How do you assess financial wellness? Consider these three financial wellness questions your financial well-being checkup.
Let’s move beyond the financial statement (if you're even looking at them at all), and into the territory of assessing your actual financial wellness.
Because that’s what really matters, right?
In order to do this, I’m going to ask you to commit some acts of financial courage.
You know, do some things that you normally shy away from (in the same way that one would “shy” away from a venomous snake).
Because when we get down to the actual truth – and numbers don’t lie, it’s us humans who do the manipulating – then we can confront actual issues and get in better financial health.
But if we dance around the actual numbers because we’re too afraid to peep? Well, that equals a lack of awareness.
Lack of awareness means you just keep on living your life in the same manner instead of getting to the heart of the money issues and really learning how to get better at managing your money.
Psssst: And by living your life? I really mean living part of your life because the symptoms are there that you’re having to deal with whether you want to confront the actual issue or not.
What is Financial Wellness?
What exactly is financial wellness? I mean, we might as well know what we're shooting for, right?
This is a very personal, subjective phrase to define. So, I'll give you some help to start.
While you'll ultimately need to define financial wellness for yourself, I can tell you with full confidence that it has nothing to do with just surviving financially. It's more in the “thriving” territory.
ConsumerFinance.gov actually came up with the first-ever definition for financial wellness and financial well-being. In a nutshell, they define it as follows:
“Having financial security and freedom of choice, both in the present, and in the future.”
Let's dig into a bit more tangible ways (with three specific financial wellbeing questions) to measure your financial well-being.
How Do You Assess Financial Wellness?
So, how do you figure out how your financial wellness measures up?
Assessing financial wellness is not done through financial statements alone. It's taking your numbers, your bottom lines, and all of that information on those financial statements, and translating them to what they mean for you in the real world. And it's also – whether you feel like you're just barely making it, financially, (i.e. financially surviving), or you feel like you're thriving financially.
You can't assess your financial wellness by looking at your savings account statement without also looking at your debt load. You can't assess your financial wellness by calculating your net worth and ignoring how much cash flow you need to bring in each month just to keep up with your obligations and lifestyle.
It's more of a a total look at your finances through a new lens – and these three financial wellness questions are going to clear things up pretty well for you.
Financial Wellness Questions to Measure Financial Wellness
Are you ready to actually measure your financial well-being?
Remember, there's no, true, definition of what makes a person financially well or financially not well. But you can certainly still see what some typical money indicators of wellness are saying about your own life.
Psst: Not liking what you see from these calculations? Stick around to the end, where I give some 7 ways to improve your financial wellness. You'll also definitely want to check out my how am I doing financially calculator and PDF.
Question #1: Add up All Your Debt, in One Large Pot…Then Go One Step Further (Freedom of Choice)
For most of the years that we were in debt, we never actually added it all up.
That’s just too scary, right?
Not to mention, debts are usually from several different lenders with their own financial statements each month, so it’s easy to compartmentalize them.
Remember though, we’re looking at your whole financial health right now.
Once I added all three of our debts together – the engagement ring, the student loans, and the car loan – we could see the entire issue in one, $25,000-gulp.
It changed the way we looked at our financial wellbeing, and it changed our goals. In other words, it forced us to confront the issue as a whole, and we took machete-like financial moves to get rid of it instead of scalpel-like ones that would have had us still in debt today (aside from our mortgage, we’ve been debt-free since September 1, 2010!).
Folks, that’s 12 years of debt freedom (aside from our mortgage) all because we confronted the entire issue.
Everything that goes into your debt number:
- Student loans
- Engagement rings
- Medical bills
- Credit Cards (even the ones you pay off each month, but haven’t gotten to yet)
- Mortgage (if this one is really high, you have my permission to separate it from your other debt pot like we did so that you don’t completely unmotivate yourself)
Now, are you ready to take this one step further (i.e. one step closer to better financial wellbeing)?
Add up your total monthly debt service load. In other words, how much money is leaving your pockets each and every month to pay your debts?
When we did this several years ago, that’s when we hit it into high gear. It turned out that $950 was leaving our pockets every single month for our debt! Granted, we were paying extra on the loans. However, once I figured out that paying off those loans equaled $950 MORE in our cash flow per month, I sold it to my husband, Paul, as our No. 1 priority and the rest was debt-free history.
Knowing your monthly debt service cost becomes particularly important for the next scenario we’ll discuss.
And decreasing your monthly debt service costs? Well, that opens up freedom to make choices NOT based solely on their cost.
Question #2: Figure Out the Number of Months You’d Financially Survive without a Job (Financial Security)
A financial statement definitely won’t complete this picture for you.
According to a Pew report, The Precarious State of Family Balance Sheets, the majority of American households (55%) are what is called “savings-limited.”
While they define this as being able to “replace less than one month of their income through liquid savings,” it’s really just a nicer way of saying that you’re around 1 paycheck away from their mother’s couch.
And if not your mother’s couch? Then certainly into credit card debt, 401k-tapping mode, and other sorts of financial nasties you don’t want to get involved with.
So, let’s do the scary deed and calculate how many paychecks you could lose before being in the “savings-limited” category.
- You lose your next paycheck. What happens?
- Then your next paycheck doesn’t come, either. What happens then?
Pssst: if the recent government shutdown taught us anything, it's that this is not an uncommon situation — many federal workers went without two paychecks.
Let me give you some hints of what could be in the pipeline for you, ordered from least harmful to most harmful:
- Unemployment insurance: Use this calculator to estimate your unemployment benefits in the event you lost your job. Also, if you can, remember to have taxes taken out while receiving your unemployment. Otherwise you’ll likely be met with a nasty tax bill come next Spring.
- Emergency fund use: How much is in your emergency fund?
- Regular savings use: How much is in your regular savings?
- Credit card use: What are your total credit card limits?
- Loan deferments: Some loans you can call and defer payments or go into forbearance for a period of time. Though, of course, interest usually keeps accumulating during this time period. But at least you won’t be sent to collections!
- Loan from 401k/Retirement Accounts: Don’t forget, these come at a major cost.
- Loans from family/friends: How much do you think you could ask for?
Given all this information you’ve just thought through, you can now more accurately answer this: How many paychecks can you go without before you use up all your alternatives (and, literally, have to think about moving into your mother’s house)?
Pssst: Check out this post to get your free unemployment kit checklist. If I were you, I’d print it out and leave it at your desk at work in case this ever happens to you! It’s happened 4 times to us.
Question #3: Track Your Net Worth
Oooohhh, this one’s juicy.
And yet, so very, very important (why might it be important to track your net worth? The answer will surprise you.). I mean, you want to know you’re headed in the right direction to financial well-being, right?
I started tracking our net worth back in November of 2009, and I now use Personal Capital's free net worth tracker to automatically keep things up to date.
I’m soooooo glad that I did, because it lets me see how far we’ve come in just 8 years. That gives me hope for the future!
I mean, we didn’t even get out of our $25,000 in debt until the fall of 2010.
It also helps me see that, because we invest, even though we haven’t been able to add as much as I’d like into our savings account after having out little guy in 2015, our net worth has continued to grow.
Nowadays? I use the free program Personal Capital to give me not only a snapshot of my net worth whenever I’d like it, but also other important (but highly-inconvenient to hand-calculate) information such as how many fees we’re paying across our investment portfolio and how diversified our portfolio is.
It’s really cool. In fact, it makes me feel all grown up with my finances because I can actually, confidently, say what all we’re doing with our money.
Bonus: Answer this Question (for Both Your Mental AND Financial Wellness)
Do you ever wonder why there are some millionaires and billionaires out there still hustling and giving up time with family and friends + their lives to make more money?
I think it’s partly due to the fact that they don’t ever feel like they have enough.
They don’t feel like they’re reached success.
And this is probably because they’ve never stopped to ask themselves, what does financial success look like to me? When is “enough”?
What does financial success look like to me? When is “enough”?
You don’t want to be that millionaire.
Well, I mean you probably want to be a millionaire. Heck, I’d like to be!
But YOU want to be the millionaire who feels like a millionaire, and who chooses to design their life instead of continuing in the hustle.
So, I want you to seriously consider how much would be “enough” for you.
Enough for what, you ask?
Enough for you to feel like you’ve “made it” and can dedicate more time to pursuing passions, people, experiences, etc. instead of staying in the “game” like you are now.
Bonus points if you can put an actual number on it.
Questions to get you diving deeper into this exercise:
- Do you include all of your assets in your numbers (such as the value of the home that you live in), or do you include only the cash you have in the bank?
- Is enough more of a feeling for you, such as when you don't have to worry, stress or think about monthly income, getting new clients or paying my bills?
- Is it when you hit a certain income per year, or based on what assets you have already in your ownership since a job’s income is not guaranteed? (in other words, is it about what you’ve kept of your earnings, or what you earn itself)?
- Why do I want to be rich?
What are 7 Ways that can Improve Financial Wellness?
Based on that definition from the CFPB, the survive vs. thrive perspective, and going through the financial wellness questions from above…you’ve uncovered a need for improvement as far as financial wellness is concerned.
You, and probably most of America!
You’re not alone, at all.
Here are 7 ways to improve your financial wellness.
Remember, that means:
- Increasing your financial security
- Increasing your freedom of choice
- Moving from financially surviving each month, to financially thriving
1. Increase Your Monthly Cash Flow
Monthly cash flow – or, the amount of money you have to work with each month – is highly important to increasing your freedom of choice, and to feel like you’re thriving.
The best way to increase your monthly cash flow is by paying off your debts. When you pay off your debts, you both:
- Decrease the money you spend to service, or pay, your debts, and give you more money to both spend.
- Decrease the amount of money your household must earn as a baseline to survive, thus opening up more freedom of choice.
You can also increase your monthly cash flow by earning more money.
2. Prioritize Spending Better
Get rid of what is not a priority for you, so that you have more freedom of choice in what you DO get to spend your money on.
3. Make Better Financial Decisions
Most people make decisions to get out of a jam. You’re going to go above that, and make financial decisions that both get you out of a situation in the now, AND, put your family in a better decision in the future.
4. Do a Portfolio Audit
I wrote a very easy-to-follow article on how to do a portfolio checkup, using free software. Get to it!
5. Change Your Money Mindset
Most of us (myself included) need to work on our money mindsets, which will change everything.
I mean, you still have to take the actions, but if you get your brain to go along with it? Game-changer.
6. Get Your Finances Under Control
If things are completely out of whack and there aren’t systems or order? Well, then it’s going to be very difficult to feel financially well (even if you are!).
Get your finances under control, and work on what needs to be worked on – with the organization, you’ll see it much more clearly.
7. Remember You Can Recover
Recovering from financial mistakes is something everyone has to do at some point. That’s because we all make money mistakes!
This is different than a normal, annual financial checkup. And it’s wayyyy different than just glancing at your financial statement. The point to all this is to elevate those numbers and really give them meaning so that you know where your financial well-being is strong, and where it needs some serious help.
So, spill your beans. What do you need to work on, based on your answers to these questions?
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