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How do you achieve financial wellness? 6 tips for managing your money

Relieve stress now — and in the future — by achieving financial wellness.

Justin Cupler

Contributing Writer at Tally

October 2, 2020

Financial concerns are a leading cause of stress among Americans. 

More than 52% of people say they regularly stress over financial issues, according to Everyday Health. With finances causing so much stress, financial wellness is critical to enjoying a healthy life. 

There is no single definition for financial wellness. It’s an idea that focuses on your relationship to money and how successfully you manage expenses now and prepare for the future. With this in mind, it’s clear that financial wellness can impact your well-being both negatively and positively. 

So, how do you achieve financial wellness? Below, we cover many of the critical components to achieving financial health.

How do you achieve financial wellness?

Answering the lingering question of how do you achieve financial wellness starts by understanding what financial wellness is. The Consumer Finance Protection Bureau (CFPB) has its own guidelines on what defines financial well-being

According to the CFPB, financial wellness is: 

  • Being in control of your finances

  • Being able to handle a financial emergency

  • Setting and tracking financial goals

  • Having the financial freedom to live your life the way you want to

Below are six tips that will help you achieve financial wellness.

1. Set financial goals and seek advice

The first step to financial wellness is understanding that it’s a lifelong journey with various financial goals guiding you. To start on the path to financial well-being, set a long-term plan and a series of short-term financial goals along the way.

For many, the ultimate long-term financial goal is to retire comfortably. Other goals may include: 

  • Saving for a large purchase

  • Paying off a mortgage

  • Owning your own business

  • Building your kid’s college fund

On your way to that long-term financial goal, set a series of smaller goals. These goals not only keep you on the path to your long-term goal, but each small win also acts as a motivator. 

Short-term financial goals may include: 

Seek a financial advisor's input on your goals. Professional financial advice will help you set realistic, achievable goals and identify issues you may run into. A financial advisor may also have alternative options to help you achieve your goals. 

If you don’t want to pay for a financial advisor, check if your bank or credit union offers free access to an advisor. If that’s not an option, there may be free financial wellness programs in your area or through your employer. 

2. Monitor your credit report

Maintaining a good credit score is a central building block of financial wellness. As such, it’s vital to monitor your credit report, which is an overview of your past seven years of credit management.

You can check your credit report from all three major credit bureaus through various websites. A quick online search will turn up many options for free credit reports. Checking your credit doesn't count as a hard credit inquiry and won't negatively affect your credit score. 

3. Create a monthly budget

No financial planning is complete without creating a monthly budget. A budget helps ensure you don't overspend, identifies potential problem areas in your financial situation and can stop the cycle of living paycheck to paycheck. 

There's no shortage of budgeting methods, but a few of the most common include the:

Choosing a method depends on how much time you can commit to setting, tracking and fine-tuning your budget and other variables. Once you settle on a method, maintaining this monthly budget can keep you on the path toward financial wellness.

4. Build an emergency fund

If you were to ask the CFPB, “How do you achieve financial wellness,” one of its answers would be having the ability to handle a financial emergency. To achieve this, you need a sufficient emergency fund.

An emergency fund is what its name implies — cash you set aside to cover emergencies, including unexpected medical bills, job loss and more.

There are many points of view on how much you should save for an emergency fund. Some financial experts recommend three to six months of your take-home salary, while others say three to six months of basic living expenses is more realistic. 

Review your financial situation and determine which amount is right for you, then set a savings plan to build your emergency fund. 

Put your emergency fund in a high-interest savings account so your savings earn interest. Preferably, this savings account will link to your primary checking account, so you can tap into it easily when necessary.

5. Pay off debt

Whether you have credit card debt, student loans, personal loans or auto loans, owing money to a company and paying interest impacts your financial future. 

Develop a plan to pay off your debt in a reasonable time using the debt avalanche or debt snowball method. Debt avalanche and debt snowball are both effective at paying off debt without straining your financial situation, but they take different approaches. 

Debt avalanche prioritizes high-balance debts with the highest interest rates first, saving you money on interest charges. The downside is that it may take a long time before you pay off that first account, making it easier to lose focus.

Debt snowball pays off your small balances first, giving you quick motivational wins. However, higher-balance debt remains unpaid longer, potentially adding up to costly interest charges. 

6. Maximize your retirement savings

Retirement is the most significant financial goal for many workers, and maximizing your retirement savings will help you achieve this goal quicker. It'll also improve your financial well-being in retirement. 

You can execute this process in small steps, as listed below, or all at once. It depends on what your financial situation allows. 

The four steps to maximizing your retirement savings are as follows: 

Take advantage of employer match

Many employers offer to match a portion of an employee's 401(k) contributions. The typical employer match is 50% of all contributions up to 6% of the employee's salary. So, if you earn $50,000 per year and contribute $3,000 per year to your 401(k), which is 6% of your salary, your employer will contribute $1,500 per year.

This is free money in your 401(k) that can continue to gain interest. Check with your benefits team to determine your company’s employer match before contributing to your 401(k). 

Put at least 15% of your salary in retirement savings

The rule of thumb for retirement planning is to save at least 15% of your income toward retirement. This 15% also includes your employer match, so if your employer matches 3% of your salary, you’re responsible for only 12%. 

If your financial situation allows you to reach this milestone immediately, great. If not, adjust your budget by paying off debt and reducing other expenses until you can afford to save 15%. 

Max out your 401(k) contributions

The IRS defers income tax on your 401(k) contributions. Take advantage of these tax savings by contributing the maximum amount each year. 

In 2020, the IRS allows you to contribute up to $19,500. If you're age 50 or older, you can contribute an extra $6,500. The IRS revisits these limits yearly and makes adjustments, so keep an eye on the limit each year.

If 15% of your salary doesn't meet the contribution limit, make budget adjustments to reach this yearly maximum. 

Diversify your retirement savings

With your 401(k) contributions maxed out, now is the time to diversify your retirement savings to maximize your earning potential. 

You can start by opening a traditional or Roth IRA. An IRA is similar to a 401(k), but typically an individual manages it rather than an employer.

The differences between a Roth IRA and a traditional IRA are in the taxes. With a Roth IRA, you contribute post-tax dollars to the account, and the interest it earns is tax-free. Once you reach 59 ½ years old, you can make tax-free withdrawals. 

With a traditional IRA, you contribute pre-tax dollars. Doing so reduces your current income tax burden, and the account gains tax-deferred interest. At 59 ½ years old, you can start making withdrawals, but the IRS taxes the withdrawals as regular income. 

Like a 401(k), maximize your yearly IRA contributions to take advantage of the tax savings. In 2020, the IRS allows you to contribute up to $6,000. If you're 50 or older, you can contribute an extra $1,000. This amount may change yearly, so make adjustments as needed with each change.

Another way to diversify your retirement savings is to invest in stock, bonds and mutual funds.

Once you've maximized your contributions to both tax-advantaged retirement savings accounts — your 401(k) and IRA — you can direct any additional retirement savings to a taxable brokerage account. 

With a taxable brokerage account, you can invest in stocks, bonds, mutual funds and other investments using post-tax dollars. Note that there are no particular tax advantages in this account, and you’ll pay yearly income tax on any interest earned.

Train your finances

How do you achieve financial wellness? It doesn't always come easy, but it's achievable with commitment and consistency. Some key ways to reach financial well-being include: 

  • Setting financial goals and seeking advice

  • Monitoring your credit report

  • Creating a budget 

  • Building an emergency fund

  • Paying off debt

  • Maximizing your retirement savings

These six easy tips can put you on the path to financial wellness, but it's up to you to take that first step.