Updated: Oct 16, 2020
You must gain control over your money, or the lack of it will forever control you. Dave Ramsey
Financial wellbeing is about a sense of security and feeling as though you have enough money to meet your needs. It's about being in control of your day-to-day finances and having the financial freedom to make choices that allow you to enjoy life.
The pursuit of financial wellness helps you reflect, understand, and appreciate your relationship with money.
Financial wellness is about holistically approaching personal finance, looking beyond just earning and spending money. It looks at money issues in terms of how they interact with other parts of our lives and behavior.
The idea of financial wellness addresses this very need for a long term and meaningful relationship between money and you as an individual.
Elements of Financial Wellness
The four elements of financial wellness are financial awareness, financial literacy, financial behavior, and financial satisfaction.
These four elements form the necessary foundation for financial wellness.
Financial awareness is the condition of being conscious of your current financial state. It involves the recognition of your present emotional as well as practical financial situation.
Financial awareness allows you to identify the starting point of your financial wellness journey. It is the first step in determining if you have the economic life that you aspire for.
Very few people take the time to become financially aware. As a result, they stumble from one financial decision to the next without an active awareness of the choices they are making.
How you feel about your current financial condition is unique to you. It could be different from the emotions that someone else in a similar situation experience. Your social environment and personality play a significant role in the emotions triggered by your current financial state.
The second part of financial awareness is the objective measure of your current financial condition.
It involves getting clear about the physical facts of your financial life as of today. This includes having a good understanding of your current income, bank balances, loans, or any other financial liabilities.
This process of getting practical financial awareness gives you a starting point as you begin the pursuit of financial wellness.
Money: it matters for your peace of mind today, and it matters for your security tomorrow. Understanding money's primary language doesn't have to be complicated.
Financial literacy is the ability to understand and adequately apply financial management skills. Financial illiteracy may lead to making poor financial choices that can have negative consequences on the financial wellbeing of an individual.
Financial literacy consists of seven key areas.
A budget is a tool to keep track of your income and expenses over some time. You could have a monthly, quarterly, or annual budget.
Having a budget to work with is the first step in financial literacy. A budget allows you to track where the money is coming from each month and where it is going.
The amount of money you can save each month has a significant impact on financial wellness. We live in a world that wants you to keep spending. There is always going to be some tempting product on offer.
How well we cope with the temptations around us will decide the actual savings we end up with.
The decision to take on debt can be a very emotionally charged decision.
Getting rid of any debt is an essential part of your ability to pursue financial wellness. The emotional cost of handling debt can far exceed any financial costs that you may incur to repay that debt.
Self-discipline, persistence, and the willpower to avoid temptations are the critical facets of an individual's personality that determine if someone falls into the debt trap or not.
Saving money is a necessary but not a sufficient condition to create wealth. It is not good enough to save money and stop at that.
The key to greater financial security is to invest the money that you are saving wisely. It is the growth in the value of these investments that ultimately makes you richer.
Preparing for the risk of something going wrong makes sense. Hope and prayer alone may not do the job – You need insurance.
Here is the thing to understand, though – Insurance can't prevent things from going wrong. Insurance will instead help you financially if things do go wrong.
Since retirement is an event that happens far into the future, it isn't easy to make it real in our imagination. As a result, it is easy to avoid saving for retirement and instead use the money for something you can buy now.
This can turn out to be a fatal personal finance mistake.
Many people realize this mistake when they are getting close to retirement. Unfortunately, at that time, it becomes challenging to make up for the decades that went by without saving correctly for retirement.
It is human nature to want to leave a legacy. For some, it may be about leaving a fair inheritance for your loved ones. For others, it may be a desire to support a social cause close to their heart.
No matter what you prefer, it is essential to plan for it while you are still around. Putting in place a WILL or a Trust with clear guidelines will ensure your money is used as per your desires.
Only you know best what you want. So, your giving plan should be made out to match those requirements.
Gaining a good understanding of these seven financial literacy concepts will propel your financial wellness journey forward.
Financial behavior is the way you feel, act, and conduct yourself in a situation that involves making a decision about money.
As human beings, the decisions we make in life are impacted by our behavior, personal values, and attitude. Just because we know what we should be doing, does not mean we do it.
Financial behavior is about the ongoing conflict between our heads and our heart. Our head tells us what we should be doing based on logic. Our heart brings emotions into financial decision making.
This third pillar of financial wellness is about recognizing that our behavior can, at times, cause us to act in ways that hurt our finances.
Financial satisfaction is a state of contentment about the economic choices we make and the life outcomes those choices lead to.
Worrying about money is normal, but the key is to do it the right way. The pursuit of material goods may deliver short term pleasure, but it seldom leads to a long-lasting feeling of contentment. We quickly adapt to whatever we own or experience.
Focusing on financial wellbeing lets you affirm your path to financial security and independence. Of course, you may achieve wealth through the process, but the focus remains on you, your financial needs, and the unique actions you take.
What does financial security mean to you? Take a moment and write down a definition for yourself. What would your life look like or feel like if you were financially well? How will you know when you reach your definition of financial security?
Complete this sentence: I will know I am financially secure when _________________.