The Ultimate Guide to Personal Financial Wellness

Financial wellness is the ability to comfortably manage your short-term finances while also contributing to long-term goals. A person experiencing a high level of financial wellness feels confident in their ability to handle their expenses. They’re also positive that they’re prepared for their future.

Why financial wellness is important

Achieving financial wellness can improve many areas of your life. Here are some of the goals and benefits of optimal financial health:

• Being able to comfortably pay for living expenses such as mortgage/rent, utilities, food, etc.
• Being able to cover debts such as student loans or car payments
• Being able to pay for healthcare, including emergencies
• Confidence in establishing short-term and long-term financial goals and plans
• Feeling secure in your employment/income status
• Being able to afford the standard of living you desire
• Ability to cover expenses for 3 months in a crisis
• Adequate retirement savings contributions
• Strong credit score
• Low levels of money-related stress

Conversely, being financially unwell can have serious consequences, both short-term and long-term. Poor financial health often leads to the following:

• Poor understanding of how to budget and save money
• Inadequate debt management (too much debt, late payments, etc.)
• Little to no savings
• No retirement contributions
• Lack of financial goals
• Inability to prioritize expenses
• Chronic stress and anxiety over finances

How to achieve financial wellness

Improving your financial health can seem daunting. Will you need to double your income to achieve financial wellness? Or trim your budget down to only the necessities?

Fortunately, most people are able to achieve greater financial wellness without drastic measures. Knowledge of budgeting, banking, and credit can put you on the right path. You’ll also benefit from a thorough understanding of your personal economic situation.

Below, you’ll find actionable tips, helpful explanations, and valuable solutions to put you on the road to financial wellness.

Budgeting, while maybe not the most thrilling activity, is absolutely essential to achieving financial wellness. Budgeting helps you understand how much you’re spending each month, where your money is going, and how much you can put in savings.

Here’s how to budget and save money:

1. Determine your income: It’s best to start with your after-tax income. Find the total amount of money you receive each month after taxes are withdrawn, but without expenses like health insurance and 401(k) contributions removed. You’ll add those items into your budget later to help you reach an accurate understanding of where your money is going.
2. Assess your spending: Before the rise of budget-monitoring apps (including budgeting apps that sync with your bank account), understanding your expenses was a complicated process. Now, you can simply download the best budget and savings app for your needs and let technology do the rest.

   Here are some examples of expense categories to track:

   • Rent/mortgage
   • Utilities
   • Insurance (auto, health, etc.)
   • 401(k) and HSA contributions
   • Car payments
   • Groceries
   • Dining out
   • Leisure

3. Determine how much you can save: Once you have an accurate understanding of your income and expenses, you can begin to make adjustments to help you improve your financial wellness. For example, if you notice an inordinately large percentage of your funds going to restaurants and coffee shops, you can adjust your habits to decrease your expenditures.

   With your eye on your future, calculate how much of your income can be directed to a savings account. A healthy savings account can help protect you from unexpected events such as a health emergency or large repair bill. It also prepares you for a down payment, a wedding, a new baby, or any other major expense that may be in your future.

With a solid understanding of your budget, you can shop for the bank accounts that will help you on your path to financial wellness. Here’s what to look for:

• If you are a typical consumer without special financial requirements, find a no-frills checking account with no monthly maintenance fees, no balance minimums, and no activity requirements.
• Some banks offer perks like the opportunity to earn interest on the funds in your checking account. Community banks typically offer higher annual percentage yield (APY) rates than megabanks.
• Most personal savings accounts will offer safe and steady returns and sometimes place a limit on the number of withdrawals you can make. Shop for terms that meet your expected savings requirements.
• Choose a bank account with access options that align with your preferences, such as convenient locations (if you like to conduct your financial business in-person) or plentiful online banking tools (if you prefer to handle things digitally).

Knowing your credit score and how to improve it are essential to financial wellness for several reasons. Your credit score will determine some important circumstances, such as whether you’re able to purchase a car or home. It will also determine how much you will pay in interest on these purchases and any other debts you incur.

Poorly managed credit can cost you thousands...and well-managed credit can save you some big bucks. Here are the questions we most often hear about credit:

• What is a credit score? Your credit score, also called a FICO score, is a three-digit number between 300 and 850 that helps lenders gauge the likelihood that you’ll repay your debts on time and in full.

  A higher score means you may have an easier time securing a loan, and you may pay less in interest. A low credit score can prevent you from being approved for a mortgage loan, auto loan, credit card, or even a home rental application. You may also face higher interest rates, which raise both your monthly payment amounts and the total amount you’ll pay over the course of the loan.

  According to Experian, a score of 670+ is considered good. A score between 580 and 669 is considered fair. A score of 579 or less is considered poor.

• How can I find my credit score? The best way to learn your credit score is to pull your credit report. You can request a free credit report from any of the three major credit bureaus:
  • Experian
  • Transunion
  • Equifax

• What can I do to build credit? If you have little or no credit history, you may be stuck in the “catch-22” of needing credit in order to begin building credit.

  You can start by asking someone with established credit to add you to one of their credit accounts as an “authorized user.” Even if you don’t actually have access to the account, you can benefit from the card’s usage and payments.

  A secured credit card uses funds pledged to your savings account to allow access to a line of credit. As you make payments by the due date each month, your credit score will be established or rebuilt based on your diligence.

  Once you are able to secure a line of credit, try making frequent payments throughout the month. This contributes to a factor called “credit utilization” which can impact your score quickly.

  Keep all lines of credit open, even cards that you no longer use.

  Most importantly, pay every bill on time. Payment history has the strongest effect on your credit score of any other credit-building method.

• How can I raise my credit score? If you’ve already established credit but would like to raise your score, you can try some credit boosters:

  One way to increase your score is to ask for credit limit increases. Raising the limit (without raising the amount you owe, of course) decreases your debt-to-credit (DTI) ratio, which improves your score. Similarly, you can pay down the amount owed to improve your DTI ratio.

  Another method is to dispute errors on your credit report. If you see any information that is inaccurate or questionable, you can contact the credit bureau AND the organization in question to remedy the situation. Under the Fair Credit Reporting Act, both parties are responsible for correcting the error.

• Does a debit card establish credit? Your bank does not report checking transactions to any credit bureau, therefore using your debit card for purchases will not build credit.

Mortgage loans, car loans, and personal loans fall under a category called “installment loans.” Installment loans are repaid through a fixed number of regularly-occurring payments in a pre-specified amount.

• How they help: Installment loans, when paid on time, build credit and increase your credit score. Because the payment terms are predetermined, you know exactly how much you’ll pay and exactly when the loan will be paid off.

  Most installment loans have a range of options to suit the borrower’s repayment capabilities. For example, the length of a loan could be extended to achieve lower payment amounts for a borrower with a tight monthly budget. Conversely, a borrower who would like to own their home or vehicle outright as quickly as possible can opt for the shortest loan term available.

• What to watch for: Once established, installment loans become inflexible. It is difficult to change the loan terms, such as the payment amount or repayment period. High interest rates leave you paying substantially more for an item than it’s sticker price.

  You may also face fees when acquiring the loan, when you are late on a payment, or when you pay the loan off early.