What does it mean to be financially well, and how can you get there?
Financial wellness is the great feeling that comes from having your income, expenses, and savings working together—all toward your goals big and small. It puts you on track for retirement and that trip next year. It also puts you on track for all kinds of things in between, like paying off student loans and owning a home.
As for how you can get there, you’re already well on your way with us. This guide shows you how. You’ll discover straightforward steps that can improve your financial health and ways you can prepare yourself for both the expected and unexpected turns of life. And you’ll also see how it all comes together as part of the personalized roadmap you get with Facet.
The four keys to financial wellness
Financial wellness is definitely a great feeling, and it has to come from somewhere. In concrete terms, that great feeling comes from having four things in play:
- Effective cash flow management
- A strong foundation of savings
- Effective debt management
- Planning for goals big and small
Each one is important on its own, yet the real magic happens when you improve them together as part of the personalized financial planning you get from Facet. We call it a roadmap, and that roadmap is flexible. It takes thoughtful twists and turns as your life takes its own twists and turns, planned and unplanned.
That’s where your action reminders and access to your planning team come in. Together, they keep you on track. And you can keep all of that in mind as you read through this article. We’ll cover a lot here, so know that we’re by your side as you improve your financial wellness.
Let’s take a look at each of these keys to financial wellness and the role they play in your roadmap.
Cash flow management
Cash flow management keeps tabs on your money as it comes in and as it goes out. In effect, it balances your income with your expenses so that you can live comfortably while also putting money toward your goals.
One popular cash management framework is the 50/30/20 rule. This rule recommends setting aside 50% of monthly take-home income for needs, 30% for wants, and 20% for savings and debt repayment. “Needs” are things like rent, food, and transportation. “Wants” can vary, yet things like weekend getaways, entertainment, and grabbing a bite out all come to mind. (We’ll talk about savings and debt repayment in a bit.)
Determining your cash flow is easy. Write down your monthly income, including sources of passive income like interest from high-yield savings accounts. Next, subtract your expenses. This gives you a view of what money’s coming in and what money’s going out.
You might want to track your expenses for several months rather than just one at a time. You might even want it to cover an entire year. That way, you catch all kinds of income and expenses that don’t crop up every month. (Things like estimated tax refunds, annual car insurance renewals, your Office 365 subscription, and even online game subscriptions come to mind.)
The goal is to get “cash flow positive,” which is another way of saying you’re bringing in more money than you spend. Over time, you can put that money to work for you, like savings toward a down payment on a home and investments that bring in yet more money.
Importantly, it can also set you up for the unexpected. It gives you a cash reserve so you can weather financial emergencies like car repairs, medical expenses, a job loss, and so on.
Building a strong savings foundation
On the topic of weathering the unexpected, a solid savings account can provide you with a critical safety net for emergencies and unforeseen expenses.
We recommend saving three to six months’ worth of living expenses in an emergency fund, depending on your situation. For single people, your emergency fund should cover three months’ worth of living expenses. Families should save six months’ worth of living expenses.
That’s not to say that your emergency fund has to sit there waiting for a rainy day. This money can still work for you. A good example is placing your money in a high-yield account (HYA), where the money you put in grows with compound interest. HYA’s typically offer more competitive interest rates than traditional savings accounts, CDs, and money markets.
We strongly recommend HYAs for many of our members. And it’s not because of the higher rate alone. It’s because of how that higher rate can create compound interest. Here’s a quick example:
- Imagine depositing $5,000 into an HYA that offers a 4.4% yield annually.
o That $5,000 is called your “principal,” the money you initially invested.
- Year one, that $5,000 would earn $220 in interest. Your total account is now $5,220.
o In other words, you now have $5,220 in principal.
- In the second year, you’d earn about $230 in interest on that balance of $5,220.
o Now, you have $5,440 of principal in your savings. And you didn’t have to lift a finger.
You can see how the interest “compounds.” Your principal grows every year and creates new interest that further adds to your principal. Now, imagine if you deposit more principal every year. You’ll see that compound interest really takes off. Your original savings, interest, and newly deposited savings will all compound interest. You can take a deeper dive on this approach in our article on compound interest.
One last note on HYAs … you can access that money just like you would any regular savings account. Be sure to read the terms of the account. Different HYAs have different terms for things like minimum balances, direct deposit, and maintenance fees. (We can help if you have questions.)
Tackling debt effectively
Tackling debt does two powerful things for you. First, it takes a financial burden off your shoulders. Next, it lets you put money towards savings and investments. When you tackle debt, your money goes toward your objectives, not a lender (and any interest they charge).
One debt reduction plan is called the “Debt Snowball Method.” You pay the smallest of all your debts as quickly as possible. Once you’ve tackled that debt, you take the money you put toward that smaller payment and then pay off the next-largest debt as quickly as possible. From there, repeat as needed to eliminate all your debt.
For example, let’s say you have $750 a month for paying off debt and the following debts you want to pay off:
- $500 credit card, with a minimum $50 monthly payment.
- $1,200 laptop payment, with a minimum $75 monthly payment.
- $20,000 student loan balance, with a minimum $300 monthly payment.
You need $375 to pay for your laptop and loan each month. Subtracting the $750 you have for paying debt leaves you with $375 that you can put toward your credit card payment. Once that’s paid off, you need to pay $300 for your loan each month, leaving you with $450 that you can pay toward your laptop.
In just a few months, you’ve paid off your credit card and laptop and you’re left with a rapidly decreasing student loan that you can pay $750 toward - a full $350 over the minimum payment. Not only does that clear your debt more quickly, you pay less interest as you do.
Another is the “Debt Avalanche Method.” It’s a lot like the snowball approach, yet this tackles debts by paying off the accounts with the highest interest rate first. Once that’s paid off, you take the money you were paying into that account and start paying down the account with the next-highest rate.
Using the same example above, you’d tackle things in this order:
- $1,200 laptop payment, with a minimum $75 monthly payment. The interest rate is 28.95%
- $500 credit card, with a minimum $50 monthly payment. The interest rate is 22.65%.
- $20,000 student loan balance, with a minimum $300 monthly payment. The interest rate is 5.99%.
So, you need $350 for the credit card and student loan, leaving you with $400 you can use to knock down the high interest laptop payment.
Which method is best? That depends on you and your situation. Your facet planning team will suggest the best plan for you when creating your roadmap. And as always, you can message your team with questions any time.
Planning for a secure retirement
The last key to financial wellness involves retirement planning. While it offers peace of mind later in life, it offers peace of mind right now too because you have a plan for your future. Plus, depending on your approach, setting aside savings for retirement can create immediate tax benefits or tax benefits later down the road.
Our article on unlocking the potential of your 401(k) touches on these and other retirement topics in deeper detail. For example, investing plays a crucial role in retirement planning. You’ll want to see what works for you, like your planned retirement date and your willingness to withstand the risks of the market. As with every aspect of financial wellness we’ve talked about so far, your planning team can help you set and adjust your plan as needed.
Your Facet Roadmap, where your financial wellness comes together
We covered plenty here. And while it gives you plenty to consider, know that you aren’t tackling your financial wellness alone. We’re your guide on this journey, from the short steps like paying down credit cards, to the big steps like owning your own home.
Once again, the four keys to financial wellness are:
- Effective cash flow management
- A strong foundation of savings
- Effective debt management
- Planning for goals big and small
And they all come together in your Facet Roadmap. It gives you clarity and direction in your life, helping you see where you are now, where you want to go, and exactly how to get there. It simplifies complex decisions by breaking them down into manageable, actionable steps, all with improving your financial wellness in mind.
The thing to keep in mind is that your roadmap changes as your life changes—just as your GPS reroutes your drive when it spots traffic up ahead or when it uncovers a time-saving route.
That’s as it should be. Life is full of financial transitions that call for flexibility. Career changes come to mind, along with the potential shifts in income that come with them. Family milestones such as marriage and having a child can also impact financial wellness. A flexible plan will help you make the absolute most of those transitions. Unforeseen changes come up too. Your roadmap can prepare you for those as well.
As questions come up, we’re here. Reach out to your planning team for advice, guidance, or simply a little help with a problem that’s cropped up. We’re always here to help.
