The 4 Pillars of Financial Wellbeing
People often ask why we make such a big deal of financial well being and often tell me it feels tacky to talk about money with others. Over the last few years I have come to learn that financial education and knowledge is often underestimated. Most of us most likely know all the basic concepts but when it comes to implementing these in our lives and making good decisions, a lot of us (myself included) fall short. People often ask why should we be focused on money? Money just buys stuff and does not buy happiness. My answer to them is money buys us choices in life and secures your financial freedom which can help you to live your life happily.
So below are some basic principles (or 101s) of financial well being that I have come to live by. If you are already following this, great! You are already in great shape. If you are not, don’t feel judged – simply read through and figure out what baby steps you can take to implement these:
- PILLAR 1: Begin with the end in mind: Stephen Covey in his book “7 Habits of highly effective people” talks about the habit of beginning with the end in mind. What are your goals? Is it a comfortable retirement, early retirement, getting your kids through college, something short term like a fancy vacation, or something more radical like a 1-year sabbatical or a bit of everything? Whatever it is, it is your choice, and this helps you define the why for financial wellbeing. This becomes your starting point both quantitatively and qualitatively on your goals.
- PILLAR 2: The gap between what you make vs what you earn – Lets keep this simple – you need to spend less than you earn. The gap between your expenses and income needs to be as big as you can afford. The bigger this gap, the faster you can accomplish your goals. On one hand, you want to earn more. On the other hand, you should aim to reduce your expenses. Having a budget and tracking your expenses is an important part of this. There are different online tools to help you do this effectively. I personally use Mint.com to track our monthly expenses. A good spreadsheet will do too. But having a good understanding of how much you are spending and where your money is going is foundational.
- PILLAR 3: My financial moat (a.k.a my emergency fund) to protect my castle! Everyone needs to keep an emergency fund! Depending on your family situation (dual income earners vs single income earners), traditional wisdom advices having 3-6 months of living expenses in your emergency fund. In uncertain economic times like these, its not a bad idea to be more conservative to have even 6-9 months of expenses. I suggest keeping a separate account for this, so you are not tempted to touch it. Do not try to invest this money in the market. Put it in a simple savings account, preferably one of those high yield online savings accounts. This is your cushion to ensure you are protected when unexpected events like a health emergency, job loss or an expected large expense hits you. It also makes you sleep better at night.
- PILLAR 4: Pay yourself before you pay others – meaning, most people think of a budget as paying your bills first and the leftover (if there is any left) is your savings. Well I challenge you to re-think your paradigm. First you pay yourself by putting money in your 401K, Roth IRA, college fund etc and whatever else you wish to save for and THEN, pay your bills. You might say that leaves very less for paying your bills. That’s your opportunity to assess both your savings and spending goals. Btw, once you figure this out, you will be better off automating your savings so every month, money automatically goes into your savings goals.
As I mentioned before, if you feel like you are far away from implementing these, don’t fret. Just take one small step today to get you closer and take another step tomorrow and so on. Eventually, these small steps will look like a giant leap when you look back!
Thank you for reading and I look forward to coming back later this month and sharing some more thoughts on financial wellbeing!
DG
Disclaimer: I am not a financial advisor and all the information in my articles are from my personal experience and are for informational and educational purposes only. Please consult with a financial advisor or CPA for professional advice.
