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What is Financial Wellness?

Sep 18, 2019 5 min read Ben Gran

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 is 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, but 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, you're not alone. According to Prudential's recent report on The State of Financial Wellness in America   PDF opens in new window, 57% of employees say that they are "very or somewhat stressed" about their financial situation. Many of these people are struggling to pay their monthly bills, lack sufficient emergency savings, are not on track for long-term savings goals such as retirement, and are exposed to significant financial risks such as premature death or disability.

Financial wellness is mostly self-directed and unique to your goals and where you are in life, but depending on which aspects you need help with, there are a variety of tools and guidance available that can help you dramatically improve your financial standing.

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

  1. Managing Day-to-Day Finances: The first pillar of wellness is 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 Financial Goals: Do you know how much you have saved for retirement and how much retirement income you'll likely have? If you're not saving enough, do you have a plan to get there? Are you taking advantage of employer-sponsored retirement plans? While retirement is just one example of many, setting and making progress toward short- and long-term financial goals are a big part of achieving overall financial wellness.
  3. Protecting Against Risk: The final pillar of financial wellness is protecting yourself against serious financial disruptions and setbacks. 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 a major component of 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 in retirement. 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? Learn more about the pillars of financial wellness and how to build the right strategies for your financial journey.


Managing Day-to-Day Finances

The first core fundamental of financial wellness is organizing and understanding your everyday finances and 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. Prudential's State of Financial Wellness in America survey found:

  • 57% of employees who identified as very or somewhat stressed about their finances said that paying monthly bills was a top reason for financial stress, while 42% said credit card debt was a main source of worry.
  • 25% of employees are spending their full paycheck or even spending more than they make each month.
  • 24% have less than $1,000 of liquid assets saved in case of an emergency.

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 is going. You might be spending more than you realized on impulse purchases like eating out, subscriptions and gym memberships that you don't use anymore, or other discretionary spending. Use the free Prudential "Slice-a-Budget" tool Opens in new window to better understand your monthly income and take control of your spending with a budget that actually works for your lifestyle.
  2. Pay off debt. If you are paying only the minimum on your credit card balances, you might be racking up thousands of dollars in interest payments. Use the free Prudential "Debt Manager" tool Opens in new window to prioritize your debt payments and pay off the right debts first.
  3. Build an emergency fund. Along with paying off debt, it's important to build up some emergency savings, held in a safe, liquid, interest-bearing savings account so that it's easy to access. A good general rule is to keep three-to-six months' worth of living expenses in your emergency savings fund. Having a comfortable cash cushion 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 credit 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.


Setting and Achieving Financial Goals

Once you are 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 Opens in new window, college for your children or your own retirement. Opens in new window

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

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 mortgage insurance.
  2. Understand your savings timeline. If you want to buy a house sometime in the next two years, you should save up for a down payment in a secure bank account — even if the interest that you earn on your savings 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 5 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. The 529 plan is one of the best ways to save for college Opens in new window, because the money grows tax-free and there are a wide variety of options to invest your money in a diversified portfolio of stocks and bonds. Contributions to 529 plans are not deductible from federal taxes, but depending on which state you live in, contributing to a 529 plan might also give you a deduction or credit on your state income taxes.
  2. Consider a Roth IRA. In addition to the 529, you can use Roth IRA funds for education expenses Opens in new window, without paying a 10% early withdrawal penalty (as long as you've had the account for at least 5 years). Just make sure you are not endangering your own future retirement in order to help pay for your child's college. Also, make sure you qualify to contribute to a Roth IRA Opens in new window — your adjusted gross income needs to be less than a certain limit.

(30+ years): Saving for Retirement

  1. Visualize your future in retirement. 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. Use the free Prudential "Retirement Calculator" tool Opens in new window to understand how much you need to save.
  2. Make the most of your employer's retirement plan. If you are eligible to participate in an employer-based retirement savings plan such as a 401(k), sign up and make sure you contribute at least enough to receive the employer match so you can maximize your savings.
  3. Invest for the appropriate level of risk. Many people who are saving for retirement make the mistake of putting all their money into conservative savings vehicles, like bonds or money market funds. Stocks tend to be riskier than bonds and cash, of course, but they also promise higher potential for long-term growth. Use the free Prudential "What's Your Investing Age?" tool Opens in new window to understand your investing style, your personal risk tolerance, and how to adjust your portfolio over time to manage your investment risks while maximizing your chances for growth.
  4. Don't raid your retirement savings. It might be tempting to take a loan or withdrawal from your retirement savings in case of an emergency or to cover a big expense, but once you have established your retirement savings account, 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.

Saving for the future is essential to financial well-being, whether your goals are to save for college for your children, save for a house or save for retirement. It takes patience, care and a plan to stay on target for your most important financial goals. But with the right strategies, you can create and attain an optimistic vision of your financial future.


Protecting Against Risk

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

According to Prudential's State of Financial Wellness in America survey, many people feel like they could use some additional risk protection:

  • 65% of employees said that they could not cover six months' expenses if income were lost.
  • 49% feel "very or somewhat unprepared" to fund their expenses in case of disability.
  • 56% do not have a life insurance policy outside of work.

Protecting yourself against risk — such as death or disability — is an important step to achieve ongoing financial wellness. Life can be uncertain and unpredictable, but there are a variety of tools and resources available to help insulate yourself and your loved ones from financial risk and surmount those challenges.

Here are a few things you can do to help manage your financial risks:

  1. Get life insurance. Life insurance is a way to provide income and financial support for your family in case of premature death. A general rule of thumb is to buy enough life insurance to cover 10-20 times the amount of the policyholder's annual salary. So if someone earns $50,000 a year, they should purchase $500,000 to $1 million of life insurance. If you can opt in to discounted group life insurance as part of your employer benefits, do that — but also consider purchasing an additional life insurance policy outside of work to make sure you're covered. Use the free Prudential "Life Insurance Calculator" tool Opens in new window to estimate your life insurance needs.
  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. Opens in new window
  3. Consider other supplemental insurance. Along with health, life and disability insurance, consider buying additional types of insurance Opens in new window like accidental death & dismemberment (AD&D) insurance, critical illness insurance or long-term care insurance. These policies are often available through employer benefits and can provide additional coverage against some of life's biggest risks.

By understanding the pillars of financial wellness, you'll be able to develop better discipline and control over your everyday spending and monthly budgeting, visualize and save for short-term and long-term financial goals, and maintain resilience in the face of life's financial risks and challenges. Not only will the pillars of financial wellness help you build a stronger foundation for your financial future — they'll also help you live a happier and healthier life.

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