Financial wellness is feeling secure about your financial future. It encompasses your ability to tackle a financial shock, balance your day-to-day finances, move seamlessly towards achieving your financial goals and have the financial freedom to make the choices that allow you to enjoy certain luxuries of life.
In order to effectively manage your “economic life” and have overall financial stability, it is important to keep the below factors in mind:
- Learn the art of keeping spending within your means
- Be financially prepared for emergency situations
- Have the necessary knowledge and tools to make smart financial decisions
- Chalk out a foolproof plan for the future
Let’s look at the 5 key components of financial wellness in depth – budgeting, saving, investing, insurance and expert guidance, all of which will help you stay financially healthy and have a big impact on your financial future:
#1 – The Importance of Budgeting
The toughest component of staying on top of your finances is creating and maintaining a budget in order to achieve goals for every stage of your “financial lives,” whether it is saving for a house, a car, higher studies, or retirement.
Here’s how you can follow a budget plan efficiently to boost your financial wellness:
- Track your daily/monthly spends
- Break it down into categories
- Eliminate the avoidable spends
- Trim your expenses if your budget limit is nearing
#2 – The Importance of Saving
Your financial wellness depends on how well you prioritize saving. At times, it is easy to ignore retirement since it seems so far off in the future.
Why is saving important? Learning to save early on will not only help you gain knowledge but also, the set of skills you’ll utilize throughout your life while planning your future finances. Savings can come in handy in many situations. Therefore, your financial goals should include:
- Saving for emergency: Emergency situations are unforeseen, hence, it is imperative to set aside a certain sum of money in the emergency fund. An emergency fund will give you relief and prevent a financial setback from overtaking your life.
- Saving for retirement: The earlier you start saving for your retirement, the better it is for your future. It’s advisable to set aside at least 10% of your take-home pay each month for retirement savings. However difficult it may seem now, you will thank your younger self later!
- Saving for miscellaneous expenses: Everyone deserves to enjoy the luxuries of life to some extent. It could be a destination from your bucket-list or a car you’ve been eyeing for a long time. Saving for such indulgences can never go waste!
#3 – The Importance of Investing
It is never too early or too late to get started on investments for long-term financial wellness. Investing helps you take charge of your financial security and at the same time, helps your family in times of need. Your investments should ideally have high returns and low risks. It’s all about finding the right balance and focusing on diversifying your investment portfolio.
Below are the types of investments you may consider:
- Fixed Deposits: When you invest your money in an FD, you are well-aware of exactly how much you will earn at maturity. FDs are risk-free investments that guarantee returns.
- Government Bonds: Issued by the government and regulated by the RBI makes these bonds a safe place to invest, with good returns available for a longer duration. It provides tax benefits and diversifies your portfolio.
- Equity and Debt Investing: Investing in equities offers you a great opportunity to maximize returns. However, taking an optimal level of risk can help you achieve your financial goals at the right time. Mutual funds, tax-saving equity linked savings schemes (ELSS), National Pension System (NPS), or stocks are various ways of investing in equities.
- Gold: Gold has always maintained its value over the long term. It offers the stability no other assets do. In all these years, it has served as a hedge against the erosion of major currencies and inflation, thus, it is an investment well worth considering.
- ETFs and SIPs: Investing in ETFs and SIPs are a smart and convenient way to stay committed to your long term goals at a relatively low cost, and ensure that you invest at regular intervals.
#4 – The Importance of Insurance
Insurance is meant to safeguard you financially, should certain unforeseen incidents take place. However, it is crucial to purchase the right type and amount of insurance depending on your specific situation. Factors such as age, lifestyle, and marital status and employment benefits play a role while building your insurance portfolio.
Here are four types of insurance recommended for everyone:
- Life insurance: Life insurance is tremendously beneficial to the policyholder and their family as it helps contribute to their families’ financial wellness. A life insurance policy covers not just the funeral expenses but also, daily living expenses, such as, mortgage payments, outstanding loans, taxes, child care, credit card debt and future studies cost.
- Health insurance: You are just one serious illness away from bankruptcy, hence, a health insurance policy is a must. Consider not only your medical bills but also, income loss due to illness. At such times, even a minimal policy is better than none!
- Auto insurance: Auto insurance can save you from heavy expenses. If you or a passenger is injured in an accident, auto insurance will cover the expenses. Furthermore, it also protects your vehicle against theft, vandalism or a natural disaster.
- Long-term disability insurance: Even the best of life insurance policies does not prepare you for the day when you may not be able to work for weeks, months, years or ever again. And, while a health insurance covers your medical bills and hospitalization costs, you’re still left with those daily expenses that your paycheck generally covers. It is therefore necessary to have a long-term disability insurance.
#5 – Importance of Seeking Expert Advice
Before making a big purchase, such as, buying a car or a house, it is wise to get expert advice on the matter. Taking two to three experienced opinions can help you make the right choice or guide you in the right direction.
Why is financial counseling important? At times, you may not be fully aware of the ins and outs of interest. Understanding interest rates can have a big impact on your finances, therefore, it’s an important concept to gain a better understanding. Even when it comes to managing your credit correctly, you may falter at times. So, it’s important to grasp the concepts and tools behind responsible credit practices before you go ahead and make a big purchase. Expert guidance can improve your financial wellness at every stage in life.
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