Ten steps to financial wellness
Some tips to help you stay in control of your finances.
Key takeaways
- Create a budget and look for ways to adjust spending.
- Learn about resources that can help you in a crisis.
- Pay down your highest interest debt first, and look for lower interest rates where possible.
- Save for emergencies and unplanned expenses (3 to 6 months of expenses).
- Understand your savings and retirement needs and invest accordingly.
- Protect yourself and your family with estate planning, a will, and insurance.
- Do a full review of your financial wellness regularly (at least annually).
Whatever your stage of life, financial wellness is all about saving as much as you can, minimising debt, preparing for the unexpected, and having a plan for your future. Here are some tips to make this the year you take control of your finances. Plan to repeat this exercise regularly – at least once a year.
Budgeting
Budgeting needn’t be scary or overwhelming; instead you can create a simple approach for saving and spending. Use the tips below to help yourself balance essential expenses with short-term savings whilst ensuring you save enough for your retirement.
1. Know how much you’re earning and spending and create a budget. Then, you can make trade-off decisions and figure out ways to adjust your budget to meet your goals. List your essential expenses (housing, groceries etc.), discretionary expenses (restaurants, subscription services etc.), debts (credit card balances, loans etc.), and savings goals.
2. Keep to the 50/10+/5 guideline. In general, consider limiting essential expenses to at most 50% of your take-home income, aim to save at least 10% of your pre-tax income for retirement (including any employer contributions), and aim to save 5% of your take-home income to cover short-term savings for unexpected expenses such as house or car repairs. Understand your retirement needs and allocate some of your remaining income accordingly (see the “Savings” section below for further tips).
3. Learn about resources that may help you in a crisis. Things like natural disasters, pandemics, emergency expenses and lost wages can have a significant and disruptive impact on your finances. There may be programs that can help ease the financial strain and worry such as unemployment assistance, disaster relief programs and emergency grants, retirement plan loans / hardship withdrawals, and government stimulus aid or incentives. Seek help and research what support is available to you.
Managing Debt
Getting out of debt can be painful but rewarding; money that you were paying in interest on past spending can instead be saved for your future. Here are some tips to help you prioritise and pay down debt more quickly.
4. Look for lower interest rates. You can often refinance loans or transfer credit card balances to products with lower interest rates, sometimes 0% for a promotional period of time. Do the maths yourself or get help – make a list of all your debts and amounts owed, monthly payments, and interest rates. You can then prioritise where to achieve the maximum savings, starting with the highest value and highest-rate debts.
5. Pay more than the minimum on credit cards and online/mobile loans. Making only the minimum payments can leave you in debt for years, and in some cases the balance may actually increase rather than decrease. Try to find spare cash to make extra credit card payments from sources such as reduced optional spending, and 13th month pay / vacation bonus.
6. Have money available for emergencies and unplanned expenses. Having an emergency fund in place could help you avoid getting in further debt. An emergency, like an illness or major house repair, is bad enough, but not being prepared financially can only make things worse. A good general rule is to have enough put aside in savings to cover 3 to 6 months of essential expenses. Think of emergency fund contributions as a regular bill every month, until there is enough built up.
Savings
Think about your future aspirations and needs; you’ll probably have a lot of goals to save for. You might be planning, or be thinking about, getting married, buying a house and having a family, taking a holiday, planning a child’s wedding, or approaching retirement. Regardless of your stage in life, knowing how much you need to save and working towards savings milestones can help keep you on track.
7. Consider your risk tolerance and time horizon when saving. For short-term savings goals where you may need the money in a few months, like an emergency fund, saving in cash may be a good option. For longer-term savings there are other types of accounts and investment vehicles available, although they may carry more risk. You should consider your saving goals, time horizon, and risk tolerance when deciding where to save. Consider using professional investment/financial advice to help you make decisions and, review your investments often.
8. Invest for your retirement no matter how young or old you are. We estimate that individuals may need to target around 30% to 50% of their pre-retirement income to come from savings to supplement their social security benefits. Take advantage of any existing tax-efficient savings programs such as employer-sponsored plans, where your employer may also be contributing. Starting early, saving consistently, and investing wisely is important. Individuals may need to save over 10% of pre-tax salary in order to meet targeted retirement income, so take steps to get to that goal.
Protection
You've worked hard to build all you have, so it’s important to preserve it, using tools like life insurance and estate planning, for your peace of mind and for those you love.
9. Create an estate plan and will. While the documents and names differ by country, the basic concepts are the same – ensuring that you have expressed, in writing, your wishes for your remains and possessions on the event of your passing, and allowing other people to make medical/financial decisions if you are incapacitated. Having the correct documents in place can help simplify legal / tax issues when the time arises.
10. Purchase adequate life, critical illness and disability insurance. Life insurance may help your family replace lost income and address other financial goals should you pass away unexpectedly. In addition, disability insurance will help you replace lost income if you should become disabled. These all provide protection to you and your dependents.
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