Understanding financial wellness

What is financial wellness?

Financial wellness is the ability to meet financial obligations and stay on track to meet future goals. It encompasses aspects like budgeting, managing debt, saving for emergencies, investing to achieve goals, and making informed financial decisions to help you feel more financially secure.

Wondering how Americans stack up? The average American adult has $6,501 in credit card debt.¹ And about 34% don’t have enough money to cover an emergency expense of $1,000 without taking on debt.²

The good news? There are steps you can take today to boost your financial knowledge and improve your overall well-being, which we'll cover below. 

Benefits of financial wellness

Financial wellness can improve your well-being by helping reduce stress related to money. 65% of Americans surveyed say money is a significant source of stress; among those under age 43, that figure jumps to 82%.³ Personal finance issues can affect mental and physical health, sleep, self-esteem, relationships at home, and work productivity and attendance.⁴

Fortunately, focusing on financial wellness offers several benefits. It can help you:

• Take a proactive approach to getting your finances under control.
• Meet unexpected expenses.
• Set the stage for financial gains and emotional wellness.
• Feel a sense of security and control over your financial future.
• Enjoy a more balanced, healthier lifestyle.

How to improve financial wellness

Balancing multiple financial goals isn't always easy, but Vanguard's financial wellness guide (PDF) identifies steps you can take to overcome challenges and achieve key financial milestones. It's built on a three-part flexible framework designed to help you balance current and future goals, build confidence, and progress toward financial freedom.

These 3 steps can help you identify opportunities for change, meet near-term financial obligations, and keep you on track to meet future goals:

1. Take control of your finances

Understanding your spending and saving habits and ensuring they align with your goals can contribute to financial wellness. Taking control of your finances begins with creating a budget and pursuing potentially rewarding opportunities that could improve your financial situation.

• Create a budget that works for you. Our wellness guide has 4 popular budgeting methods and makes it easy to choose which budgeting style works for you based on 2 factors: what you want to budget for and if you like tracking your spending. Find a strategy that works for you, and that you can stick with over time.
• Maximize your employer-matched savings. Find out if your employer plan offers a match. If it does, make room in your budget to contribute and earn the full match.
• Pay the minimum on all your debt. Pay at least the monthly minimum(s) on all your loans. This will reduce costs over time and help improve your credit score. To ensure you don't fall behind on your payments, set up a reminder or automate them to save time and energy.
• Pay down high-interest debt. Allocate as much as you can toward paying down high-interest debt. Increasing the monthly payment or taking advantage of onetime windfalls, such as tax refunds and work bonuses, is a great way to save on interest charges and free up more money for other priorities. 

2. Prepare for the unexpected

These strategies can help you maintain financial stability in the face of life's uncertainties:

• Set up emergency savings for spending shocks. Aim to save at least $2,000 or half a month's worth of living expenses (whichever is greater) in a cash emergency fund for common spending shocks, such as a flat tire, home repairs, or unexpected travel.
• Build up a contingency reserve in case of job loss. Aim to have about 3–6 months' worth of living expenses in readily accessible investments, like a taxable brokerage account, to cover an unexpected income shock.
• Evaluate your insurance needs. It's important to consider which insurance features are essential to you and worth the cost. At the very least, consider purchasing health, life, disability, auto, and homeowners or renters insurance.
• Get your legal documents in order to ensure your wishes are realized. Establish your will(s), name your beneficiaries, and designate a power of attorney.

3. Make progress toward your goals

These steps are designed to help you explore additional ways to stay on track with your longer-term goals.

• Increase your savings and make the most of tax-advantaged accounts. Consider saving more in tax-advantaged accounts to help fund a comfortable retirement, cover education expenses with 529 plans, and manage current and future health expenses with health savings accounts (HSAs) and flexible spending accounts (FSAs). Here are some effective saving strategies for lowering investment taxes.
• Explore taxable accounts for added flexibility. Although these accounts don't offer tax benefits, they do provide flexibility. You can use them to save more than the amounts allowed in tax-advantaged accounts for retirement, health, and education, or to save for shorter-term goals such as house and vehicle down payments, vacation, and early retirement.
• Consider paying off lower-interest debt. Evaluate your comfort level with debt and your liquidity needs. Determine whether you'll feel more peace of mind from paying down low-interest debt, using the extra money to invest and potentially earn a higher return in the market, or having additional cash on hand to cover emergency spending needs.
• Develop a charitable giving strategy. Reflect on your desire to pass down assets to loved ones or support charitable causes. While your philanthropy may come with potential tax benefits, there are 2 key considerations to keep in mind: First, although donations to qualified organizations offer potential tax benefits, those benefits rarely exceed the total cost of the gift.⁵ Second, giving away assets today may affect your ability to achieve other financial goals. Before getting started, think through the benefits, timing, and amount of your gifts, and explore available ways to maximize the impact of your gift.

Achieving financial wellness

Vanguard's mission is to take a stand for all investors, to treat them fairly, and to give them the best chance for investment success. Part of that success includes being able to allocate budgets to pay bills, tackle debt, prepare for the unexpected, and invest to achieve long-term goals. Objective, straightforward research on financial wellness and quality advice and guidance can help investors meet those goals.

Vanguard's guide to financial wellness (PDF) is designed to empower investors who are still accumulating assets, no matter where they are on their financial journey.