Fiscal Fitness: Simple Steps for Improving Financial Health
When people think about their health, they often consider physical and mental well-being, but an important third component is financial well-being.
Financial well-being is how people feel about their money. Debt, concern around funding retirement or college tuition, and worries about paying for caregiving or emergencies all contribute to poor financial well-being. It can cause stress while diminishing people’s ability to be productive and happy. Having a plan with specific goals can help relieve this stress.
There are some simple steps everyone can take to improve financial well-being. Teaching children these principles early can help them with their financial well-being as adults.
Establish a budget
Studies show about 60% of American families don’t have a budget. This translates into another alarming stat that about 78% of workers live paycheck to paycheck. This scenario is easy to understand because living expenses, discretionary spending and debts can stack up. A budget provides a framework to get a handle on where money is being spent and to provide a path for building savings.
Create an emergency fund
Next, set aside money for an emergency fund. This monetary reserve should only be used to pay for unexpected needs like a surprise car repair, health care expenses or the loss of a job. Starting an emergency fund can be done by automatically diverting money from checking to a savings account or through payroll deduction.
More than half of working adults don’t have enough savings to pay unexpected bills and need to borrow money when they come up. Credit cards are often used to pay for these expenses and interest on this form of debt can exceed 20%, putting added financial pressure on the borrower. An emergency fund provides the financial cushion to absorb life’s financial emergencies and is one of the most important steps toward financial well-being.
Once an emergency fund is fully funded with 3 to 6 months of estimated living expenses, additional savings can be used for other short-term and long-term goals.
Short-term goals can include:
- Paying off credit card debt.
- Saving for a vacation or travel.
- Setting aside money for home repairs and improvements.
Long-term goals can include:
- Contributing to a retirement fund.
- Putting away money for a down payment on a home.
- Paying off a mortgage early.
- Saving to purchase a vehicle with cash.
- Growing a college fund for children.
One of the wisest long-term goals is establishing a retirement fund. The secret to building a nest egg is understanding the importance of time in growing wealth. The longer money is invested, the more it grows. Choose investments that will deliver long-term growth. Always contribute enough to receive any full employer match.
Life is much easier when debts are either under control or eliminated. A top goal should be to reduce and eliminate all forms of non-mortgage debt. This will enhance quality of life while providing an opportunity to save and invest for long-term goals. Here are some tips for tackling what can be the toughest part of becoming financially fit:
- Make a list of debts.
- Decide which debts to pay off first.
- Put a priority on paying off debt with the highest interest rate—usually credit cards.
- Pay bills on time each month to avoid incurring penalties, fees and damage to your credit score.
- Use cash to make purchases to avoid going deeper in debt.
In many ways, financial well-being is like physical well-being. A daily commitment to goals pays off over time.
Cindy Bjorkquist is director of well-being at Blue Cross Blue Shield of Michigan. Jeff Rubleski is a Certified Financial Planner™ and director of group consulting at Blue Cross Blue Shield of Michigan. For more health and wellness tips, visit ahealthiermichigan.org.
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