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What Is Financial Wellness?

Apr 12, 2021 6 min read Ben Gran

Key takeaways

  • Start with the basics: Create a budget, build an emergency fund, dump debt.
  • Short- and long-term financial goals require different savings approaches.
  • Proper risk protection can give you peace of mind and open possibilities.

 

What is financial wellness, and what does it mean for your life?

Most people understand that they have to budget, save and prepare for the future, but they aren’t always sure how to put it all together to achieve a state of overall financial well-being. Being "well" financially includes the total picture of your financial health, including how your financial situation affects your stress levels and overall mental and physical health. Financial wellness is not a destination; it’s a constant journey of making adjustments and building resilience to maintain financial equilibrium, not only to pay your bills but also to enjoy a more stable, healthy and successful life.

If you’re feeling stressed about your finances—especially these days—you’re not alone. According to Prudential’s latest Pulse of the American Worker survey, nearly seven in 10 workers (68%) now worry about their financial security. Meanwhile, a special report from Prudential’s Financial Wellness Census found that nearly half of Americans (46%) are struggling financially due to the COVID-19 pandemic. Indeed, too many are having a hard time paying bills, lack sufficient emergency savings, aren’t on track to meet long-term savings goals like retirement, and face significant financial risks such as disability or premature death.

Even so, your financial wellness is mostly unique to your goals and where you are in life. Depending on which aspects you need help with, a variety of tools and guidance can help you dramatically improve your financial standing.

Prudential has identified three pillars of financial wellness that can help anyone improve their financial well-being:

  1. Managing day-to-day finances. Learning to manage your budget, understanding your credit score and building short-term emergency savings so you can better handle life’s day-to-day ups and downs.
  2. Setting and achieving goals. Do you know how much you have saved for retirement—and how much retirement income you can expect? If you’re not saving enough now, do you have a plan to get there? Are you taking advantage of employer-sponsored retirement plans? IRAs? While retirement is just one example, setting and making progress toward short- and long-term financial goals are a big part of achieving overall financial wellness.
  3. Protecting against risk. Protecting yourself—and your loved ones—against serious financial disruptions and setbacks can go a long way toward lowering your stress. From life insurance to health insurance to retirement savings, having the resources to navigate and manage financial challenges such as a serious illness or injury, or the premature death of a spouse or breadwinner, is key to a financially secure life.

People who are financially well can comfortably pay their bills, manage their monthly expenses (without living paycheck to paycheck) and conserve money for emergencies. They can also save for long-term goals and feel confident about their future. They’re resilient in the face of financial setbacks because they have the right resources and strategies in place.

Are you ready to join the ranks of the financially well? Here’s more about the pillars of financial wellness and how to build the right strategies for your financial journey.

 

Manage day-to-day finances

The first fundamental of financial wellness is organizing and understanding your everyday finances, then finding the pathway that works for you to create a sustainable budget.

Many Americans are feeling financial stress from the challenges of managing their monthly budgets and everyday spending. According to Prudential’s Financial Wellness Census special report:

  • One in four (24%) Americans have fallen behind in paying their bills—including one in 10 (9%) who’ve missed a mortgage or rent payment.
  • One in five households (19%) has debt related to health-care costs. (For those without emergency savings, that number rises to 26%.)
  • Fully six out of 10 (61%) say it’s getting harder to “keep up with my financial obligations, despite having a job.”

Here are a few ways to create a healthier day-to-day, week-to-week financial game plan:

  1. Create a budget. Track your spending for 30 days—every purchase, every dollar—to understand where your money goes. You might be spending more than you realized on impulse purchases like eating out, subscriptions and (pre-COVID-19) gym memberships you don’t use anymore, or other discretionary spending. Prudential’s Slice A Budget tool can help you strike a better balance between how much money comes in and how much goes out each month.
  2. Pay down debt. If you’re paying only the minimum on your credit card balances, you might be racking up thousands of dollars in interest payments. Prudential’s Debt Manager tool can help you prioritize your payments and pay off the right loans first.
  3. Build an emergency fund. Along with paying off debt, it’s important to build up emergency savings in a safe, liquid, interest-bearing account (like a bank savings account) that’s easy to access. A good general rule is to keep a cash cushion of three to six months’ living expenses—must-haves like food, shelter and utilities—though, as many people who lost their jobs during the pandemic have learned, even more is better. Having a comfortable rainy-day fund in the bank will help you avoid the stress of financial emergencies or a short-term loss of income.
  4. Understand your credit score. If you haven’t checked your credit recently or don’t know what your credit score is, it’s time to find out! Understanding your score will motivate you to keep paying bills on time, manage your debt and enjoy the benefits that come from good credit.

These fundamentals are all part of a virtuous cycle of day-to-day financial wellness. The less you spend, the more you save and the stronger your finances.

 

Set and achieve goals

Once you’re feeling comfortable with your monthly budget and emergency cash savings, it’s time to move on to the next level of wellness: setting short- and long-term financial goals, whether that’s saving for a down payment on a house, college for your children or your own retirement.

Some recent statistics show that plenty of people could improve their progress toward long-term financial goals:

  • Only 42% of millennials own a home by age 30 (compared with 48% of Gen Xers and 51% of baby boomers)—and nearly one in five (18%) think they never will, according to Apartment List Opens in new window.
  • Eight out of 10 (80%) of parents ages 30 to 59 were not saving for their children’s education as of 2017, reports Statista Opens in new window.
  • One in five (19%) employees with access to a defined-contribution retirement savings plan (such as a 401(k) do not contribute to it, according to a 2017 Prudential study  on financial wellness.

Here’s how you can make better progress toward your short- and long-term financial goals:

 

Short-term goals

2-5 years: Saving for a house

  1. Figure out how much house you can afford. A general rule of thumb is that your total housing costs (mortgage, property taxes, homeowners insurance) should be less than 28% of your monthly gross income. Try to save a down payment of 20% of the home’s price, as this will help you avoid having to pay for private mortgage insurance (PMI).
  2. Understand your savings timeline. If you want to buy a house sometime in the next couple years, save for a down payment in a secure bank account—even if the interest you earn is low. You don’t want to risk losing part of your down payment on investment losses. But if you don’t want to buy a house for five years or more, you might want to consider saving for your down payment in a Roth IRA.

 

Long-term goals

10-15 years: Saving for college

  1. Set up a 529 college savings account. A 529 plan is one of the best ways to save for college—the proceeds are tax free if you use the money for qualified higher ed costs (including room and board), and there are a wide variety of diversified investment options available. Contributions aren’t deductible from federal taxes, but depending on where you live, you might net a deduction or credit on your state income taxes.
  2. Consider a Roth IRA. While the amount you can contribute to a Roth each year is limited (and based on your income), if you qualify Opens in new window you can use Roth IRA funds for education expenses tax free—and without facing a 10% early-withdrawal penalty if you're under age 59½ (as long as you’ve held the account for at least five years). Just make sure you’re not endangering your own future retirement to help pay for your child’s college.

30+ years: Saving for retirement

  1. Visualize your future life after work. Do you know how much money you want to have in retirement? It might seem hard to imagine, especially if your retirement is still several decades off, but you need to plan for what a comfortable retirement looks like to you. Prudential’s retirement calculator can help you understand how much you need to save.
  2. Make the most of your employer’s retirement plan. If you are eligible to participate in a workplace retirement savings plan such as a 401(k), sign up and make sure you contribute at least enough to receive any employer match so you can maximize your savings.
  3. Invest for the appropriate level of risk. Many retirement savers make the mistake of putting all their money into conservative vehicles like bonds or money market funds. Stocks tend to be riskier than those, of course, but they also provide greater potential for long-term growth. Prudential’s What’s Your Investing Age? tool can help you understand your investing style, your risk tolerance, and how to adjust your portfolio over time to manage your risks against your potential rewards.
  4. Don’t raid your retirement savings. It might be tempting to borrow or withdraw from your retirement fund in case of an emergency or to cover a big expense. But once you’ve established your nest egg, you should leave it alone and let your savings grow. Dipping into your retirement funds early can lead to penalties and jeopardize your future financial security.

 

Protect against risk

Once you’ve created a stronger financial foundation, with adequate short-term savings and a solid long-term retirement investment plan, it’s important to protect what you have by insuring yourself against life’s biggest financial risks.

According to Prudential’s 2017 financial wellness study, many workers feel they need more risk protection:

  • About two-thirds (65%) said they couldn't cover six months’ expenses if their income were lost.
  • Half (49%) feel “very or somewhat unprepared” to cover their costs if they became disabled.
  • Nearly six in 10 (56%) do not have life insurance coverage outside work.

Protecting yourself against risk—such as disability or death—is an important step toward achieving ongoing financial wellness. Life can be uncertain and unpredictable, but a variety of tools and resources can help you and your loved ones surmount those challenges.

Here are three ways to help manage your financial risks:

  1. Get life insurance. Life insurance is a way to replace income and financial support for your loved ones in case you’re not around. A general rule of thumb is to buy enough life insurance to cover 10–20 times the amount of your annual salary. But everyone’s situation is different, so use an insurance calculator (or talk to a financial professional) to determine how much coverage you need. If you can opt in to discounted group life insurance through your employer, do that—but also consider buying an additional individual policy to make sure you’re fully covered.
  2. Buy disability insurance. What would happen if you suffered a serious injury or illness that kept you from working for months or years? Disability insurance can help protect against the financial disruption of illness and injury.
  3. Consider other supplemental insurance. Along with health, life and disability protection, consider buying other types of insurance, like accidental death & dismemberment (AD&D), critical illness insurance or long-term care coverage (which you might be able to get through certain life insurance policies). These kinds of policies may be available through employer benefits and can provide additional coverage against some of life’s biggest risks.
 

What you can do next

Study the pillars of financial wellness to see where you stand—then look for ways to fill your gaps. By doing so, you’ll develop better discipline and control over your budget, your savings toward short- and long-term goals, and life’s financial risks and challenges. Not only will they help you build a stronger foundation for your financial future—they’ll also help you live a happier and healthier life.

Footnotes

Ben Gran is a freelance writer based in Des Moines, Iowa. He writes about personal finance, public policy, financial services, technology and business.

 

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