There are 3 phases of Financial success – Financial Wellness, Financial Freedom and Financial Independence. The internet is full of information on Financial Freedom and Independence. But what is Financial Wellness?What is the difference between the three? Why is Financial Wellness important? and, What are the steps to reach it?
My Journey to Financial Wellness
Prior to sitting down and creating our plan to Financial Freedom, I thought that getting out of debt and becoming “Financially Free” was going to mean two things…
- It was going to take forever and be miserable.
- It was going to require a lot of complicated financial knowledge that I didn’t have.
With six more years of student loan payments and feeling I lacked the financial knowledge I needed, I felt hopeless and stuck. But it turned out that with the right information and some extra motivation, it was something even a broke, rock climbing, history major could do, and in far less time than originally thought possible. It doesn’t take overly complicated strategies to start seeing progress. It just takes a little bit of knowledge, a lot of focus and readiness to take action.
Not only that but Rebecca and I discovered another huge milestone on everyones journey to Financial Freedom that often get’s overlooked – Financial Wellness.
What is Financial Wellness?
The first Waypoint on the journey to Financial Freedom, is Financial Wellness.
Called financial wellness because of the impact it has on your overall wellbeing, the benefits are unbelievable when you reach this milestone! Everyone knows that money and financial stability are incredibly important. But not everyone understands the impact financial stress can have on your mental, emotional and even physical wellbeing. [ Hear us talk more about this in our podcast episode: Can Money Buy Happiness?]
What is Financial Freedom?
Financial Freedom is being free from debt, in addition to the accomplishments made achieving Financial Wellness.
What is Financial Independence
Financial Independence on the other hand is when you have enough wealth to pay for your life without having to work. This involves a strategic plan to save, invest and manage your money in a way that allows you to “retire” either early or on time.
Why is Financial Wellness Important?
That said, it can be very helpful to set your sites first for Financial Wellness, freedom from debt etc. will come later. Starting with the fundamentals of a financial strategy and reaching Financial Wellness is not only a necessary stage for everyone to go through. But when you break a large goal down into smaller tasks, your success rate is usually higher.
In addition to that, the most important thing is to make sure you take the following steps to reach Financial Wellness in this exact order. Think of it like building a strong foundation before you start building your home. Similarly, you have to build a strong financial foundation that you can build upon.
By the time you complete all three of these steps, you will have built the foundation that will lead to long term financial success and a healthier, happier life with less stress, anxiety and more freedom of choice in your life.
Step 1: Save $2,000
Saving $2,000 OR 1 month’s worth of income is a major step forward in your financial journey.
By saving what we call a “starter emergency fund”, you are officially breaking the cycle of living paycheck to paycheck. This is a crucial first step because it means that when something comes up or an emergency arises, you can pay cash rather than going further into debt.
Reaching this first milestone is usually accompanied by a big breakthrough in your mindset about money and acts as proof that you are capable of making progress! But don’t stop now! It’s time to make some big time money moves.
Step 2: If you have debt – get out of it!
Despite what you have heard, paying off debt is more important than you think. We’re not going to get into the whole “good debt vs. bad debt” discussion so many people get distracted by, because at the end of the day, debt works against your ability to save. There is simply no denying it.
Not only are interest rates on your debt higher than the interest rates of a savings account, but between car payments, student loans and credit cards odds are your cash flow is tied up month after month for payments towards debt. So if you try to save and pay off debt simultaneously, not only will you end up paying more in interest on debt than you would make in a savings account. You’re also unable to save and invest as much as you’d like.
If you have a lot of debt, this step can feel overwhelming but that’s normal. Instead of thinking of the total debt, break your debt into each individual account and create smaller, more digestible milestones and concentrate your financial resources on paying off one at a time.
What’s the best way to get out of debt? Glad you asked. And if you’re still in school here are ways to avoid student loan debt.
*At this step you are focused on all your debt except for a mortgage.
Step 3: Create a 3-6 Month Emergency Fund
If you are at this step congratulations! Not only do you have a starter emergency fund, but you also reduced your monthly expenses and increased your Cash Flow! It’s time to buy yourself a nice bottle of champagne and celebrate! You earned it.
Now that you’ve gotten this far, this next step will be completed before you even know it because you’ve set yourself up for success! With the uncertainty of life being so magnified in 2020, we can all agree in the importance of a substantial emergency fund.
The amount you set aside for this purpose comes down to personal preference and you and your families comfort level. The purpose of this fund is to protect you from going into debt when the unexpected happens. Losing a job, car repairs, flooded basement, etc. we don’t always know when these things will happen, but they happen. When you have an emergency fund you can manage these surprise financial burdens without putting yourself back into debt, undoing much of the hard work you did in Step 2.
PRO TIP: It is best to keep your emergency fund in a separate account to avoid accidentally spending it. You should also seek out High Yield Savings accounts that pay you a much higher interest rate than a run of the mill savings account that doesn’t provide a great interest rate. You can learn more about these types of accounts and how to shop for them in this blog about savings accounts.
What Comes Next?
Once you complete all 3 of these steps – congratulations are in order! Not only have you improved your financial life, but you are likely experiencing less stress, have more energy, are enjoying happier relationships, and feeling like there are more opportunities now than ever before. But don’t stop now – things are just getting interesting! Once you have mastered your cash flow and gotten out of debt, it’s time to grow and to set your sites on building the life you have been dreaming about!
After reaching this point of financial wellness, it’s time to set your sites on bigger goals like Financial Freedom.
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