Happy New Year! January is Financial Wellness Month, which is the perfect time to get a jump on your finances for the new year. Starting the year off right, as related to your finances, can help you manage stress and anxiety about money. After all, money is one of the highest causes of stress in America and the #1 thing couples argue about.
What is financial wellness? Much like your health-related wellness, it is an all-encompassing view of your financial life. This includes financial education, budgeting, saving and investing, managing debt, etc. Each of these components of financial wellness are important by themselves, but collectively they can put you on the path to not only peace of mind, but financial freedom.
So where should you begin? Well, in order to know where you are going, you need to know where you are now.
- You have to take stock of your current financial situation by laying out your current picture. What is your income? Expenses? Debt level? Current savings? Don’t forget to include investment accounts, 401(k)s etc. You need to make sure your income exceeds your expenses in order to save and invest. If it doesn’t, then you need to look at everywhere you are currently spending money.
- The best way to track spending is to lay out a budget and compare what you are spending a year vs. what you expected to spend. When creating a budget, don’t forget to include often overlooked items such as personal care (haircuts, nails, etc.) and gifts for birthdays, holidays as well. Use a budgeting app or online sample budget for you to follow.
- Now that you know where you are and have a budget, you need to develop a set of financial goals. Your budget can tell you if your debt is too high or you are paying too much interest. If so, your goals should include addressing all of those issues.
- Part of your goals must include an emergency savings fund of times when things pop up such as an unplanned home or car repair, loss of a job or reduction of work hours. Shoot for 4-5 months’ worth of expenses in your emergency reserve.
- Debt management is key to achieving your financial goals. Too much debt can limit your ability to save and ultimately invest. Look at your debt and either start with the smallest debts first or those with the highest interest rates. Look to get rid of credit card debts quickly since they tend to have the highest interest rates and also aren’t tax-deductible like mortgage interest is.
- Investing should follow these steps. The faster you can start investing, the faster you may be able to achieve financial freedom. The goal is to ultimately have your investments make more than you do from working. That’s true financial freedom. Being able to walk away from your job if you choose to, because your investments earn more than you.
- Lastly, if you are feeling overwhelmed by all of these steps, then seek the advice of a professional who can guide you through this process. The role of a financial planner is to guide you through wherever you need help with financially.
While it might not be easy, getting your finances in order can be one of the most rewarding and confidence-boosting endeavors you can take on for yourself. There’s no better time to start than right now at the beginning of the new year. Taking the first step is the hardest but before you know it, you’ll be on the road to financial wellness.
Frequently Asked Questions About Financial Wellness
1. What is financial wellness and why does it matter?
Financial wellness is your overall financial health. It includes budgeting, saving, investing, and managing debt. When all of these areas are working together, it can help you reduce stress, feel more in control, and build a path to help you reach your long-term financial goals.
2. Where should I start if I want to improve my financial wellness?
Start by understanding your current financial picture. Review your income, expenses, savings, and debt. From there, create a budget to track your spending and identify areas where you can save more or reduce unnecessary costs.
3. How much should I have in an emergency fund?
A good goal is to save enough to cover 4 to 5 months’ worth of expenses in an emergency fund. This can help protect you from unexpected situations like job loss, medical expenses, or car home repairs.