A 6-PART FINANCIAL WELLNESS SERIES
Traveling is as much about the ability to pursue dreams as it is about boarding passes and bucket lists. At Griots Republic, we understand that building a secure financial base is only one aspect of ensuring that we reach those dreams. Stay tuned and please leave comments or questions for our 6 part financial wellness series.
A little under two months ago many of us were starting the new year with a fresh outlook. Some made resolutions on physical health, incorporating fitness goals and the approach that they should take to reach them. The same should apply for financial wellness. In order to put yourself and your family in a position where finances are not a sore spot you will need to devise a plan for improvement. Are you satisfied with the current state of your finances? Does the thought of bringing up money, credit, debt, retirement and planning for the future give you anxiety? What is the meaning of financial well-being anyway?
In January of 2015, the Consumer Financial Protection Bureau (CFPB) released a report defining financial well-being as: “a state of being wherein a person can fully meet current and ongoing financial obligations, can feel secure in their financial future, and is able to make choices that allow them to enjoy life.” Unfortunately, in America gaps in wealth might be the most powerful measure for success & social class.
The concept of financial well-being has four central elements:
- Having control over day-to-day, month-to-month finances;
- Having the capacity to absorb a financial shock;
- Present Financial Freedom: Are you on track to meet your short term financial goals; and
- Future Financial Freedom: Have the financial freedom to make choices that allow you to enjoy life later on (retirement, paying off mortgage).
In order to have control over your day-to-day and month-to-month finances, start by making a monthly budget.
- Write down your monthly net income (paycheck etc. after taxes).
- Write down all of your fixed monthly expenses (rent/mortgage, utilities, car payment, insurance, child care etc.)
- Then write your variable monthly expenses (groceries, gas/fuel, mobile phone, etc.).
- Subtract the total of your monthly expenses from your monthly net income. The result will be how much money you on average will be able to save a month.
You should track your spending every day/month to see where you can save money on your expenses. Tracking them will show you areas to save on variable expenses and cut back in order to save. Your savings and how you manage them are the key to financial well-being.
The next element of financial well being is the ability to absorb a financial shock. Unexpected expenses can happen at any moment and it is always a good idea to be prepared and proactive. Lay-offs, sickness, legal affairs, natural disasters, and unforeseen circumstances can lead to financial ruin. Most financial experts suggest that you need a cash savings equal to six months of expenses (e.g. If you need $5,000 to survive every month, save $30,000). Personal finance guru Suze Orman advises an eight-month emergency fund because that’s about how long it takes the average person to find a job.
Now that you have your budget and have created a savings strategy, the next steps are to set your financial goals. There are two types: Short term goals and long term goals. Short term goals should take no longer than a year to achieve (saving for a wedding, vacation, large purchase, or paying off a bill). Long term goals such as eliminating debt (house or car), saving for retirement and saving for a child’s education will take much longer and therefore need careful planning. Examine your health expenses. One of the biggest expenses that you can expect as you get older is healthcare. Currently, if you have a high-deductible health care plan you can get a Health Savings Account. It’s a great place to save money for future health care expenses and the contributions aren’t taxed when they go in or when they come out as long as the funds are used for health care.
As you can see, if you focus on these four key elements you will be well on your way to financial wellness. Having the financial freedom to choose your own path is very liberating. Rather than having circumstances dictated to you, you will be able to choose what you want to do and when you can retire. Make consistent check-ins on your financial wellness just like you would your physical health. When you look back you will be able to see the direct results of establishing healthy habits. Discover where you can improve.
If you have never considered consulting with a financial advisor now might be a good time. You can find a CFP (Certified Financial Planner) at: http://www.letsmakeaplan.org/choose-a-cfp-professional/find-a-cfp-professional/.
Source: Wealth Inequality: http://www.pewresearch.org/fact-tank/2014/12/12/racial-wealth-gaps-great-recession/
Source: How much cash should I keep in the bank? http://www.investopedia.com/articles/personal-finance/040915/how-much-cash-should-i-keep-bank.asp