Financial Wellness: What It Is and How to Achieve It in 5 Steps

There isn’t a one-size-fits-all definition of financial wellness. It isn’t about having a particular amount of money—it’s about how you feel about your financial situation.

Do you feel in control of your finances, or are you constantly worrying about money? Are you confident that you’re on track to achieve your financial and lifestyle goals, or do you feel like you’re just getting by?

Signs of financial wellness

Some indicators of financial wellness are:

• Feeling confident about your money management skills
• Having an emergency fund large enough to pay for 3–6 months of expenses
• Knowing how to navigate various financial situations (and where to seek help if you need it)
• Consistently saving and investing for the future
• Spending less than you earn
• Having a moderate-to-high credit score and knowing how to improve or preserve your score
• Generally feeling good about your financial situation and your ability to manage money
• Understanding various financial terms and opportunities, such as good debt vs. bad debt
• Having a written financial plan
• Feeling secure in your financial future

Why financial wellness matters

Financial wellness is essential because it directly impacts your quality of life. A 2019 survey revealed that financial stress is the number one cause of millennial anxiety:

• 82% of Generation Z and 81% of Millennial consumers said finances were a significant source of everyday worries
• 61% of millennial women were very stressed about finance, compared to 47% of millennial men
• 73% of people surveyed considered money to be one of their top stressors

Studies have also shown that financial stress is linked to a host of physical health problems, including headaches, heart disease, and high blood pressure.

In other words, financial wellness is key to both your mental and physical well-being, and lacking it can have serious consequences.

Although financial wellness means different things to different people, there are five concepts that are popularly referred to as its “pillars.”

Understanding these can help you create an overall strategy to keep yourself financially stable.

The five pillars of financial wellness are:

1. Managing your money

Managing your finances is all about controlling your spending.

To manage your money successfully, you have to:

• Spend less than you earn: This seems like common sense, but it’s often easier said than done. Many people tend to overspend and rack up debt, which can quickly spiral out of control. With a bit of financial discipline, you can avoid this trap. Start by tracking your spending for a month to understand where your money is going, then cut back on unnecessary expenses.
• Saving: You should always have cash stashed away for unexpected expenses, such as vet bills, new tires, and last-minute trips. It’s important to be able to pay for these without putting a dent in your regular budget.
• Paying off debt: Debt, especially high-interest debt, can be a huge burden. To be financially well, you may have to make a few sacrifices to pay off all your debt, but it’ll be worth it in the end.

2. Earning money

No matter how great you are at money management, it’s impossible to get ahead if you’re not earning enough cash.

There are two ways to earn money:

• Passive income: This is income that you earn without actively working for it. Interest from investments, rental properties, and royalties are a few examples of passive income.
• Active income: This is money that you make from working a job. Your salary, tips, and commissions all fall into this category. When you’re starting out on your financial journey, this will probably be most or all of the money that you make.

3. Growing your money

Once you’ve gotten a handle on your finances and are earning enough money, it’s time to start thinking about how you can multiply it.

Investing can be a great way to grow your money. There are many different types of investments, including:

• Stocks
• Bonds
• Mutual funds
• Real estate
• Precious metals

Investing is a big topic, and you shouldn’t engage in it recklessly. Read up on it before plunking down serious sums of money.

4. Borrowing money

Borrowing money (i.e., taking out a loan or using credit) can be very useful—if you do it carefully.

You can use borrowed money to purchase a home, start a business, or even consolidate debt. But it’s important to remember that borrowing money also comes with risks.

You need to be sure you can pay the money back on time and in full. If not, you could damage your credit score or even face foreclosure or bankruptcy.

To borrow effectively, it’s important to avoid overspending and have a good payment history.

5. Protecting your money

Nobody likes to imagine worst-case scenarios, but it’s essential to have a financial safety net in case something goes wrong. Unexpected medical bills, job loss, and natural disasters can all put a financial strain on families.

Protect your hard-earned cash with insurance. It can sting to pay for something you never hope to use, but insurance serves as protection for when unexpected emergencies do come up.

Not only will insurance help cover unplanned emergency costs, it also provides peace of mind. You can rest assured knowing that something out of your control can’t obliterate your savings.

There are a few different types of insurance. Here are some of the most common:

• Health insurance
• Auto insurance
• Homeowners/renters insurance
• Life insurance
• Disability insurance

Health insurance is absolutely essential, as is auto insurance if you drive (in fact, in most jurisdictions, it’s legally required).

Some people do without homeowners or renters insurance, but it’s better to have them than not. If paying for them puts a strain on your budget, see if there are any other expenses you can cut back on.

If you’re ready to start your financial wellness journey, great! Follow these steps to achieve it:

1. Know where you stand

The path to financial wellness begins with a clear understanding of your current situation, so give yourself a financial audit and find out exactly where you stand. This is a three-step process:

1. First, list all of your sources of income (including your paycheck, investments, and any other money coming in).
2. Next, tally up all your debts (including credit cards, loans, and any other money you owe).
3. Last, calculate your net worth (your total assets minus your total liabilities).

Write down all three of these numbers so you can reference them whenever you need.

2. Make a plan

Once you know where you stand, it’s time to make a plan. This will be your road map to financial wellness and success:

Set financial goals—both short-term and long-term—and create a monthly budget so you can live within your means and reach them.

You might find that you just don’t have enough money coming in to do that. If so, don’t panic. See if there are any areas where you can trim your spending and look into boosting your income.

One of the easiest ways to generate extra money is with a side job or side hustle. If you’re strategic about it, adding just a few hours of extra work per week can make a big difference (and if your schedule is too tight for that, there are several passive side hustles that take no time at all, such as renting your car out for money). Review this list of side hustle ideas and see if any of them suit you.

3. Get your spending under control

Mindfulness is a big part of wellness. Is your money going where you think it’s going? You can’t save if you’re not in control of your spending.

Reference the work you did in step one and see if there are any areas you can cut back. Even if you’re just able to save $50 per month, it’ll help.

Common strategies for saving money include:

• Cooking more food at home instead of eating out
• Taking public transportation instead of driving
• Canceling some of your subscriptions, such as Netflix
• Moving in with a roommate (or just moving to a cheaper neighborhood—there are a lot of ways to afford living alone

Once you’ve designated an amount to save and figured out a way to do it, open a separate account to store it in so that you’re not tempted to spend it (and so that you can’t do so accidentally).

4. Automate your savings

Many financial institutions offer programs that allow you to automatically transfer money from your checking account into your savings account.

Setting up an automatic transfer is like putting your financial health on autopilot—you’ll grow your savings without any extra effort.

5. Improve your credit score

Your credit score is like your financial report card. A poor score can hold you back financially, even if you’ve cultivated healthy spending skills and you’re saving like crazy.

On the other hand, a great credit score can open up opportunities for you to get lower interest rates on lines of credit and loans (including auto loans and mortgages), which makes it easier to budget in the future.

Here’s how you can improve your credit score:

• Pay your bills on time
• Keep your credit card balances low
• Monitor your credit report for errors, and dispute them with the credit bureaus if you find any
• Use a secured credit card if you can’t qualify for an ordinary (unsecured) one
• Ask for higher credit limits on your current credit cards

Financial wellness offers real payoffs for your physical, mental, and emotional health.

Here are some of the ways financial wellness can make your life better:

• Improves your mental and physical health and the health of your relationships
• Reduces stress
• Increases job satisfaction and productivity
• Increases financial security and peace of mind
• Boosts your ability to make informed financial decisions and weather economic shocks

While achieving financial wellness might seem like a daunting task, it’s a journey, not a destination. In fact, that’s the whole point—becoming financially well means adopting a healthy and sustainable attitude towards your finances, regardless of what state they’re in, rather than hyper-focusing on any particular outcome.

As with any endeavor, the first step towards financial wellness is to simply begin.