5 ways to achieve lifelong financial wellness

Problems such as lingering high inflation, increased borrowing rates and the threat of a recession have many Americans worried about their finances. In fact, more than half (52 percent) say money has a negative impact on their mental health, according to Bankrate’s financial wellness survey.

Financial wellness is the ability to manage your money in a healthy way, which involves living within your means, setting financial goals and taking the necessary steps to meet them. Financial wellness can enable you to weather things like a job loss or an unplanned large expense. It provides the peace of mind that leads to reduced stress, a healthier mindset and better sleep.

Here we’ll go over why financial wellness is so important and then share some simple ways you can become more financially healthy.

Benefits of practicing financial wellness

Covering unplanned expenses

Money in a savings account can help you cover expenses that can arise suddenly — such as a car repair or an emergency room visit — without having to go into debt. However, only 43 percent of U.S. adults would pay for an unexpected expense from their savings, Bankrate’s latest emergency savings report found. Experts recommend having an emergency fund that can cover at least three months’ worth of living expenses. A high-yield savings account provides easy access to your money, making it a good place for your emergency fund.

Bouncing back after a job loss

When you have a healthy nest egg in a savings account, you’ll be able to weather a sudden job loss or decrease in income more easily. Having several months’ worth of living expenses gives you more freedom to conduct a thorough job search instead of feeling the need to take the first job opportunity that comes your way.

Having a high credit score

Paying your bills on time and not carrying high debt contributes to a good credit score. Those with a high credit score often receive lower interest rates on credit cards, higher credit card limits, lower mortgage interest rates and lower insurance premiums.

Reducing your need to borrow

Having some money saved up can help you provide a larger down payment on things like a house or a car, which in turn will result in smaller monthly payments and less money owed in interest. Depending on how much you can save over time, you might even be able to pay cash for your next vehicle or vacation.

Freedom to retire when you choose

While the amount of money needed for retirement depends on your own personal situation, planning ahead and saving a healthy amount gives you more freedom to decide when to stop working. The earlier you start saving, the more your retirement nest egg will benefit from compound interest.

How to increase your financial wellness

Some practical steps can help you work toward your short- and long-term financial health. These involve paying attention to where your money is going each month, adding to your savings regularly and actively paying down debt. Here are five good places to start:

1. Create a budget

Living within your means is the key to saving money and achieving financial health. A monthly budget will help you spend less than you earn each month, so you can add to your savings account regularly.

Ways to create a budget include using a spreadsheet, pen and paper, or a handy budgeting app. From there, you’ll list out all your essential and discretionary expenses, such as:

• Housing (rent or mortgage payments)
• Insurance (auto, homeowners or renters)
• Food (including food eaten at home and at restaurants)
• Utilities (electricity, gas, cell phone bill)
• Car loan payment
• Gasoline or train/bus fare
• Other debt repayment (credit cards, student loans)
• Memberships (streaming services, gym subscriptions)
• Entertainment (movies, live shows, etc.)
• Any other discretionary expenses (clothes shopping, gifts)

Whatever money is left after your expenses should go into a “savings” category in your budget and be transferred into your savings account. Seeing where your money is going is a great way to help decrease spending and increase savings. For instance, you may decide to shop around for more affordable insurance, eat more meals at home or cancel subscriptions you no longer use.

Various budgeting strategies exist, such as the envelope method, the 50/30/20 rule and the zero-based budget.

For those who wish to cut back on discretionary spending, it’s important to understand your habits, intentions and goals, says Cara Macksoud, a certified financial behavior specialist and CEO of Money Habitudes, a financial personality assessment provider.

2. Establish savings goals

One way to help motivate yourself to save money every month is to set goals for what you’ll do with your savings. Whether you have future plans to get married, buy a house or take your dream vacation, decide how much you can devote to your savings goals each month and make a line item for each in your budget.

Once you know how much money you need for living expenses each month, the remainder can go toward emergency savings or other goals. Decide what amount to devote to each goal based on when you’ll need the money for that event or purpose. Some banks — such as Ally Bank — offer savings accounts in which you can create categories for each of your goals. That way, you can allocate portions of your savings to different things you’re saving for.

3. Save for your golden years

A popular way to save for retirement is an employer-sponsored, tax-deferred 401(k) plan. A significant benefit of 401(k) accounts is the convenience of having money taken out automatically each paycheck. Another big perk of 401(k) accounts is that employers often match employee contributions up to a certain percentage, which is sometimes referred to by experts as “free money.”

Alternatives to a 401(k) — or supplements to one — include tax-deferred traditional IRAs as well as Roth IRAs, to which you contribute after-tax dollars. Contribution limits for both traditional and Roth IRAs in 2023 are $6,500 if you’re under 50 and $7,500 if you’re 50 or older.

4. Have a debt-repayment plan

Whether you have a mortgage, student loans or credit card debt (the average American owes $96,371 in debt for these three combined), several strategies exist to help you tackle your debts effectively. The debt snowball method, for instance, involves paying down your debts in order from largest to smallest — while still making the minimum payments on the others each month.

Another approach is the debt avalanche method, which prioritizes paying down your debts in order of the one with the highest interest rate to the one with the lowest. Or you might decide debt consolidation is the best route if you’d rather not juggle multiple due dates each month. One way to consolidate your debts is by moving them to a balance-transfer credit card.

5. Find the best insurance for your needs

An important part of financial wellness involves making sure you have proper coverage when it comes to healthcare insurance, auto insurance, and renters or homeowners insurance. This will help keep you from being hit with a large bill — and the possibility of going into debt — in the event of illness, injury, accident or damage to your property.

It can also pay to shop around to see if you can find the same amount of coverage for less money from another trusted insurance provider. To find the best car insurance company, for instance, you’ll need to determine your insurance needs, find providers that match your priorities, read third-party reviews and compare quotes from different companies.

Bottom line

Taking some simple steps can help you begin increasing your financial health, which will result in more financial freedom and security, as well as peace of mind. You’ll reduce your stress levels and sleep better knowing you’re living within your means.

In addition to making a monthly budget, saving toward goals and paying down debt, you can improve your financial wellness and financial literacy through various free online resources. For instance, Bankrate offers free personal finance courses as well as articles on the basics of investing, insurance, retirement and paying off debt.