Financial well-being refers to a person’s healthy relationship with their finances, where they have a sense of security and freedom of choice, both in the present and future. Achieving financial well-being involves 4 elements of financial well-being: control over your finances, capacity to absorb a financial shock, financial freedom to make choices and enjoy life, and being on track toward meeting your goals.
While many financial plans focus only on increasing financial security, a comprehensive financial plan should encompass all 4 elements of financial well-being, with every decision made based on the person’s goals. We will discuss how these elements can be achieved through a tailored financial roadmap.
The 4 Elements of Financial Well-being
Once all four elements have been achieved, a person is considered to have reached financial well-being. The great thing about financial well-being is that it has nothing to do with the amount of money you have – it’s about how you use it. This means that someone earning $80k/year can have a higher financial wellness level than someone on $400k/year.
A good plan incorporates all elements of financial well-being, where every decision is made with your goals in mind. The table below shows how each part of financial well-being is achieved through one of our tailored financial roadmaps.
Control over your finances
When people lose control over their spending, their financial well-being is negatively impacted. The primary rule of personal finance is to spend less than you earn. To achieve this, it is crucial to be mindful of your expenses and implement systems that enable you to live within your means.
One effective way to control your finances and spend less is to master budgeting. Financial wellness depends on clearly understanding your priorities and being intentional about where your money is going. Turning your budget into a spending and savings plan is important, assigning every pound earned a specific purpose that aligns with your values and goals.
A helpful guideline for managing your spending and savings is the 50, 30, 20 rule, created by US Senator Elizabeth Warren. This rule suggests that you should allocate 50% of your income towards essential living expenses, 30% towards non-essential luxuries, and 20% towards savings for future use, such as pensions and emergency funds.
In conclusion, prioritizing your needs, being mindful of your wants, and including savings for the future are essential to becoming a responsible financial adult.
Capacity to absorb a financial shock
Having financial stability and the ability to withstand financial shocks is an important aspect of managing one’s finances. This can be achieved by controlling day-to-day spending and maintaining a budget aligned with one’s financial priorities. The basic rule of personal finance is spending less than one earns. To achieve this, one should clearly understand their spending habits and put systems in place to live within their means.
The 50-30-20 rule, created by US senator Elizabeth Warren, is a useful guideline for managing money. This rule suggests that one should spend 50% of their income on essential living expenses, 30% on non-essential luxuries, and 20% on savings for future use. This includes saving for retirement and having an emergency fund for unexpected expenses.
One can become a financially responsible adult by prioritizing needs, controlling spending on wants, and being disciplined with saving for the future. Financial wellness requires clear financial priorities, intentional spending and savings, and the ability to withstand financial shocks.
Freedom to make choices to enjoy life
Financial freedom allows you to make choices that will allow you to enjoy life. It is about having the resources to live the life you want without worrying about money. Having clear financial plans and the ability to withstand financial shocks, you can be confident in your choices and live a fulfilling life. Achieving financial freedom requires mindful spending and saving, aligning your finances with your priorities, and making choices that support your long-term goals.
On track to meet your goals
A clear plan to achieve your financial goals is essential to financial wellness. It involves setting specific and measurable objectives, determining the steps necessary to reach them, and regularly monitoring and adjusting your plans to ensure progress toward your goals.
This goal-setting and planning process helps you stay focused and motivated on the path toward financial stability and security. Having a clear plan also enables you to make informed decisions about your spending, savings, and investments and prioritize your financial priorities in a way that aligns with your values and long-term aspirations.
A clear financial plan gives you a roadmap for success, allowing you to progress toward your goals and achieve financial peace of mind.
Bottom Line
Financial well-being is not just about having financial security but also the freedom to choose and enjoy life. A good financial advisor should understand this and provide a comprehensive plan that encompasses all four elements of financial well-being.
That’s it from our experts about 4 elements of financial well-being. In conclusion, financial well-being is essential to a person’s overall well-being, and a tailored financial roadmap is a valuable tool for achieving it. Our approach focuses on understanding our client’s goals, helping them control their finances, preparing for emergencies, and providing financial freedom to choose and enjoy life.
With regular check-ins and the ability to adjust their plan as needed, our clients can be confident in their financial future.
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