Guide to Personal Financial Wellness

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Every time you turn on your television or open your web browser there is another company selling a product that promises to solve some aspect of your finances. Many of us do need help with our finances! They can be complicated with each decision being a line of dominos that extends decades into our future.

An example of the complexity is that a dinner date at home rather than going out allows you to spend $100 less on dining this month. If you put that $100 towards your credit card debt you are going to save $20 this year on interest. If you put that $20 into your IRA that might grow back to $100 for you to spend when you retire.

This complexity requires a holistic approach to your personal finances and financial wellness is one of the approaches you might have heard about.

Financial wellness is the state at which someone is financially prepared for all major life events up to, and including, retirement. It is the result of building sound financial habits where small actions, such as paying an extra $50 towards debt with every paycheck or setting up automatic transfers into a child’s college savings account, add up over time to produce big results.

Good habits form a strong foundation for your personal finances but in order to achieve financial wellness, there are some specific actions that you need to take to prepare for the future and position yourself to achieve your goals. Some of these actions are universal (e.g. pay off consumer debt) while others are unique to a person’s circumstances (e.g. insurance and estate planning).

Regardless of one’s wealth, or lack thereof, one should regularly take time to review their personal finances and ensure they know where they stand today and that they are making progress in the right direction for tomorrow. A financial plan without numbers and action is called hope.

Personal finances are your personal responsibility and not something you can outsource to those companies that advertise in your Facebook feed. Without financial discipline, the richest people in the world can end up bankrupt. With financial discipline, many poor people can overcome their circumstances and rise out of poverty. There is no silver bullet but a combination of education, tools, discipline, and action increases one’s chances to succeed.

The factors that determine financial wellness differ with each individual (a 25-year-old with no children has very different circumstances than a 50-year-old with three children at home) but here are some of the aspects of personal finances that play a large part. 


The budget is the first thing that we focus on as part of an individual’s personal financial path. How one spends, saves, and invests their income is what determines their financial future. Actively making those decisions as part of the budgeting process creates results as opposed to the passive approach that most people have with their money.

The first budgeting objective is balancing the budget by making sure that in a given month you are spending less than you are making. At that point, we look at each of our budget categories for ways to save money in order to accelerate the debt payment plan.

Often people talk about “making a budget” as if it is something that is done once and then stuck in a drawer like one might do when they “make a will.” If only that worked. Rather, budgeting is a hands-on process that involves tracking your spending throughout the month and assessing where your spending stands in each budget category prior to making any purchase decision (software, a spreadsheet, or a piece of paper on your fridge can help here). Without the ongoing dedication to the budgeting process, one rarely makes the changes that will move the needle on their personal finances.

Paying off debt

Until debt tear us apart printed red brick wall at daytime
Photo by Alice Pasqual on Unsplash

Past spending decisions–that resulted in accumulating debt–are the chains that keep people from building wealth and meeting their financial goals. Oftentimes, this is due to circumstances rather than poor money management but the resulting burden is the same.

Removing this weight from someone’s shoulders has a huge impact on their happiness and job satisfaction, not to mention their ability to build wealth.

Paying off debt has three steps:

  1. Creating the debt payment plan
  2. Taking action on the plan
  3. Sticking with the plan

Seeing a debt payment plan through to the end is something that few people do. Many Americans are in debt from the day they graduate high school to the day they die. They have good intentions but life happens. A car breaks down, a job is lost, or a surprise medical bill can derail someone’s personal finances to a degree that it could take years to recover. It rarely is a straight and easy path and every day is a new start. By tracking their debt they will visualize their progress which will help them overcome their setbacks.

Building savings

Paying off debt takes a metaphorical weight off of one’s shoulders. Building personal savings has a similar effect as it provides future financial security which keeps you out of the paycheck-to-paycheck cycle or from spiraling back down into debt. It is also the means of achieving many of your financial goals such as buying a car or paying for a wedding.

An emergency fund is the initial focus of savings. That is a specific budget category that you build up until you have six months of living expenses saved up.

For two-income households you may be able to get away with less than six months in cash as presumably one of the incomes would be able to cover some of the expenses should one person lose their job. However, I have been doing this for many years and have never heard someone say they wish they hadn’t saved so much.

It is a good idea to build a small emergency fund of one month’s basic living expenses prior to tackling your debt payment plan. This small emergency fund will cushion any unexpected expenses that might crop up such as an appliance breaking down or an insurance deductible that needs to be covered in the case of a broken bone.

While not necessary if you have fully adopted the budgeting mindset, many people put their emergency fund in a separate savings account which segregates it from the money they use for their living expenses. This has an added benefit of earning you a very small amount of interest on the money you have saved however you need to be sure that there are no account fees that will offset that.

You might use other avenues to achieve your other savings goals. For goals with longer timer horizons (five or more years), consider investing your savings rather than putting it in a savings account. There is some risk there but it gives you the opportunity for your money to grow which means you have to save less out-of-pocket to reach your goal. For shorter-term goals (under five years) you might not want to take the chance that the amount you need is not there when you need it due to a down market. In this case, a savings account, CDs, or short-term treasuries might best serve you.


man carrying to girls on field of red petaled flower
Photo by Alice Pasqual on Unsplash

Insurance has two important functions when it comes to financial wellness:

  1. Insurance protects the wealth and lifestyle that you have worked long and hard to build.
  2. Insurance protects your family’s future.

If you do not have anyone depending on your income then you might not need life insurance but health, auto, homeowners, and disability are still required or good ideas to make sure that you are protected for an accident or disaster.

When you have a family that relies on you to keep a roof over their heads and food on the table then life insurance is a necessity. Typically people look for enough insurance to cover their debt (including student loans and mortgage) as well a number of years of living expenses. The proceeds of life insurance can be invested which can factor into your calculations. E.g. if your living expenses are $30,000 a year and you wanted to cover ten years of expenses then the immediate thought is that you need $300,000 in life insurance. However, with market growth assumptions you can buy a bit less insurance, invest the payout, and get a similar level of income.

When shopping for life insurance get recommendations on agents and be sure you understand the difference between whole and term. If the agent cannot adequately answer your questions (using easy-to-understand terms) about what they recommend then find an agent that can.


Retirement readiness (a specific component of financial wellness) is being on track to have the money saved to pay for your living expenses in retirement without worrying about running out of money if you live longer than you anticipate.

When talking with someone about their desired retirement age there is one point that I really try to drive home: “The day you retire you are moving to another phase in your life. Currently, you are earning income. When you are retired you live solely off your investments and Social Security.” This often gives people pause as their projected retirement income falls far short of what they think their living expenses will be. If possible wait to retire and start taking your Social Security. It will give you longer to build up your nest egg and less time to draw it down.

Building retirement savings is something that people do over the many decades of their career but many get started too late or hit a bump and raid their retirement savings to get around it. It is never too late to start saving for retirement and anything one saves is better than not saving at all.

The two big factors to the amount of savings you will have when you retire are:

  1. Contributions
  2. Asset allocation

The contributions are the amount of money that you have contributed to your retirement accounts up to the point that you start taking money out. Contributions made earlier in your career are worth more than contributions made later in your career (they have had more time to grow). The more years you wait to retire the more years you can contribute to your retirement accounts.

Asset allocation refers to what you have invested your retirement money into. Typically that is a mix of stocks and bonds. When you are younger you can take more risk, due to the longer time horizon until you retire, and will hold more stocks than bonds. When you are a few years until retirement you cannot afford a downturn or recession when you need to start drawing on your savings for your living expenses. Thus you will be more conservative and hold more bonds than you do stocks.

The more money you have invested, and the longer it is invested, the more asset allocation affects the outcome.


two blue beach chairs near body of water
Photo by Aaron Burden on Unsplash

Estate planning varies widely from person to person with everyone having different needs. At a basic level, it is setting up instructions on what should happen to you and your assets upon your death. If you have children who are minors then establishing who will care for them is the primary concern.

Everyone should have an inventory of all assets, accounts, and passwords (we recommend using a password manager) that you can keep in a safe place and that will be accessible to their surviving spouse or the executor of their estate. All retirement accounts should have a primary beneficiary and a secondary beneficiary. You should have a will that covers your assets and a living will to ensure that your decisions on their health are respected should you not be able to make them themselves. Additionally, a health care proxy should be specified to cover any gray area or new treatment options that are not covered by the living will.

As wealth grows in size, as well as in diversity of assets, estate planning becomes more complex and the considerations grow. It is often worth it to consult an attorney and accountant to walk you through your options.

Small steps and forward progress

Accomplishing financial wellness will take a lot of planning and effort. It is usually achieved by focusing on a single thing and working to improve it rather than trying to improve everything all at once. A series of small wins add up to a big win. That will keep you moving forward towards your financial goals and the momentum provided by each small win will keep you motivated.

Getting in a good place with your personal finances and future planning is life-changing. Your efforts are a gift to your future self. Put in the work today to make sure they are in the best position to be successful.

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