Financial wellness basics you need to understand for Financial Literacy Month

Financial wellness basics you need to know for Financial Literacy Month


Many Americans visit their doctor for a physical every year, an annual check-in that helps ensure your physical health is where it should be. And just like an annual check-in for your physical health, you could also use an annual check-in to monitor your financial wellness.

What better time to do so than Financial Literacy Month?

Financial Literacy Month reminds us of the importance of overall financial literacy, helping Americans build and maintain healthy financial habits. And whether you’re a seasoned pro or you’re just getting into the financial literacy game, there are a few basics you’ll want to know—starting with budgeting, credit scores, and saving and investing.

Let’s get to it.

Setting a budget: the ‘how’ and ‘why’ of planning your expenses

We’re going to go out on a limb here and assume that most American consumers have at least heard of budgeting and understand the general concept of creating a budget—but currently, only about two in five Americans have a budget in place for their family or household [1].

Yikes.

Having a budget not only provides you with a roadmap of where you are spending your cash each month, but it also can outline clear goals and actionable ways to meet those goals. So whether you’re saving for a vacation, your kids to go to college, or your own retirement, having a budget can help you get there. You wouldn’t start a road trip without having at least a general idea of how you’re going to get to your final destination, right?

Budgeting gives you a solid, concrete plan for how you’re going to spend (and save) your money moving forward and forces you to spend only the amount you allotted in your budget on a given line item. Further, creating a budget can help keep you from living paycheck-to-paycheck and ensure you have enough money to cover all of your monthly bills, plus have some left over. All things considered, a monthly budget puts you back in control of your finances—the first step to achieving overall financial wellness.

But how do you do it?

Planning a monthly budget

Clearly, having a well-defined budget is important. But setting a budget can seem like a daunting task (who really likes to crunch numbers, anyway?) for many workers. Luckily, in reality, even a financial newbie can successfully set—and follow—a monthly budget.

So how do you get started? Think about the basics—how much money do I have, and how much do I need to cover my basic monthly expenses? Take a look at your paystub and determine what your take-home pay is relative to your necessities, like food, housing costs, regular bills, car payments, and the like. From there, take a look at what is left over and split the amount between discretionary expenses and saving. Remember to think critically about your goals while divvying up the remaining balance—if you want to save $5,000 per year, for example, you should allocate the leftover funds accordingly.

If you’re stumped thinking about all the areas you may need to allocate money each month, experts recommend including the following ten categories in your budget, as you see fit:

  • Health

  • Recreation

  • Personal

  • Giving

  • Saving

  • Housing

  • Food

  • Transportation

  • Insurance

  • Utilities


Need more help planning out your monthly budget?
Download our free budgeting worksheet.

How bad credit is derailing your overall financial wellness

Many people don’t realize how easy it actually is to ruin your credit score or how serious the ramifications of bad credit can be down the road. Low credit scores are no joke—often showcasing serious effects, like difficulty getting a loan, being denied a line of credit or credit card, increased interest fees on credit you are approved for, trouble finding housing, and even being bypassed as an applicant for a new job.

What?!

Yes, you read that right. There are no federal laws in place preventing you from being denied a job due to poor credit, and pulling your credit score prior to making a final hiring decision is surprisingly common in the workplace. Luckily, there are simple ways you can increase your credit score and get yourself back in good standing status with creditors.

Tips for improving bad credit

If your credit score is less-than-stellar, the first thing you’re going to want to do find out why. Look at your outstanding loans, past-due payments, and your full credit history. Verify that the information on your credit report is correct, and if there’s anything that seems inaccurate, you’ll want to contact the creditor to verify their records and confirm the error. It may take a few weeks to have the error removed from your credit report if confirmed as inaccurate, but you should see an immediate boost in score once the ‘ding’ has been removed from your report.

From there, work on paying off debt and aim to carry a low balance on your credit cards. You’ll also want to try to avoid opening any new credit cards while you’re trying to increase your score—although we don’t necessarily recommend closing out cards you already have that you don’t use. Credit history is a big factor in your overall credit score, so the longer your credit history, the better. If you feel like you have to close out any of your current credit cards, choose to close newer ones rather than your more-established lines of credit. It’s also very important to pay your bills on time—so set payment reminders or implement auto-pay if you struggle to remember the due dates of your regular bills. Just make sure you always have enough in your account to cover the full cost of the bill if you do set up auto-pay to avoid bouncing a check or over-drafting your account.

And most importantly, remember that drastic changes in your credit score won’t happen overnight. This stuff takes a little bit of time, but stick with it and you’ll reap the benefits of a slightly higher credit score within a few months and a significantly higher credit score within a few years.

The importance of saving and investing for the future

As nice as it would be, life isn’t all sunshine and flowers. You’ll likely face financial challenges and adversities at some point in your life—and it would be worth your while to prepare for them before they happen.

Statistics show that 61 percent of Americans wouldn’t be able to cover an unexpected $1,000 expense using their savings, which is more than a little bit alarming [2]. Chances are you’ll have to cover an unexpected expense much higher than just $1,000—hello car repairs, an overnight stay in the hospital, damage to your home from a natural disaster, etc.—and you don’t want to have to take out a loan or withdraw against retirement savings, for example, to pay for the expense. Instead, take control of your finances and start saving for the unexpected; experts recommend saving 3-6 months’ worth of living expenses in a rainy day fund in case of emergency.

This mentality extends to retirement savings; you need to have a plan in place for funding retirement so you don’t reach retirement age with insufficient savings and a poor quality of life. Eventually, there may come a time where you can’t work, so start saving for the golden years of your life as early on as you can to keep you retirement-ready at any age.

Paying down debt vs. saving for retirement

We hear it time and time again; many people struggle to save for retirement due to the impact student loans and other high-interest debts have on their finances. However, you don’t need to make either/or decisions. You can save for retirement while also paying off debt—and it would be worth the effort to do so.

Let’s break it down and look at two hypothetical 25-year-old savers. Both have $30,000 in debt at a 3.7 percent interest rate; under a standard monthly repayment plan, our two savers can expect to pay $217 per month for 15 years, or $2,604 annually—equating to a total repayment amount of $39,100 with interest factored in.

Now let’s assume both savers earn $50,000 per year working and can afford to put $6,500 a year toward some combination of loan repayment and retirement savings. Both savers are also offered an employer match of 100 percent up to 3 percent in their 401(k).

Our first saver invests $4,000 per year into a retirement plan and puts the other $2,500 toward paying off her debt. She does this for 15 years, from ages 25-40. Once the loan is fully paid off, she allocates the entire $6,500 per year into her retirement savings account until retiring at age 65.

Our second saver starts off his career by putting the entire $6,500 he can afford to save toward paying off his debt, and as a result, is able to completely pay off the $30,000 debt he owes in just seven years. Then he begins saving for retirement at age 32, just seven years after our first saver—again fully investing the $6,500 each year until reaching retirement at age 65.

Which saver in this scenario ends up with more money at retirement time?

As you can see, the saver who prioritized saving for retirement while still paying down debt came out significantly ahead of the saver who paid off his debt as fast as possible before investing in his future. But how?

It all comes down to a simple mathematics principle: compounding interest. Compounding interest is the snowballing effect that allows interest to earn interest on itself (or the eighth wonder of the world, according to mathematics genius Albert Einstein). And the more time you give compounding interest to work its magic, the better off your retirement savings are going to be at the end of your career. Despite our two savers spending the exact same amount on their debt and retirement savings ($5,000 per year for 40 years), the saver who prioritized retirement savings came out over $175,000 ahead at the end of her career. That’s the power of compounding interest; that’s the power of time.

You might also be interested in: When to start saving for retirement

Just like you don’t learn to read overnight, it also takes time to achieve true financial literacy. Start with the basics and move toward more advanced financial concepts as you feel more and more confident with your own financial health. And at the end of your career, arrive at retirement age with financial security, feeling confident about the decisions you’ve made to get there.

If you need any guidance along the way, we’re here to help. Check out our retirement-planning resources, and don’t hesitate to contact our retirement specialists with any questions that come up along your journey to retirement readiness.

 Sources:

[1] 2016 U.S. Bank Possibility Index, U.S. Bank, 2016.

[2] 2018 Financial Security Index, Bankrate, 2018.