Wellness is a $4.2 dollar trillion industry, according to the Global Wellness Institute.
The term “wellness” usually focuses on health, but financial wellness matters, too. Money is routinely the most common stressor in American Psychological Association stress surveys, and as we know, stress kills.
To me, financial wellness occurs when finances aren’t a major stressor in your life. Paycheck-to-paycheck living, an inability to pay emergency expenses, and no retirement savings — these are stressful signs of being financially unwell.
Steps to financial wellness
When you’re financially well, you avoid those problems and have more options at your disposal. Here’s a plan for better financial health.
Cash Reserves
The foundation is a safe base of accessible cash to cover expenses and avoid debt. Strive to save six months of fixed expenses. That includes your mortgage, credit cards, and any other debt. If you’re more conservative, make it a year of expenses.
Debt
High-interest debt compounds quickly. You can buy time to pay it off by transferring balances to an interest-free card.
Similarly, if your mortgage rate is 5-7 percent or more, refinance to a lower rate. Refinancing can free up cash.
Control the Present
You can’t plan ahead with no grasp on the present. Track income and expenses for a month or two to create a simple cash flow statement.
Software can help, or you can write it down. You’ll obtain cash flow clarity and identify areas for improvement.
Look to the Future
After addressing the present (everything above), look to retirement savings. If you’re in a qualified plan like a 401(k) or 403(b), take full advantage of any match. It’s free money.
Health Savings Account (HSA)
With a high deductible health plan, you can get an HSA, which offers triple tax benefits:
- Pre-tax contributions
- Tax-free growth
- Untaxed if used for qualified expenses
HSAs can provide a substantial nest egg for health costs. Some employers even match contributions.
Tax planning
To increase cash for saving, analyze your current W-4 withholdings.
For instance, changing federal withholding allowances from 0 to 3 could increase your paycheck, which you could then use to save in a qualified plan before it’s taxed. Saving into a qualified plan can lower your taxable income. The goal would be to increase qualified plan savings enough to reduce the impact of increasing your federal withholding allowances.
You should discuss this with your CPA. If this approach is not implemented carefully, you could end up with a large tax bill and penalties.
Professional expertise
Advisors offer a broad range of services to complement your strategy. An advisor can determine your future cost of living, which helps answer how much you need to retire.
Similarly, an advisor can help you better understand your risk capacity, or how much risk you can afford, which differs from how much risk you’re willing to absorb. They can use their resources to help you track and interpret your financial information in order to create meaningful goals.
For entrepreneurs
An owner’s largest asset is often their business. Turning it into retirement cash can be complex, but it’s essential for financial wellness.
How do you want the transition to look? What price will fund your individual retirement goals? What might cash flow look like after the sale?
Professional guidance can answer these questions and many more.
Health and wealth
Achieving financial wellness is a worthwhile endeavor, even if it takes time.
There are obvious monetary benefits. But the best perks of financial wellness have less to do with wealth and more to do with better health.