Financial wellness

Much has been written about financial wellness, and with good reason. Far from a buzzword, financial wellness can be as important to a person’s overall well-being as physical or mental wellness. What exactly is it? The definition of financial wellness is about your ability to lead a healthy financial life and take control of your financial security. Financial wellness is less about the size of your bank account and more about feeling confident about your financial situation, knowing what to do next with your money – and being prepared to withstand an unexpected monetary shock, for example, due to a disability that keeps you from earning income.

Let’s face it – while money isn't everything, finances are undoubtedly an important part of life. That's why it's worth taking a few minutes to learn more about financial wellness and the steps you can take to improve yours. It makes a real difference in your life, now and in the future.

Why financial wellness matters

A person’s relationship with money directly influences physical health, mental well-being, and quality of life. In fact, Facing Financial Fragility, a new study by Guardian, found that finances impact overall well-being more than physical or emotional health. What's more, your financial health may directly affect your emotional health.

Source: Guardian, Facing Financial Fragility (2024)

According to the study, 55% of Americans faced financial challenges over the past year, a substantial increase over 2021, when only 37% felt financial stress. What's more, financial stress — and overall lower financial wellness — can manifest in specific physical symptoms, such as headaches or migraines, a weakened immune system, high blood pressure, digestive issues, and more.

Financial wellness helps ensure the freedom to live a more fulfilling life without the constant worry about money. It is a highly personal journey that can be influenced by many factors, such as your level of financial knowledge, degree of financial confidence, and individual money management practices.

How financial wellness differs from financial well-being and financial literacy

While interconnected, the three concepts are distinct. Investopedia defines financial literacy as the ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing. When you are financially literate, you have an essential understanding of money matters that can advance your financial wellness journey. Financial well-being is the ultimate goal when you can fully meet your current and ongoing financial obligations, feel secure in your financial future, and make choices that allow you to enjoy life, according to the Consumer Financial Protection Bureau. Financial well-being is a result of financial wellness, in much the same way that physical well-being is directly influenced by physical health.

Why it can be hard to achieve financial wellness

Like almost any worthwhile goal in life, achieving financial wellness has always been a challenge due to a variety of factors. But the Facing Financial Fragility study found that recent trends have made the task even more difficult:

1. Inflation/cost of living

A report by the American Psychological Foundation found that adults aged 35 to 44 were more likely to report that money and the economy were the factors that cause them significant stress today compared with 2019, 77% vs. 65% and 74% vs. 51%, respectively. Guardian's research helps explain why: more than 70% of respondents say that inflation or the cost of living had a significant personal impact on them in the past year, affecting their decisions around how they allocate their spending. There has been a staggering rise in living expenses since 2000, impacting housing (+175%), rent (+149%), college tuition (+179%), and raising a child to the age of 17 (+87%).

2. Wage stagnation

Real wages – and buying power – aren't rising, which impacts earners across the board: The cumulative rise of inflation since 2000 was 79%. However, the average annual wages in the US have risen only 16% during the same time period. While yearly pay raises varied widely across the last 20+ years to match inflation rates, 55% of workers said they hadn't had a raise in more than a year. This wage stagnation means that many workers face tough decisions around staying at underpaying jobs or making sacrifices to work more. Additionally, the Guardian study found that 40% of full-time working Americans live paycheck to paycheck.

3. Unforeseen expenses

While it’s important to know how to budget, it’s impossible to anticipate every expense that could come up. Unpredictable circumstances such as sudden unemployment, health issues, or an economic downturn can disrupt financial stability. The Guardian study found that 57% of Americans are unable to afford an unexpected expense of $1,000.

4. Lack of financial literacy

Without a solid understanding of concepts like budgeting, investing, and retirement planning, it's hard to make informed decisions related to financial wellness. A lack of financial literacy can lead to poor money management, excessive debt, and financial insecurity. The Guardian study found that financial literacy among women consistently tends to trail men, with only 10% of women demonstrating high financial literacy vs 23% of men. The three weakest areas of literacy for women are investing, insurance, and comprehending risk.

What are the key components of a financial wellness strategy?

Many factors contribute to financial wellness, but four of the most important components include:

1. Budgeting

Managing both short- and long-term finances is key to achieving financial wellness. It's essential to create a realistic personal budget that accounts for income, expenses, and savings. Short-term expenses include your monthly costs for things like gas, food, home and car maintenance, etc. Long-term expenses may include saving for college or retirement.

A budget helps to control spending and ensures necessities are covered. Many financial professionals recommend the 50/30/20 budget, which suggests that 50% of your income goes toward needs, 30% toward wants, and 20% toward savings and debt repayment. You can create a budget using a simple worksheet, such as this one from NerdWallet. But remember: life – and finances – are fluid, so periodically adjust your budget as financial circumstances change.

Also, consider factoring the costs of medical expenses and even long-term care needs into your budget because the more you're prepared to face different kinds of financial challenges, the farther along you’ll be in your financial wellness journey. That’s why it’s also a good idea to consider life insurance as a form of financial protection for your family. This term insurance quote tool can help you estimate monthly payments to include in your budget.

2. Saving

A budget can help ensure that your financial obligations are met and that you start to save consistently. Some of those savings should be for emergency expenses and short-term goals, and other savings should go to long term goals, like retirement.

You can use several different savings methods – not just one. You might choose a traditional liquid savings account, a high-yield savings account that locks your money up for a period, or perhaps an investment account for long-term goals. Automating your savings can also be a beneficial strategy. This way, a set amount of money is transferred from your checking account to your savings account each month, making the process seamless and reducing the temptation to spend. Regularly review and adjust your savings strategy to ensure it remains aligned with your goals, especially for the long term. Tools such as Guardian's retirement calculator can help you determine if your savings are on track for retirement or if you need to adjust your monthly contributions.

3. Investing for the long term

Investing can be a reliable means to grow wealth over time. It's important to understand various investment options and align them with your individual financial goals and risk tolerance. The good news is there are several types of investment vehicles, such as money market funds, stocks, bonds, and mutual funds – something to suit every risk level. Individual retirement plans (IRAs) and workplace 401(k) plans are excellent, tax-advantaged ways to save for the long term. Permanent life insurance can also help build assets because these policies accumulate tax-advantaged cash value that can be accessed while you are still alive.

4. Debt management

Understanding how to manage and reduce debt is vital. It's always advisable to pay more than the minimum required to your credit cards each month and avoid adding unnecessary debt. Set a strategy for debt repayment – consider either the snowball method (paying off smaller debts first) or the avalanche method (tackling high-interest debt first).

Additional ways to reduce debt include consolidation loans, negotiating lower interest rates with your credit card companies, transferring balances to accounts with lower interest rates, and seeking additional sources of income to pay off your debts.

Remember, financial wellness is not a one-size-fits-all concept. How you achieve financial wellness will vary based on your unique circumstances and financial goals. If you need help figuring it out, consider speaking with a financial professional who can help you understand the actions that make the most sense for your individual situation.

Practical steps to help improve financial wellness

1. Familiarize yourself – and take advantage of – your employee benefits

Many employers offer 401(k) plans with matching contributions. If you’re not taking full advantage of this employee benefit, you're essentially leaving free money on the table. Your contributions to a 401(k) are pre-tax, reducing your income taxes for the year. Moreover, the money grows tax-deferred until withdrawal, allowing your savings to compound faster over time.

Also, a growing number of employers are focused on improving the financial security of employees and their families by offering financial wellness programs to help employees reach their goals. Some of these newer offerings include emergency savings funds, student loan assistance, and financial education and planning resources. Be sure to check with your employer to see if they offer any of these programs or are considering doing so in the future.

2. Intentionally develop good financial habits

Having a budget and setting your strategy for savings, investing, and debt elimination are a great start. But it’s not enough to set these things up – you need to continually stick to the objectives you’ve set for yourself. Commit to making financial wellness a daily effort, just like watching your weight or practicing mindfulness. And, if you’re among the millions of people who use technology apps to help meet your physical or emotional goals, consider using one of the growing number of financial apps to help you improve your financial wellness.

And remember, like any habit, the more you practice, the easier it is to achieve. Use these tips from the Harvard Business Review to build new habits that can help solidify your financial wellness strategies.

3. Build an emergency savings fund

An emergency fund is a safety net that protects you from unexpected financial shocks. Experts recommend that your emergency fund be enough to cover at least three to six months of living expenses. Without an established emergency fund, credit cards and loans are two costly options for dealing with unexpected expenses, potentially incurring late payment fees and high interest, further compounding debt and taking a negative toll on financial health.

4. Protect yourself with insurance

This is an often overlooked aspect of financial health. Adequate coverage, including health, life, disability, and property insurance, protects against unforeseen events that could otherwise harm your financial ruin. For example, without disability insurance, an illness or injury could lead to significant debt.

The idea of practicing financial wellness might seem intimidating at first. But with a bit of knowledge and consistency, you can make significant strides on your journey toward financial freedom and stability. Budgeting, repaying debt, saving for retirement, and investing can all make a positive contribution along the way.

Guardian can help

For more tips on how to improve your financial wellness, visit our financial wellness Q&A page. Or, talk to a to help you define your financial goals and map out a financial wellness plan to help you achieve them.