Let’s face it, thinking about your whole financial picture can be scary — especially if you know you’ve made some financial mistakes on your journey. But set your fears aside because this financial wellness guide is low-stress and easy to understand (even if you’re a newbie to the world of personal finance).
So whether you’ve had some financial bumps in the road or just looking to take your financial wellness from good to great, we’ve got you covered.
This guide will outline the basics of financial wellness. In fact, by taking the time to read this guide, you’ve already taken your first step toward a healthier financial future. *High five!*
Okay, let’s start with the basics.
What is Financial Wellness?
Financial wellness refers to the overall “health” of your financial picture, including your savings, investments, debt, expenses, and income. It means feeling good about your financial big picture—both now and in the future—and not spending too much time stressing over how you will pay bills or make ends meet every month.
Financially healthy people generally share the following traits.
A healthy debt-to-income ratio.
Your debt-to-income ratio is the percentage of your monthly income that goes towards paying down debts. For example, if you make $2,000 monthly and your monthly debt payments are $400, your debt-to-income ratio would be 20%.
Ideally, you want to keep your debt-to-income ratio below 36%. By keeping this ratio below 36%, you’ll look like a responsible borrower who pays their debts in a timely manner. Making sure you don’t borrow — or charge — more than you can afford will also help ensure that you can comfortably make monthly debt payments (without breaking a sweat).
An emergency fund.
An emergency fund is a savings account you use for, well, emergencies. This could be anything from a last-minute flight home to visit a sick family member to unplanned car repairs.
Most financial experts recommend you should have three to six months of living expenses saved. This will help ensure you’re covered when you experience a financial setback.
A budget that allows them to live within their means.
A budget is a plan for how to allocate your money. It includes your income, debts, expenses, and financial goals. Creating a budget helps you make informed decisions about where to spend your money—and stick to spending within your means.
For example, many financially healthy people use budgeting strategies to balance their various financial obligations and long-term goals.
Why is Financial Wellness Important?
Just like your physical and mental health, financial wellness is something that you can work to improve. But why bother? Here are just a few reasons to care about improving your financial wellness.
It alleviates a significant source of stress.
Money is one of the most common sources of stress in our lives. According to a survey by CNBC Money, 77% of Americans are anxious about their finances. In fact, financial stress has been linked to a whole host of health problems, including anxiety, depression, high blood pressure, and even heart disease. So improving your financial wellness can positively impact your overall physical and mental well-being (remember, they’re all connected!)
It offers you more work/life balance.
If you’re constantly stressed about money, it’s tough to focus on anything else. You might start overworking yourself by picking up extra hours or yet another side hustle.
When you devote so much time and energy to work, it’s easy to lose track of the people in your life who matter most—your family. Improving your financial health will alleviate the need to focus so much energy on work.
It helps you achieve big goals and dreams.
Where do you see yourself when you close your eyes and dream of the future? Do you want to be a homeowner? Maybe you want to start a business?
Even if you’re looking to have a little extra cash to travel or you want to buy a fancier car, financial wellness can help you achieve big goals and small ones.
How Do You Improve Your Financial Wellness?
Here’s the good news: no matter what hand you’ve been dealt so far, your financial wellness isn’t set in stone. Instead, financial wellness is something that you can actively work to improve and maintain. Here’s how:
Financial wellness needs a holistic approach.
Financial wellness isn’t just about having a high income or being debt-free. It results from setting boundaries for yourself and holding yourself accountable for achieving your life goals.
Your financial health isn’t an end goal in and of itself—you’re a complex person with life goals, and financial wellness is merely a stepping stone to give you more choice and opportunity when it comes to building a life you love.
Knowledge is half the battle—we call this your Money IQ.
When it comes to financial wellness, knowledge is power. The more you know about your financial situation, the better equipped you’ll be to make informed decisions that will improve your financial health.
This means taking the time to understand things like credit, investments, and how to budget. It also means being honest with yourself about your financial situation and recognizing where you need to make changes. When you gain technical knowledge about personal finances that helps you make better decisions, you raise your Money IQ.
The other half is your financial behavior — we call this your Money EQ.
Of course, financial wellness isn’t just about what you know—it’s also about your financial behavior. Like any other life goal, financial health requires effort and discipline. You must be mindful of spending, save regularly, and make strategic decisions with your money.
But here’s the thing—so much of human behavior is driven by emotion. That’s where your Money EQ comes in. Your Money EQ is your ability to identify and manage the reactions and emotions that play a role in managing your personal finances.
5 Simple Ways to Improve Financial Wellness
If you’ve made it this far, then you’re definitely ready to make the changes necessary to improve your financial wellness. But if you’re still not quite sure where to start, we’ve got you covered.
Here are five simple and effective steps to get you started.
1. Build your financial literacy.
Start by learning the basics of financial literacy. You could also call this your “Money IQ.” Financial literacy is about understanding how money works and making informed financial decisions. Financial literacy also teaches you how to access things like your credit score and what you need to do to reduce your spending habits.
2. Create a budget.
A budget is a critical tool that can help you take control of your finances and improve your financial wellness. When you create a budget, you make clear, strategic choices about spending your income. This helps you avoid impulsive spending and make progress toward your financial goals.
One of the best budgeting strategies is the 50/30/20 method. In short, it works like this:
- 50% of your income goes toward essential expenses like housing, transportation, and food.
- 30% goes toward financial goals and non-essentials like travel and entertainment.
- 20% is saved or invested.
3. Make a plan to tackle your debt.
If you’re carrying debt, it’s essential to create a plan to pay it off. Debt can be a significant financial burden and can greatly impact your financial wellness. The good news is that you can use proven strategies to get out of debt and improve your financial health.
One effective strategy is the debt snowball method.
This method lets you focus on paying off your smallest debts first. Then, once you’ve paid off your small debt, you move on to the next one on your list. As you tackle each debt, you’ll gain momentum and confidence—and eventually, you’ll be debt-free!
4. Start saving and investing.
Saving and investing are two crucial financial habits that can help you build long-term financial security. When you save, you set aside money for short-term or emergency needs. This gives you a cushion of cash to cover unexpected expenses or financial setbacks.
Investing is all about putting your money to work for you by earning a return on your investment. Over time, investing can help you grow your wealth and reach your financial goals.
5. Set SMART financial goals.
The final step to improving financial wellness is setting financial goals. But not just any goals—SMART financial goals.
SMART financial goals are specific, measurable, attainable, relevant, and time-bound. In other words, they’re realistic goals you can achieve within a particular time frame.
Some examples of SMART financial goals include:
- I will save $500 for an emergency fund by the end of the year.
- I will pay off my credit card debt within 18 months.
- I will invest $50 per week in a mutual fund for retirement.
Need more support? Julep pairs psychology with financial management techniques to help you change your money mindset.
Julep is not a financial institution, financial advisor, or credit repair company, and does not provide credit repair services of any kind. The information provided is for general educational and reference purposes only. The information is not intended to provide legal, tax, or financial advice. We do not propose any guarantee that the information provided will repair or improve your financial profile. Consult the services of a competent licensed professional when You need financial assistance.