Happy Spring! It’s the season of transitions, renewal, hope, and growth; it’s also the season of makeovers, de-cluttering, and getting back to basics.
Spring cleaning often bring order and the peace of mind. The same is true when your finances are in order and you understand what you are earning, spending, and where you can find cash flow to save and invest. This tax season is the perfect time to focus on basic elements of your financial well-being.
Financial wellness is as important as physical and emotional wellness, and in fact they are related. Consider yourself a person who attained a level of financial wellness if you meet the following criteria:
- You have minimal financial stress, or at least a manageable level; finances are not keeping you up at night and stress is not impacting you physically or emotionally
- You have a very strong financial foundation: strong emergency fund (at least six months of living expenses if you have uneven stream of income); proper insurance based on your circumstance – if there were something to happen to you, your family would be ok without you
- You have an ongoing plan and you are on track to achieve your financial goals at the desired timeframe – buying a car, home, sending children to college, expanding your own business, taking a sabbatical, or leaving a legacy
If you meet the above criteria, consider yourself financially well. Even though you may not be entirely financially secure, you know that you have structures, behaviors and habits in place to ultimately be in a position to work because you want to, not because you have to.
Attending to your financial well-being is as much about the numbers as it is about your relationship to money. To help you gain clarity, start with asking yourself the following questions:
- Why money is important to me?
- Why do I invest so much of money and time in X?
- Why do I spend so little on Y when I claim it’s so important?
- Why do I save as much (or as little) as I do? What am I hoping to achieve?
Thinking about money is a process that gives us an opportunity for introspection and personal growth. In my experience business owners are particularly thoughtful about asking these kinds of questions. Eventually, you’ll still get into budgeting and numbers, but the “what” and “how” will help to more organically integrate money into your life.
Getting clarity about money related issues like spending, savings or investing fits perfectly into a paradigm of well-being when we begin to view it as a form of self-care. Just as you go in for regular health check ups, do frequent check-ins on your financial well-being.
Ask yourself if there isn’t more you can do to enhance your financial wellness. The following are the foundational areas to address:
- SPENDING PLAN (aka BUDGET): most people equate a budget with limitations, if not with an outright deprivation, but think of it as a tool to help you prioritize spending decisions; think of budgeting as less about numbers and more about personal awareness; spending plan forces you to face the reality that none of us has unlimited resources; it also reveals the gap between what you say is important to you and how you spend your money
- SAVE: guaranteed way to bring calm and confidence into your life is by deciding how much of your paycheck can you, and will you, leave untouched; putting money aside is a way of caring for your future self; the rule of thumb is to save 15-20% of your income, but if you can’t do that, save as much as you realistically can; think of it as your freedom fund, because freedom is what it’s going to buy you in the future
- INVEST: the need to invest can easily be compared to our need for exercise; we exercise to fight the corrosive power of ageing – we invest to fight the corrosive power of inflation; your savings should be invested, rather than kept in a money market fund with low interest rates, otherwise, inflation will erode the value of your assets
- PROTECT: most business owners invest in ensuring their family’s well-being with health and life insurance, but many don’t consider other things that can leave their family vulnerable like the costs of long-term disability care; in general, you should buy disability insurance before any other type of insurance coverage – if you take your income and project cumulative value of your salary over the next 10 years, it adds up to hundreds of thousands of dollars; on most entrepreneurs’ balance sheets nothing comes even close to its value
How can you make big changes to your financial wellness? Think small wins. Don’t spread yourself too thin. Just make one or two important moves. Find one or two good tools that can help you, and stick with that. If it feels like too much, reach out to a financial planner for help. Remember why you are doing this in the first place – to reduce stress, to bring order, calm, and confidence into your financial life. Taking care of your financial wellbeing is a practice and a lifestyle, very much like what’s required to maintain your physical well-being.
Use this tax season as an opportunity to look at your finances, clean things up, and get back to basics. Bring clarity and simplicity to your financial life – so you can focus on those things that are most important to you.
Joanna Nowak is a Certified Financial Planner and Wealth Advisor. Find out more at www.moneywisefa.c