monetary situation involves your credit, debt, savings, investments, and income. Financial wellness affects your physical, mental, and social well-being. It can improve or diminish over time and differs from person to person. 

What is Financial Wellness?

Financial wellness is your ability to meet short-term financial obligations and establish long-term goals. It’s being economically secure enough to handle expected and unexpected expenses. You live comfortably, pay essential bills, have savings for an emergency, and have manageable debt. If you’re financially well, you focus less on day-to-day money worries and instead commit to a sustainable retirement strategy.  

Ways to measure the health of your finances and look for potential improvement include: 

  • Debt-to-Income Ratio. Carrying too much debt harms your financial health. You can get a sense of where you stand by calculating your debt-to-income ratio. The ratio compares your monthly debt obligation to your income. Most mortgage lenders prefer a ratio below 43% and may even require one no greater than 36%.
  • Credit Score. Credit scores range from 300 to 850. Your score reflects your credit utilization, repayment history, credit mix, and length of credit history. Lenders offer more favorable rates to people with higher scores because they are less risky. 
  • Emergency Fund. An essential component of financial health is an established emergency fund. It’s if you have enough money to keep you afloat in an unexpected situation, such as job loss, car breakdown, or medical emergency. Experts generally recommend you have an emergency fund with three to six months’ worth of living expenses saved.
  • Retirement Savings. Central to a secure retirement is saving as early as possible. The amount you want to save will depend on how you want to spend time and where you want to live when you retire. And although ideally you want to start saving while you’re young, it’s never too early or too late for retirement planning.

Why is Financial Wellness Important?

Everyone can relate to financial stress. Debt and unpaid bills create an uneasy feeling of instability and cause considerable hardship and daily stress. Financial problems often result in divorce, poor health, depression, and bankruptcy. Being financially well doesn’t mean you’re on frequent vacations and living in luxury. It means you reach your goals, take advantage of opportunities, and prepare for financial emergencies. It also means no matter your stage of life or income, you’re living within your means, sticking to a budget, and spending responsibly. You understand the importance of saving, the difference between good and bad debt, and why you should avoid high interest.

How to Achieve Financial Wellness

Financial wellness depends heavily on changing financial behaviors. And while it may seem overwhelming at first, don’t get discouraged. It’s about making good decisions, consistency, and keeping your goals in mind. Begin with making a plan and stabilizing your day-to-day financial situation to create a solid foundation on which you can build a financial future. 

Step 1: Use a Budget

A budget is fundamental to financial management and living within your means. It helps you control your spending and track expenses. Sticking to a budget allows you to make better financial decisions, build an emergency fund, get out of debt, and save for significant purchases such as a car or home. A budget can put you on a firmer financial footing for both the day-to-day and the long term. Knowing what’s coming in and going out is a huge step in financial wellness. Once you start tracking, you may be able to quickly identify simple changes you can make to your spending habits. 

Step 2: Review Your Purchases

Before making budget changes, understand your spending habits. There are lots of apps to track expenses and spending. Automatic payments are a great way to ensure you don’t miss a bill, but you still need to review your transactions. Without a keen eye, you may not notice when a charge increases or becomes unnecessary. Small changes can help you save money. 

Step 3: Build Your Savings

Building savings is more than just putting money away for long-term goals. It’s also saving for unexpected expenses and emergencies. You need a minimum of six months of living expenses stashed in case of employment termination, medical emergency, or home repair. Open a savings account specifically for emergencies separate from your regular savings account. Treat your emergency account like other bills by making monthly payments toward it.

Step 4: Save for Retirement

Retirement planning is about saving and investing for your future. If you have a 401(k), take advantage of employer contributions and the pre-tax savings on your earnings. Make funding your retirement savings automated too. This automation makes it easier to manage, and consistent contributions help with budgeting. Even a small contribution can grow into a large nest egg over time. Consider channeling any tax refund or side gig money directly into your retirement funds for additional savings.

Step 5: Plan for Purchases and Set Goals

Set short- and long-term financial goals to keep you motivated. If you plan to buy a large-ticket item like an appliance, take a vacation, or buy a car, adjust your budget and build your savings to pay for it. You’re more likely to succeed if you plan for specific goals or outcomes.  

Step 6: Know Your Credit Score

A high credit score gives you access to lower interest rates when taking out a personal loan, car loan, or opening a credit card. Late payments, too much debt, and high credit card balances negatively affect your credit score. Check your credit report annually. It’s free to review and allows you to look for inaccuracies. And if your score increases, it may be an excellent time to refinance loans.

Step 7: Set Banking Alerts

Alerts for checking and savings account usage are excellent reminders of your financial decisions. They provide real-time insight and help you track when, where, and how you spend your money. They also can notify you of fraudulent or unauthorized activity.

Focus Federal Financial Wellness Programs Can Help 

Sound financial wellness requires you to be informed. You need to understand retirement planning, interest rates, credit scores, and more to be confident you’re making sound financial choices. Focus Federal Credit Union is here to help. We offer financial wellness programs to help you better understand your current financial status and plan for the future.