Understanding and implementing the five pillars of financial wellness is crucial in the journey toward financial independence and security. These pillars serve as the foundation for building a resilient financial future, capable of withstanding life’s unexpected turns and thriving in times of prosperity. “Financial Wellness” is not just about having money in the bank. It’s about creating a comprehensive strategy that covers all aspects of your financial life for peace of mind and a secure future. Remember, “dreams without a goal are only dreams.”
1. Emergency Savings Accounts (ESA):
Establishing an ESA is the first pillar of financial wellness. This pillar is about creating a financial safety net to keep you from experiencing money-related hardship due to unforeseen situations. An emergency fund is essentially a high-yielding, liquid, cash reserve account that is separate from your savings or checking account. It is designated for unexpected expenses such as medical emergencies, car troubles, sudden job loss, or urgent home repairs. Think of an emergency savings account as your “what if” money.
Key benefit: By having an ESA individuals are less likely to dip into their long-term savings, such as retirement accounts or investment portfolios.
We recommend having 3-6 months of essential expenses in a safe, separate, liquid account. (3 months is the recommended minimum, and 6 months is the long-term goal.)
2. Budget
Creating and sticking to a budget is the second pillar of financial wellness. A budget is a powerful tool that gives you control over your finances, allowing you to track where your money goes each month and make informed decisions about your spending. It’s about ensuring that your spending aligns with your values and financial goals.
Budgeting involves categorizing your expenses, setting spending limits for each category, and tracking your spending to stay within those limits. Online banking or online accounting systems will help. This process identifies unnecessary expenses, enabling you to reallocate funds towards more important goals, such as saving for retirement, purchasing a home, starting a business, or paying off debt. By living within your means and prioritizing your financial goals, you can build a solid foundation for financial wellness. If the budget is still tight, consider creating your “side hustle.”
We recommend allocating 50% of your money toward your MUST HAVES / SHOULD HAVES, 15% toward your FUTURE (i.e. retirement), 5% toward your EMERGENCY SAVINGS ACCOUNT (ESA) until it is funded (see Pillar #1), and the remaining 30% toward your COULD HAVES / WANTS.
3. Debt
Managing and eliminating debt is the third pillar of financial wellness. Some debt, like a mortgage, debt on a rental property, or a reasonable student loan may be considered productive debt because it is an investment in your future. Other high-interest debt from credit cards or personal loans would be considered reductive debt, hindering your financial progress.
The key to managing debt is to develop a repayment plan that prioritizes high-interest debts while maintaining minimum payments on other debts. Strategies such as the debt snowball(paying off the smallest debts first to build momentum) or the debt avalanche (targeting the highest interest rates first) can be effective in reducing overall debt.
4. Protection – Insurance
The fourth pillar, Insurance – Protection, is about safeguarding your financial future against risks that could derail your financial wellness. Insurance acts as a protective barrier, offering financial security in the face of life’s uncertainties, such as illness, disability, property loss, or death.
Different types of insurance cover various aspects of your life: health insurance for medical expenses, life insurance to support your dependents, disability insurance in case you’re unable to work, and property insurance to protect your assets. To choose the right insurance coverage, assess your needs and potential risks thoroughly. This approach ensures you protect yourself adequately while avoiding overpayment for unnecessary coverage.
5. Investment/Retirement
The fifth and final pillar of financial wellness is investing for the future, with a particular focus on retirement planning.
Investing allows you to grow your money over time by taking advantage of compound interest, tax benefits, and the potential returns of the stock market, real estate, private investments, crypto and other strategies.
Retirement planning is about more than just saving money; it’s about strategically investing to ensure that your retirement savings keep pace with inflation and grow to meet your long-term needs. This involves diversifying your investments, understanding your risk tolerance, and regularly reviewing and adjusting your investment strategy to stay on track toward your retirement goals.
Conclusion
Achieving financial wellness is a multifaceted journey that requires attention, discipline, and commitment to these five pillars: emergency savings, budgeting, debt management, protection through insurance, and investing for retirement. By addressing each of these areas, you can build a foundational financial plan that not only secures your current financial situation but also paves the way for a prosperous future.
Remember, financial wellness is not a destination but a continuous process of making informed decisions and adjustments to your financial strategy. With dedication, discipline, and guidance from an independent advisor, you can achieve financial wellness, ensuring peace of mind and security for yourself and your loved ones.