How to Improve Your Financial Wellness
What is Financial Wellness?
Financial wellness is the ability to lead a healthy financial life, including the ability to build and stick to a budget, understanding financial terms to evaluate offers of credit or loan, and creating a plan for the future to protect against emergencies and support your retirement.
Financial wellness is important because it shows you have control of your spending and debt. It also indicates you have enough money saved up and can handle any financial crisis or event that may come your way. Let’s take a closer look at what you can do to improve your personal financial wellness.
Review Your Credit to Build Financial Knowledge
Credit is an important part of your financial life. Lenders and creditors will look at it to determine how risky of a borrower you are. Most of them will consider your FICO credit score, which is made up of these factors:
- Payment history
- Total amount of debt you have
- Diversity of your credit accounts
- Length of your credit history
- How many recently opened accounts you have
Bad credit or a low credit score could prevent you from getting approved for a loan or credit card. It can also leave you with higher interest rates that cost you thousands of extra dollars.
Fortunately, there are some ways you can build a positive credit history and increase your credit score. Here are some ideas to get you started.
Take out a Credit-Builder Loan
A credit-builder loan, designed for those with no credit or bad credit, is secured by a deposit. Once you pay off the loan in full, you’ll get the deposit back. By making regular payments on the loan, you’ll be able to establish a positive credit history.
Open a Secured Credit Card
Like a credit-builder loan, a secured credit card requires you to put down a deposit. Your credit limit on the card will be no higher than this deposit amount. As you spend and promptly pay what you owe, you can watch your credit score rise.
Become an Authorized User
Becoming an authorized card user may be easier than opening your own card account, but there’s a catch. In order for this approach to build your credit, the other person's credit card company must report your payment history (as an authorized user) to the credit bureaus.
The amount you've borrowed is the second-biggest component of your credit score. Keep your total debt at a manageable level by only borrowing—or, in the case of a credit card, spending—what you know you can pay back.
Pay off Your Debts On Time
Making on-time debt payments is the single best thing you can do for your credit. Once you have a credit card or loan in your name, commit to making at least the minimum payment every month. After six months to a year of positive payment history, your credit score can improve significantly.
Build a Budget to Maintain Financial Wellness
A budget is a plan for what you’ll do with your money. If you create and stick to a budget, you’ll find it easier to meet your spending and savings goals. Since there are a variety of budget options out there, it’s important to choose one that works well for your unique lifestyle. Several of the most popular budgets for financial wellness include:
With a line item budget, you list out your expenses for an entire year. As you go through the year, compare current expenses to previous ones to make sure you’re on track. If you use this technique, don’t forget to add a savings line item to your list of expenses. This way you’ll remember to save.
Pay Yourself First
Pay yourself first is where you devote a certain percentage of your income towards savings as soon as you get your paycheck. If your priority is saving money, rather than tracking expenses, it’s worth considering. It will ensure you save before you spend.
The envelope budget allows you to physically allocate set amounts of cash to budget categories like gas, groceries, and restaurants. You keep dedicated pools of money in different envelopes. Once an envelope is empty, you can no longer spend in that category for the month.
With the zero-sum budget, you assign each dollar of your monthly after-tax income a “job”. This budget can help you figure out what is most important to you and make the most of your cash. It’ll also encourage you to treat your savings and investments just like your other expenses.
Create a Savings and Investment Plan for Financial Wellness
Saving for emergencies and investing for the future is a large component of financial wellness. With an emergency fund of 3 to 6 months’ worth of expenses, you’ll be prepared for an unexpected expense like a car repair or medical bill.
An emergency fund can help you avoid debt and give you some much needed peace of mind. To build one, sell items you no longer need or want, pick up a side gig, and reduce your expenses. Remember to replenish your emergency fund every time you use it.
Once you have adequate emergency savings, it’s time to focus on investing. If you don’t already have one, open a retirement account like a 401(k) or ROTH IRA. Contribute to it every month so that when you hit retirement age, you’ve built a substantial nest egg.