They say money can’t buy happiness. But today, many people might disagree. As the economy reels from the effects of the pandemic and war in Ukraine, inflation is rising at break-neck speeds. The cost of living is spiralling and by 2023,1.3 million Brits could be pushed into absolute poverty. When we feel like we’re losing control of our finances, it can be a deeply stressful and anxious time. We may not feel like ourselves anymore. And that’s where financial wellness comes in.
Financial wellness is the ability to meet current and future obligations, feel secure and make choices that let us enjoy life.
Just like our physical health, financial wellness needs long-term work and commitment. But the rewards can be immense. Peace of mind, quality of life, reduced stress, better relationships and even an improved IQ are some of the many benefits.
Think of it like a financial journey. ‘Financial wellness’ isn’t something we achieve overnight – something we either have or we don’t. It’s something we work at and hopefully progress with over time.
Like a game, there are certain ‘levels’ we have to pass along the way and, with each level, we progress a little bit further in our financial journeys.
But what does it all mean in practice? Here, without further ado, are our four basic levels of financial wellness.
Level 1: Living within your means
Living beyond our means has sadly become a way of life for many in the UK today. Even before the pandemic, 2019 research by insolvency group R3 discovered that a staggering one third of Brits spent more than they earn.
Even if this doesn’t sound like you, with the rising energy prices and soaring cost of living, now is an important time to double-check. To do this, scrutinise your bank statements and credit cards. Some banking apps have useful features that break down expenditures into categories. You should be steering clear of your overdraft, and ideally have a little left over each month.
If you find that you’re spending more than you earn, don’t despair. According to mental health charity Mind, some people can feel helpless in this moment. They can start to ignore the issue or even resort to impulse splurges. But the truth is that facing this situation head-on is a powerful moment in the journey to financial wellness. It’s the time to take back control!
From here, you can make informed choices and changes. For example, you may be able to share the cost of transport or childcare with someone in a similar situation. You could consider switching away from expensive service providers to a cheaper deal elsewhere. There are hopefully several things you can do to chip away at the expenses and bring in a little extra income. For inspiration, try scouring money-saving blogs for discounted experiences and cost-cutting hacks. You’d be surprised how fun it can be!
Nearly everybody in the UK has debt. The average household owes £63,582 – but it’s not always bad! Taking on some debts such as mortgages or a student loan can be a sensible investment. After all, it helps to make more money further down the line.
However, some debts such as credit cards, payday loans or Buy Now Pay Later – also known as “Unsecured Debt” – are generally not a good idea. If you have these debts, you’re not alone. The average Brit owes a considerable £1,104 on their credit card. But you should probably try to eliminate it. Unsecured debt can eat away at financial wellness, making you feel less secure over time and even stopping you from meeting other obligations.
To improve your financial wellness, there are steps you can take to reduce debt. Aim to pay off the loan with the highest interest rate first. When you think about it, this makes sense as you do not want to be paying extra rates for longer, it’s a waste of money. And always pay off more than just the minimum. Even if you can only afford to go a couple of pounds over, it is worth doing. With minimum payments (1% of the outstanding balance) it would takes the average borrower an incredible 25 years just to pay off the £1,104 debt.
Another valuable approach is to bring all your debt together into one manageable chunk. When you only have one lender to pay each month (instead of many), you reduce the risk of late fees and punishments. Plus, debt consolidation services are usually free, and can even offer you a better interest rate. It could be a real win-win!
Level 3: Build an emergency cash fund
For true peace of mind, it’s important to build up an emergency reserve of cash. This is for those unexpected costs nobody could’ve predicted. A broken boiler, a vehicle that stops working or being made redundant from work, for example. This reserve is your financial safety net.
Experts recommend setting aside between three- and six-months’ worth of living costs. For the average British household (bringing in £37,622 a year or £2,437 a month after tax) this would be between £7,311 and £14,622. This is a financial buffer to help you live comfortably until you get back on your feet again.
However, if this figure seems daunting or out of reach, start small. Setting aside what you can afford is already a great way to boost your financial wellness. Even just £25 a week will build up to £500 in less than half a year. Knowing that you have a cushion of emergency money can help you sleep easier at night and feel more secure.
Level 4: Budget towards savings and investments
To truly boost your financial wellness and bring it up to a gold-level standard, save or invest a portion of your income each month. How much you put aside depends on your unique situation.
Senator Elizabeth Warren popularised the famous 50-30-20 budgeting technique with her daughter Amelia Warren Tyagi. They recommend allocating 50% of your income towards things you need. For example, essentials like rent, bills and necessary grocery shopping. Then 30% is to buy things you want. This could include holidays, gym memberships, going out or luxury shopping – anything that’s not strictly necessary. Finally, 20% is for saving or investing – which can include pension payments. The 50-30-20 rule is a guideline and you should do what’s right for you.
Setting aside money towards investing regularly – no matter how small – can be a seriously positive step towards true financial wellness. This is because when you invest, you open the possibility of earning passive income and benefitting from compounding returns. This means that you could be making money without having to work for it. Although there is a risk that you may get back less than you put in, diversified investing is one of the most effective ways of increasing your wealth over the long-term.
… Bonus ingredient: Financial literacy
We’ve broken down financial wellness into four beginner levels:
- Living within your means;
- Stamping out debt;
- Building an emergency cash fund; and
- Budgeting for savings and investments.
This is the list of bare essentials. The starter kit.
But there’s one crucial thing that ties everything together, and that’s financial literacy. By financial literacy, we don’t mean being able to read numbers. Although that helps. We mean truly understanding how finance works, and what you can do to make the most out of your money.
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