Financial Wellness is not just about money
We recently read a wonderful article describing how financial wellness is more than about how much money you have. We have provided a summary of the article below.
Understanding Financial Wellness
We hear regularly about physical wellness and mental wellness, but the concept of financial wellness is often overlooked. If you’re thinking financial wellness simply means having a lot of money, think again. The concept is more comprehensive and subtle than that.
Financial wellness is about creating a healthy economic life that aligns with your needs, your values, and your goals. It is about understanding and effectively managing your economic life for both short-term financial security and long-term financial stability. It isn’t just about being rich, but about feeling secure and in control of your finances, whether your income is large or small.
When you’re financially well, you have the capacity to absorb a financial shock, are on track with your financial goals, and have the financial freedom to make choices that allow you to enjoy life. It has far-reaching impacts, from affecting your mental and physical health, your relationships, to even your productivity at work.
Essentially, financial wellness refers to the process of learning how to successfully manage your finances. It involves a healthy balance of financial knowledge, apt planning and management, and the ability to navigate financial challenges. It’s about having clarity over your financial standing.
The cornerstone of financial wellness is financial knowledge and management. Without understanding the basics of budgeting, investing, retirement planning, tax management, and risk assessment, it becomes challenging to navigate the complexities of financial decisions. In other words, being financially literate is a critical component of financial wellness. It empowers you to understand and interpret financial information, make informed decisions, and be proactive about your financial health.
For example, someone with a firm grasp on their financial management skills won’t be swayed by market trends or quick-rich-schemes but will understand the importance of patience and consistency in their financial journey.
So, while financial wellness might initially seem to be all about dollars and cents, it’s really about the peace of mind that comes with financial stability and the confidence in knowing that you’re making wise financial decisions. The goal isn’t merely wealth accumulation, but sustainable financial health and independence.
The Components of Financial Wellness
Achieving financial wellness requires a holistic approach that encompasses four key elements: earning, saving, spending, and protecting.
Earning – the role of stable income - A stable income is fundamental to achieving financial wellness because it forms the base upon which all other financial decisions are made. Without a consistent income, it becomes challenging to plan for the future or meet daily needs.
Saving – the importance of saving and investment for financial security - Savings serve as a financial buffer against unforeseen expenses and life’s many uncertainties. But saving goes beyond just stashing money away in a bank account. It also involves investing – making your money work for you. You can take too much risk, but you can also take too little risk.
Spending – responsible spending habits - While spending is a necessity, it becomes problematic when not managed responsibly. Developing good spending habits involves living within your means, avoiding unnecessary debt, and making sure your spending aligns with your financial goals. It’s about making informed, deliberate decisions about where your money goes.
Protecting –being prepared for emergencies - One way to achieve this is through insurance, or building an emergency fund to provide a financial buffer to ensure you’re prepared for whatever comes your way.
Physical health – stress and health issues related to financial insecurity
Financial insecurity often comes with a heavy price tag for our physical health. Chronic stress, associated with persistent financial worries, has been linked to a host of health problems, from heart disease and high blood pressure to diabetes and sleep disorders. This stress can also lead to unhealthy coping behaviours, such as overeating, smoking, or excessive alcohol consumption. Achieving financial wellness can alleviate this stress, contributing to better health outcomes and improving your overall quality of life.
Mental health – anxiety and depression related to financial problems
The connection between financial wellness and mental health is equally strong. Research shows financial stress can increase the risk of mental health issues such as anxiety and depression. The burden of debt, the worry of making ends meet, or the fear of an uncertain financial future can weigh heavily on a person’s mental well-being – and we see these pressures across people with a wide range of annual income.
Relationships – the impact of financial issues on personal relationships
Financial issues can also put a strain on personal relationships. Money-related disagreements are a common source of conflict among couples and can lead to tension, resentment, and even breakups or divorce.
Productivity – how financial wellness can increase productivity at work
Lastly, financial wellness can have a significant impact on your productivity at work. Financial worries can be a major distraction, leading to decreased focus, lower job performance, and less engagement with work. In contrast, employees who are financially well are more likely to be focused, engaged, and productive.
Common Misconceptions About Financial Wellness
Despite the growing conversation around financial wellness, several misconceptions persist. Understanding these misconceptions is the first step towards demystifying financial wellness and making it a more achievable goal for everyone.
Equating financial wellness with wealth - while wealth can provide financial security, it’s not a guarantee of financial wellness. Financial wellness is about your relationship with money: your ability to manage financial resources, make informed decisions, feel secure in your financial future, and have the freedom to enjoy life. Someone with a high income but poor money management skills might not be financially well. Conversely, someone with a modest income but excellent budgeting and saving habits might be very financially well. The key is balance and sustainability.
Thinking financial wellness is only about saving money - financial wellness encompasses earning, spending, saving, and protecting your financial resources. It’s also about having the knowledge and skills to manage these resources effectively. Therefore, spending money wisely, investing wisely, and ensuring you’re adequately protected against financial risk are also key components of financial wellness. Indeed, we have some clients who can afford to spend MORE which we think will alleviate sources of stress they have – our challenge can be convincing clients who have spent decades saving that now is the time to increase their spending!
Believing financial wellness can be achieved overnight - The path to financial wellness is a journey, not a sprint. Financial wellness requires time, patience, discipline, and ongoing learning. It involves making consistent, informed financial decisions, adapting to changes in your financial situation, and continuously striving to improve your financial habits. While certain milestones can be reached more quickly than others, true financial wellness is a lifelong endeavour.
How to Achieve Financial Wellness
With the right strategies and a commitment to learning and adapting, financial wellness is within reach for everyone. Some key steps include:
Financial education – knowledge truly is power when it comes to financial wellness. A solid understanding of financial principles can greatly enhance your ability to make informed financial decisions. Lorica Partners has created a range of educational tools on our website for our clients and their families to access: www.loricapartners.com.au/learning
Have a financial plan – for some people this may entail a detailed, bottom-up budget, whilst for others it is knowing every month a certain amount is deposited into their bank account which they know will provide them with a sustainable, wonderful lifestyle. Plan always beats no plan.
Building an emergency fund – Lorica refers this as Risk Capacity, or your ability to withstand a financial shock. There are many ways to create risk capacity – building an emergency fund or an appropriate asset allocation with 5+ years of cashflow needs invested in low risk, capital stable assets are two examples.
Seeking professional advice – while self-education is crucial, a financial adviser can provide personalised advice based on your unique financial situation and goals. Knowing you are making informed decisions aligned with your goals undoubtedly enhances your overall financial wellness.
In summary, financial wellness is a holistic, multifaceted concept that goes beyond simple wealth accumulation or saving. It’s a long-term journey that requires a balanced approach to managing all aspects of your financial life. By dispelling these misconceptions, we can foster a more accurate understanding of what it means to be financially well, making this goal more attainable for everyone.
Author: Rick Walker
Source material: Financial Wellness: It's Not Just About Money - Balance The Grind