But what does it really consist of? A simple definition might be that financial wellness is when an individual or an institution achieves the optimal balance between their income and expenses, so that they can deal with unforeseen events and achieve their life goals.
These life goals are the key to considering that financial wellness has been achieved. So one person may understand that they have accomplished this when they are debt-free and their income is sufficient to cover their expenses; and another person may define it as when they have enough capital saved to continue with their standard of living once they reach retirement.
Financial wellness helps us to achieve our life goals.
Although the moment when we achieve financial wellness is subjective, there are several conditions that should be fulfilled to ensure that the decisions we are making are the right ones and that they will help us live a more secure life from a financial point of view:
- Having control over our finances: this implies knowing the details of our income and expenses, and thus knowing what our savings capacity is. To improve it, the first thing we must do is to control those expenses, and for that it is essential to establish a family budget.
- Setting our life goals, and being clear about whether and how our finances influence them. It is not the same to plan to do a Master’s degree next year, as to want to take a trip around the world when we retire. For both of these things we will need to have some money saved up when the time comes, but in the first case the amount is less, and the time needed to get it is less, too. Knowing how to save is one of the tricks that will help us with our objectives.
- Being prepared for contingencies.There are certain expenses that we know will crop up at some point in our lives, and therefore we can be ready to handle them, but there are others that are unpredictable and we cannot plan for them. Or can we? Once again, the answer is “yes”. To avoid getting into debt in this situation, it is important to have an emergency buffer. To ensure that our plans are not ruined, it is imperative that we have this financial cushion, so that we can sleep more soundly.
Insurance is another protection tool. For an annual cost, which is more than affordable, we can protect ourselves against a wide variety of unforeseen events that we would not be able to cover with our savings.
- Knowing that saving is not enough. We must be aware that the euros we save today will not be worth the same down the road. That is how inflation affects our money. But there are also tools that can help us minimise how our savings can lose value: investments. This is a scary term and most people think that in order to invest you have to have a lot of money, but the reality is quite different. Acquiring some basic knowledge and being advised by experts can make the money we have saved up increase in value, helping us to avoid the negative effect of inflation.
Financial wellness is unique to each individual, and varies throughout life
Several international studies agree that the main stresses that people suffer are health, a heavy workload or responsibilities, and finances. Now that you know how to achieve your financial wellness, you can reduce the impact of this factor in your life, and dedicate yourself to being happy and achieving the goals you set for yourself.
Adrián Gutiérrez de la Dehesa
Financial Education Expert at Fundación MAPFRE