Financial wellbeing is having the freedom to make choices that allow you to enjoy life. The question as to what is financial wellbeing and what it means to you has been central to the understanding of happiness.
Your financial decisions affect your personal finances and mental health. Not managing finances properly and over-thinking about managing finances can impact your physical and mental health. Are you comfortably placed to bear unexpected financial expenses? How are you managing your savings and debts? All these factors influence financial wellbeing. Therefore, your everyday decisions and choices should be well-thought-out after visualising probable consequences.
What is the definition of financial wellness?
Financial wellness or financial wellbeing is different from financial education. It cannot be compared with financial knowledge, and it’s not equal to financial wealth. Financial wellbeing is about managing money that affects your life on the whole, including the future. It’s about your ability to meet financial obligations of the present, be financially prepared for unexpected events, be able to save for future goals including retirement, and have the financial freedom to make choices that allow you to enjoy your life – now and also in the future. Financial wellbeing is your ability to use financial knowledge for wellbeing.
What does financial wellness mean?
In simplest of the terms, financial wellness means –
Able to meet your day-to-day financial needs and manage debt responsibly
Being prepared for an emergency, and able to bounce back after sudden unexpected huge expenses
Feel secure about your future obligations, and goals. And, able to save for a happy and financially independent life after retirement.
The six dimensions of wellness
According to the National Wellness Institute (1976), the earliest literature on wellness has six dimensions of wellness.
Why is financial wellbeing so important?
Financial wellbeing is important because it affects other dimensions of your life, including physical and mental health. Financial stress to be avoided. If you cannot manage your finances properly, you will overthink it. If you don’t have an emergency fund, you will be stressed to meet unforeseen obligations. Similarly, if you are unable to pay your monthly bills and don’t have sufficient savings to pay back your debt, it will impact your personal life as well. Your mind will be in search of suitable avenues whereby you don’t default on your obligations. Your life satisfaction and happiness will be impacted negatively. Therefore, you need to take care of your financial wellbeing, and it’s important.
What determines financial wellbeing
Stress about money and finances may have a significant impact on you. According to research, around 72% of adults report feeling stressed about money, and nearly 25% say that they experience extreme stress about money.
The American Psychological Association (APA) recognizes financial stress as one of the leading causes of unhealthy behaviours like smoking, weight gain, alcohol, and drug abuse. Other behaviours linked to financial stress are gambling and overextending credit balances. Each time an individual turns to these temporary stress relievers, it can be concluded that the stress returns, and often at even greater intensity.
What is financial distress?
Financial distress is an unhealthy trait when you are unable to meet your financial obligation due to mismanagement of savings and debt. What does distress look like? Here are some questions to ask yourself, and answers to these questions may indicate warning signs of financial distress.
- Are you taking loans against your retirement savings? Like a loan against PPF or withdrawing from long-term investments.
- You or your family members have a medical issue that could be avoided, but you didn’t go to the doctor because of cost? Unable to take care of medical needs due to the cost involved is a sign of financial distress.
- Are you asking for a salary advance? Are you frequently converting your credit card due into EMIs of which interest rate is comparatively high?
- Are you missing your work with unexpected absences for managing financial affairs?
- Are you seeking financial assistance, frequently, from your friends, colleagues, and relatives?
The answers to these questions will give you an idea about the condition of your financial wellbeing. You will be able to do a self-assessment of your financial health. You will be in a better position to avoid probable financial distress by taking corrective steps at an appropriate time.
Why is financial wellbeing important to you?
Knowledge about your financial wellbeing helps you to take steps to improve it. You should be able to match income and expenses. You will know about the steps that need to be taken to improve your wellbeing in the future.
Factors influencing financial wellbeing
Various factors affect your financial wellbeing. Based on an analysis of existing research on financial literacy, psychology, decision-making, and related fields, the following factors affect your financial wellbeing-
- Social and economic environment
- Attitude towards life, savings, and investment.
- Decision-making process
- Knowledge about financial wellbeing and related issues
- Available opportunities
- Your personal financial wellbeing – Your personal satisfaction with your existing financial wellbeing affects your wellbeing.
Tips for managing financial wellbeing
Your overall understanding and appreciation of wellbeing will help you in making informed choices in life. Here are a few tips to enhance financial wellbeing-
Prepare your weekly, fortnightly, or monthly budget, whichever is possible. Once you start budgeting and controlling the expenses, it may be easy to avoid financial distress. The probability of you achieving short-term or long-term financial goals will increase. There are many mobile apps to help you record every transaction. Once you have data about monthly income and expenses, it will be easy to control unwanted expenses and increase savings.
Save for emergencies
You must expect the unexpected and plan for financial emergencies. There is a line from the book – The Psychology of Money
“The most important part of every plan is planning on your plan not going according to the plan.“
A good rule of thumb is to have a minimum of six months of living expenses in your account, saved in the most liquid instrument. Having a decent amount in an emergency fund will have great relief and personal satisfaction.
A financial advisor or a relationship manager from your bank may help you develop a strategy for approaching your financial goals. It not only anticipates your needs, but also offers ways to accommodate your evolving financial needs. Plan for your big-ticket investments like buying a home, education of children, or retirement plan. It is best to begin saving and planning as soon as possible.
Try to stay debt-free. Use credit sparingly and responsibly when needed.
Plan for retirement
You should assess and establish your retirement needs and goals. Start saving early to enjoy the magic of compounding. It is equally important to choose appropriate investment instruments for retirement. Managing finances and diversification is another big topic of personal finances.
Maintain your creditworthiness
Your credit score is important to fulfil your financial obligations and goals. Avoid financial delinquency and keep watch on the score. You must ensure to pay your bills on time and focus on paying off the high-interest credit card debt first. An unfavourable credit score may increase the rate of interest on future loans if required, which may impact overall financial wellbeing.
Start practicing what you learn
Pay close attention to your financial behaviour. Start taking action. Put something learned into practice. Thinking about healthy habits may not help
Misconception of happiness
More expenditure may not give you happiness. The habit of stress shopping or shopping for the sake of shopping needs to be avoided. Try to understand the difference between needs and wants.
What increases happiness – Identify various activities which cost nothing but make you feel happy. Practice self-control. Avoid impulsive buying. If you are running low on budget, rationalise by purchasing non-branded products which serve the purpose but at a lesser cost.
Our belief drives our behaviour which drives financial wellbeing.
You may have to change lifestyles to suit the pocket. Don’t buy articles only to show them off. Understand the concept of depreciating and appreciating assets. If need be, take help from qualified financial planners.
Financial life is connected with many other dimensions. Are you giving to charity? Are you taking care of your spiritual health or wellbeing? If not, take steps to fill the void. Unhealthy beliefs to be changed.