How To Quickly Assess Your Financial Wellness

As you’ve probably noticed, financial wellness is all the rage. According to one survey, about 90% of large and mid-sized companies are now offering financial wellness programs as an employee benefit. But what exactly is “financial wellness” and are you financially well?

Financial wellness isn’t just about your income, your net worth, or even your credit score. As one of the pioneers of the industry, we define it as a state of being in which you

  • experience minimal financial stress,
  • have a strong financial foundation of consistently living with your means, having an adequate emergency fund, and having little or no high-interest debt,
  • and are on track to meet your future financial goals.

If you’re not fortunate enough to work for one of the growing number of companies that are now offering financial wellness programs that provide a free and comprehensive assessment of your financial wellness, here’s how you can quickly assess how you stack up:

How financially stressed are you? This is an easy place to start. If you’re stressed about being able to pay the bills or feel overwhelmed with debt, you’re probably not financially well. This stress can even impact your physical wellness and job performance.

Are you consistently living within your means? This is the foundation for the rest of your financial wellness. Living beyond your means can lead to growing debt while living below your means can provide the savings needed to meet your goals.

Don’t just estimate your expenses. Instead, go through your actual bank and credit card statements and record your expenses on a worksheet like this. (You may not know what you spent with cash but at least include whatever you withdrew.) You can also add in big non-monthly expenses like vacations and holidays by dividing how much you spend per year by 12 in order to turn it into a monthly amount. After you recover from the shock of seeing where your money is going, compare it to how much you’re taking home each month.

How much do you have in emergency savings? At the very least, an adequate emergency fund can reduce your financial stress. At best, it can keep you from going in debt or even losing your home.

Once you know how much you spend, you ideally want enough savings to keep your roof over your head, your car in the driveway, food on the table, and the lights on if you’re in between jobs for at least 3-6 months. (If your job is high-risk and/or you think it may take longer to find a new one, you might even want enough savings to cover 6-12 months of necessary expenses.) If you’re not there yet, start with a more achievable goal like $1-2k in savings and build from there. Finally, keep in mind that your emergency fund should be kept someplace safe and easily accessible like a bank account or money market fund, not invested in something that may be down in value or otherwise inaccessible when you need it.

How much and what type of debt do you have? This is one of the biggest sources of stress and can be a huge obstacle to achieving your goals. When it comes to high-interest debt like credit cards and personal loans, the less the better. This debt can hurt your credit score and you can probably save more in interest by paying it down than you’re likely to earn by investing the extra money instead.

Not all debt is equal though. Low interest debt like most mortgages and even many student loans can be considered “good debt” if they’re used to purchase an asset that appreciates like a home or can produce income like an education. This type of debt also typically has a low enough interest rate where it can make more sense to invest extra money rather than pay the debt down early.

Are you on track to meet your future financial goals? People don’t plan to fail. They just fail to plan. After all, we tend to overestimate how much we can achieve in the short run and underestimate what we can achieve in the long run. That means you may be surprised by how much of an impact small changes now can have over your long term progress.

The most common long term goal is retirement and your best bet is to run a retirement calculator like this to see if you’re on track to hitting your goals. To be on the safe side, you may want to use conservative assumptions like an income replacement target (how much of your current income you’ll need in retirement) of at least 80%, a life expectancy of 90 or above (about half the people will live longer than average), an inflation rate of 3%, and an average annualized investment return of no more than 4-6%. You can also use this calculator to see if you’re saving enough for other goals like a down payment on a home or education expenses. Just be sure to prioritize retirement over education saving. After all, there’s no financial aid for retirement.

If your financial wellness is not where you’d like it to be, you might want to consult with a qualified and unbiased financial professional who can help you put together a plan to improve your financial wellness. (Even if you’re financially well, you may also want to get a more thorough analysis by a professional that includes things like insurance coverage, credit score, estate planning, taxes, and your investment portfolio.) If you’re really fortunate, you may even work for one of those companies with a financial wellness program that offers this service for free. Now do you see why it’s all the rage?

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