Financial wellness, sometimes called financial health or well-being, is generally defined as the ability to meet your financial needs, a feeling of security about your financial future, and the freedom to make choices that allow you to enjoy life. It’s not about the numbers in your account, or how well your investments are performing.
In fact, financial wellness is closely linked to mental health. Money problems are a very common source of stress, so improving your financial wellness can help. If you feel confident and secure in your ability to manage your everyday finances, cope with unexpected costs, and plan for the future, you can significantly reduce the time and energy you spend thinking about money.
So let’s look at the four main elements of financial wellness: Spending, Saving, Borrowing, and Planning. Balancing these elements can help you achieve better financial health by making sure that you:
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Meet your financial needs and don’t spend more than you earn
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Have savings to draw on for emergencies and set aside for the future
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Can borrow what you need and manage your debt
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Plan ahead for future needs, like retirement
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Spending
Spending money is a necessity - the trick is to make sure that you’re spending less than you earn. That way, you have enough money to set aside for savings. How do you do that? Here are two helpful tips:
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Understand how much you’re spending, and on what, by creating a budget
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Pay your bills on time to avoid late fees, additional interest, and potentially a negative impact on your credit score
Create a budget
When you can see how much you earn and how much you’re spending, it’s a lot easier to spot ways to cut back and set goals for yourself. That’s the whole point of a budget. For example, if you’re looking at a list of your monthly spending you might see that you’re paying $10 for lunch every day and set a goal to make your own lunch and put the extra money into your savings account.
Making a budget doesn’t have to be complicated, either - it’s easy to find an option that works for you:
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Use online banking or your mobile banking app to look at a list of all your transactions
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Download a budgeting app
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Write it down
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Create a spreadsheet
The important thing is to find a method that works for you, and stick to it.
Pay bills on time
Another important part of managing your spending is paying your bills on time. Late bill payments can result in fees or higher interest, which means you’ll spend more in the long run. Your credit score can also go down as a result of late payments. To avoid late bills, you can set up automatic payments or create alerts to remind you of payment due dates.
Saving
Saving money gives you security and peace of mind. When you have enough money set aside to deal with unexpected expenses, like repairing your car or covering medical costs, you’ll have one less thing to worry about in a crisis. Also, saving for long-term goals like buying a home, retiring, or going on a trip, can help you feel better about your future.
Here are four tips to help you start saving:
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Set realistic goals
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Make saving a habit
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Set aside emergency savings
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Save for the long-term
1. Set realistic goals
If you’re just getting started, you might not be able to save a lot right away. That’s OK. Remember - we’re looking for balance. The best way to come up with a realistic savings goal is to look at your budget. How much money do you have left over once you take care of your usual expenses? Look at your budget - what expenses can you cut and add to savings instead? How much do you need for your next big expense, like a car, trip, or mortgage? The answers to these questions will help you set realistic goals.
Calculate how much you could save with Meridian’s High Interest Savings Account
2. Make saving a habit
To reach your goals faster, start contributing to your savings whenever you can. Did you know you can set up automatic deposits (also known as pre-authorized contributions) to add money to your savings or investments? Just choose an amount to move into your account every week, two weeks, month, etc. There are also other tools out there to help you save automatically - like Meridian’s Auto-Save feature.
3. Set aside emergency savings
Sooner or later, you’ll have an unexpected expense to deal with, like losing your job, car repairs, or health costs. Building up an emergency fund now means that you won’t have to stress about the costs later, or go into debt putting sudden expenses on your credit cards.
The ideal emergency fund covers three to six months of expenses. At the very least, it’s a good idea to set aside at least $1,000.
4. Save for the long-term
Start saving for big goals like retirement early on - that way, your money has more time to grow. Even if you have some debt (especially low-interest debt) it’s a good idea to save for the future - you can start small. If you wait until you feel like your finances are perfectly in order, you might miss out on some great opportunities.
Borrowing
Having some debt doesn’t mean that you’re bad with money. You can borrow money and still achieve financial wellness if you:
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Have manageable debt, meaning that you have more good debt than bad debt and you have a plan for paying it off.
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Maintain a good credit score.
What’s the difference between good debt and bad debt?
“Good debt” is when you’ve borrowed money to buy something that will increase in value over time. For example:
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A mortgage - this is debt you take on to gain something that will become an asset - your home.
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A student loan - this debt allows you to gain knowledge and skills that will help you earn more money in the future.
“Bad debt” is when you borrow money for something that won’t increase in value. For example:
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Credit card debt - Generally, the things you buy with a credit card will decrease in value. Also, credit card interest rates are typically very high. That’s why it’s better to pay your full credit card balance each month. Otherwise, your debt just increases.
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Auto loans - Cars start decreasing in value as soon as you start driving them, and auto loans generally have high interest rates. There are some ways around this - like buying a used car or leasing a new one. If you do get a loan to buy a new car, though, just make sure that you understand how to manage that debt.
Tips for managing debt
Debt can play a big part in how stressed people feel about money. Here are a few tips on managing your debt for financial wellness:
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Make sure that paying off your debt is part of your budget.
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Set up automatic deposits so that you don’t miss your debt payments.
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Consider consolidating your debt into a low interest loan or line of credit.
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Get suggestions about the best approach to your debt from an expert - like a Meridian financial advisor.
What’s a good credit score and how do you get one?
Your credit score is a number between 300 and 900, calculated using the information in your credit file with one of Canada’s credit reporting agencies: Equifax Canada or TransUnion Canada. Having a good score helps you get approved for things like a loan, mortgage, or lease, because it indicates that you’re likely to pay back the money you borrow. A credit score of 660 or higher is considered good, and scores around 760 or higher are considered excellent.
Here’s how to maintain or build towards a good credit score:
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Pay bills and make debt payments on time.
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Keep your debt under control - no big outstanding credit card balances, for example.
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Avoid applying for new credit unless absolutely necessary.
Declaring bankruptcy, missing payments, and carrying a lot of debt for a long period of time can all have a negative effect on your credit score.
Learn more about getting your credit score up
Planning
Planning helps you prepare for future financial challenges and goals. Here are three key elements of financial planning:
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Make sure you have insurance for your own peace of mind and protection.
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Understand your taxes, and plan for them
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Create a plan to help you save for retirement
1. Get the right insurance
Protect yourself and your family by getting insurance. That way, when something unexpected happens, you have a safety net. You have several insurance options: life insurance, mortgage insurance, creditor insurance, tenant insurance, travel insurance, and more. Talk to an expert to find out what’s right for you.
2. Tax planning
Tax planning helps you organize your finances in way that minimizes the amount of taxes you pay, taking into account tax rules, credits, long-term goals, income, gains, and losses. Good elements of tax planning include:
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Understand how your different investments are taxed. You can talk to your advisor about which investments will give you more after-tax income, and how to turn that to your benefit.
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Consider the long-term - how much are you earning now, how much do you expect to earn in the future, and how will that change your taxes?
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Do you expect to pay other taxes in the future? For example, property taxes on the house you plan to buy.
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Put your tax refund to work - invest it in your retirement savings, for example.
3. Save for retirement
Start saving with a clear picture of how much you’ll need to have the retirement you want. What will your expenses look like? You may spend less money on some things in retirement, but you also need to account for possible health expenses, or maybe more travel spending. What will your income need to look like, compared to what you’re earning now?
Set up an investment plan to build up your savings to act as income for your retirement. This might include RRSPs, RRIFs, TFSAs, mutual funds, GICs - and financial advisor can help you decide on the right combination. You should also check what kind of income you could get from the Canada Pension Plan (CPP) and Old Age Security (OAS).
If you have questions about how to achieve financial wellness, talk to a Meridian financial advisor
Learn more about financial planning
Six ways to add money to your RRSP
What does a wealth advisor do?
The basics of retirement readiness
A version of this article was originally published May 6, 2020