The basic tenets of financial wellness are simple — spend less than you earn, save what you can, invest the rest, and protect your assets. However, applying these principles to our everyday lives is an entirely different story.
The reality is that many of us are struggling to make ends meet — 40 percent of Americans can’t cover a $400 emergency, we’re drowning in student loan and credit card debt. Plus, the wealth gap in our country is ever-increasing.
While there are systemic issues that come into play with one’s finances, the onus falls on us to do what we can to manage our money. So how exactly can financial health be measured? For starters, the Center for Financial Services Innovation (CFSI) has come up with eight indicators. Here’s what they are, and how you can begin making improvements in each area:
1. Spend Less Than Your Income
Why is it that there usually seems to be more month than money? To stay within your means, you’ll need a budget. Sure, budgeting is something many people avoid, points out Wilson Muscadin, CFEI, and financial coach and founder of The Money Speakeasy. “It can be time-consuming and it's hard to stay consistent, but it can be different if we change our perspective.“
Instead of thinking of budgeting as a chore, Muscadin recommends thinking of it as a to-do list for our money. “We use to-do lists so we can allocate our most important tasks over a finite period of time, whether it’s a day, week, month,” says Muscadin. “When we don't budget, we can easily overspend and not fund our priorities.”
2. Pay Bills On Time and In Full
You’ve probably heard this one many times, but automate your bills if you can. Sync up your bill payments to your paychecks. For instance, if you get paid twice a month, one paycheck can go toward rent and your utilities, and the second paycheck can go toward insurance, groceries, and personal items.
It's important to be aware of the advantages and disadvantages of setting up automatic payments, says Muscadin. “We know those bills will be paid and as long as there are sufficient funds in the account, and we don't have to worry about missing payments,” he says. “The disadvantage is that once we automate, we tend to disengage with our bills, so if there is an error or if the bill was higher than expected, we're less likely to question it or catch it.”
If automating all bills isn’t something you’re comfortable with — or you aren’t able to pull it off just yet — Muscadin recommends automating fixed expenses, or recurring expenses that are the same each month — and set several calendar reminders to pay variable expenses.
3. Have Sufficient Living Expenses in Liquid Savings
The general rule of thumb is to save anywhere from three to six months of your living expenses. You might be nodding your head, while asking, “Umm..how”? Start with a $500 cushion, then build from there.
One tactic to try is to divvy your paycheck to multiple accounts, suggests Muscadin. You can do this by either percentage or dollar amount. “Having multiple checking and savings accounts may seem like more of a hassle, but it can actually streamline our spending and saving,” says Muscadin.
For example, Muscadin’s family figured they could save $200 per paycheck. But instead of transferring the money from a checking account, they had it taken out of their paycheck and put directly into their savings account.
You can also split your paycheck so part of it goes toward an account just for paying bills, and another account solely for personal spending. “This requires budgeting in advance and knowing your numbers, but if our goal is to reduce overspending, having a separate checking account that is strictly for personal spending can help,” says Muscadin.
4. Have Sufficient Long-Term Savings or Assets
Once you have enough savings to cover living expenses for a few months, you’ll want to focus on the holy grail, marathon-equivalent of savings: investing for retirement, or acquiring valuable assets like a business or home.
So how do you even get to the point where you have $1 million in your nest egg? Start by getting into the habit of saving, suggests Jackie Cummings Koski, a CEPF®, personal finance educator, and author of Money Letters 2 My Daughter. “No matter how small, just start,” she says. “As your salary begins to increase, so will your savings.The $20 a week you used to save will turn into $50 a week, then $80 a week and so on.”
For long-term goals such as retirement, let the magic of compound growth do the rest of the work by investing in a low-cost index fund, says Cummings Koski. If you’re an investing newbie, get started by using an investing app or discount stock brokerage.
5. Have a Sustainable Debt Load
No matter how much debt you owe, you’ll want to make sure you can afford the payments. If you’re having trouble staying on top of your payments, you’ll want to come up with a debt repayment plan that’s feasible with your budget. When paying off debt, there are several different popular debt repayment strategies, such as the debt avalanche, debt snowball, and the debt blizzard.
Other options include consolidation, or a debt management plan. You shouldn’t live the life of an ascetic and eat only ramen to pay off your debt. The key is to balance happiness in the present with paying for your past (aka debt) and planning for the future.
6. Have a Prime Credit Score
Credit scores for consumers range from 300 to 850. A prime credit score is considered a score ranging from 740 to 799. When trying to boost your credit score, the first step is understanding how your credit score is calculated, explains Cummings Koski. The lion’s share, or 65 percent, of your score is made up of two parts: your payment history (whether or not you’ve been making your payments on time), and how much credit you’re using (your debt) versus your available credit (this is called your debt ratio).
The other factors that impact your score are new accounts, credit mix, and length of credit history. “To really make an impact on your score, make sure you’re in good shape with your repayment history and your amounts owed,” says Cummings Koski.
You can order a credit report for free — one from each of the three major credit bureaus — by going to annualcreditreport.com. As for scores, a handful of free credit monitoring services and credit card companies now offer your score for free. “Dispute any errors, because those mistakes could be causing you points on your credit score,” says Cummings Koski. “And keep track of your credit score so that you can quickly address any issues that pop up.”
7. Have Appropriate Insurance
In a nutshell, insurance is designed to protect your assets and family in case something terrible happens. And the type of insurance and coverage depends on your unique needs and situation. If you’re single and don’t own a home, you probably don’t need life insurance. But if you are a homeowner with a family and pets, you might want to look into life insurance, setting up a pet trust, and homeowners insurance.
8. Plan Ahead for Expenses
Planning ahead for expenses ties in to having a budget. Besides your ongoing monthly living expenses, such as your rent, groceries, and gas for your car, you’ll want to plan for times during the year that are more expensive — summertime, back to school, and the holidays.
And of course, plan on only using money you already have. One of the biggest mistakes people make is spending money they thought they were going to get, explains Cummings Koski. For instance, the supposed tax refund that ended up being a tax bill, or the bonus check that wasn’t quite as much as expected. “This could derail even the best planning, so the first tip is don’t spend money unless you have actually received it,” says Cummings Koski.
It is important to plan for the expected and unexpected, she adds. Besides automating your savings through direct deposit or banking transfer, Cummings Koski suggests naming your bank accounts for specific savings objectives, like “The Hawaiian Vacation Fund 2020” or “Baby Fund”.
While it’s a lot to mull over, taking small steps toward financial wellness will help you from enduring stress and anxiety with your money. If you would like assistance with your finances, the arsenal of knowledge and tools available from Money Management International (MMI) can help you with your money situation.