What is Financial Wellness and why is it important?

There are many parallels between financial wellness and sending remittances. For the 281 million migrants across the globe, supporting their loved ones from afar often means saving extra money to help their families achieve their collective goals, be they purchasing household essentials, providing better educational opportunities for younger relatives or setting up local businesses that will generate future income.

Yet, by learning more about financial wellness, you can discover new ways to manage your personal finances and remittances more effectively, knowledge that can then be passed on to family members back home. With that in mind, let’s explore some of the concept’s core facets so you can take those all-important initial strides toward a more financially secure future.

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Understanding Financial Wellness

At its heart, financial wellness is about adopting healthy financial habits in order to meet both your immediate and future needs. More broadly speaking, it encompasses your entire relationship with money, from your day-to-day spending to your wider interactions with savings, debts and investments. Through small adjustments and the careful management of your income, reaching financial wellness can help you gain greater stability, opening you up to new opportunities for yourself and even your family.

Given this mindset can be applied throughout the whole of your career as well as later on in retirement, financial wellness is typically divided into three stages:

Limited Financial Security

Referring to your ability to make ends meet, this initial phase involves covering your essential needs such as utility bills, groceries as well as any household expenses. Achieving this level of financial wellness is essential as it often serves as a foundation for future stability.

Financially Stable

The crucial next step is all about being able to respond to unexpected setbacks. This means you have savings or insurance plans in place for life’s uncertainties, thus potentially avoiding the pitfalls of high-interest loans. Additionally, this stage also includes making well-rounded decisions to support a secure future, be it buying a home or preparing for retirement.

Financial Independence

The ultimate goal of financial wellness is the freedom – through your savings, investments and income – to live comfortably. In practice, this means you can make choices without the stress of financial constraints.

The Importance of Financial Wellness

Above all, observing good financial practices will provide you with a secure platform from which you can progress toward your personal goals. Regardless of whether you are looking to set up a business, raise a family or start a new life abroad, having a positive relationship with money will make these goals more attainable. This is also true when planning for retirement. While financial wellness isn’t always a straight-forward journey, it’s important to set aside some money for later life. Having a defined plan to save and invest your funds will help you prepare for the future when you’ll no longer be part of the workforce.

Additionally, sound financial behavior can also favorably impact your immediate social and physical wellbeing. According to the Sleep Foundation, financially secure individuals tend to experience better sleeping patterns as they have lower anxiety levels when it comes to household bills. Better still, having a set budget and a safety net for emergencies will also strengthen your mental health, resulting in a range of positive changes, including stronger relationships, increased confidence as well as a more optimistic outlook on life.

Similarly, enhanced financial security can also help you feel more at ease at work. A joint study by the Employee Benefit Research Institute (EBRI) and the International Foundation of Employee Benefit Plans found that financially secure employees are 12% more productive than their money-stressed counterparts. This is partly due to the fact these employees have higher levels of job satisfaction, lower rates of absenteeism and can clearly see how their income contributes toward their wider plans.

How to Improve your Financial Wellness

In essence, financial wellness is a lifelong process that involves discipline, planning and education. Yet, despite its ever-evolving nature, there are also some key practical steps that will help you get the most out of your money:

1. Expand your knowledge: Before you start putting together monthly budgets and establishing long-term goals, it’s important you understand all the options available to you. A recent OEDC/INFE study found that only 34% of adults across 39 different countries displayed sufficient knowledge to make informed monetary decisions. Saving, credit building, and investing are great places to start.

2. Carefully manage any debts: Given loans generally include interest payments, it’s always a good idea to be debt free. That said, certain situations sometimes require us to go beyond our existing means. In these circumstances, it’s important to avoid high-interest charges like those associated with credit card overdrafts as they can quickly become a burden, if not properly managed.

3. Budget: Understanding both your income and spending habits is a fundamental part of financial wellness. Creating monthly budgets will give you a realistic view of your financial situation and help you make well-informed decisions. One of the most common ways to start budgeting is to adopt the 50/30/20 rule, a concept that encourages you to divide your income into necessities, niceties, and savings respectively.

4. Start saving: Regardless of the amount you are aiming to save, it’s important you remain committed to your budget. Fortunately, there are many smartphone apps that can help you keep track of all your purchases. Some of these products, for instance Pocket Guard and Buxfer, will even send you real-time alerts when your spending approaches your limit. Equally, set up an emergency fund. In 2020, nearly 100 million Europeans reported that they didn’t have enough money in reserve to cover their regular expenses for two months. From sudden household repairs to taking days off to look after loved ones, life is full of unexpected twists and turns. Having an emergency fund will enable you to live with adequate breathing space, thus reducing financial anxieties.

5. Consider insurance and long-term investments: Where possible, contemplate protecting your home, your vehicle and any small business you run with robust insurance plans. This coverage will provide you with further stability and peace of mind that unforeseen events won’t impact your personal finances. Likewise, invest part of your savings into something that can appreciate over time. Through the power of compound interest, the value of your investment will likely increase in the long run. For instance, a standard investment in corporate stocks of $100 in 1970 would have been worth over $27,000 in 2024. Boosting your funds this way helps reverse losses in purchasing power while also giving you more financial freedom in the future.

Want to learn more?

Given the path to financial wellness begins with a sound understanding of how to best manage your money, why not start by exploring our financial literacy guide. Offering budgeting tips and in-depth insight into microfinance and compound interest among other topics, our tailor-made guide details the full scope of our personal finance content.