Chances are you have received offers in your mail encouraging you to sign up for a new credit card, informing you that you’ve been pre-approved for a loan that you were not even considering, or of the chance to get the car of your dreams with no down payment and a low monthly fee. In some cases, it might make sense to take any one of these offers. Most of the times, however, you should not accept such offers to acquire debt, regardless of how appealing they are packaged. This is because the decision and actions to become financially smart is some of the most important steps you can take towards achieving a state of wellness.
Being Financially Smart is Associated with Wellness
There is a pretty strong association between wellness and finances (Larrimore, 2011). With money, you are more likely to be able to get the education. This can, in turn, help you to better understand the word and society and, hopefully, to make good choices. You are able to buy better quality food, and to live in a safer, more comfortable, and less stressful environment. All of these things bring about greater peace of mind and an increased sense of wellness.
The disparities between the health of the income groups is especially true in the United States, where the health disparities between low- and high-income individuals is greater than in other developed nations (Khullar & Chokshi, 2018). Of course, money is not a solution to all problems. However, money definitely gives one more options and opportunities. If money is put to good use and is used with caution, it definitely has the potential to make most aspects of life easier.
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Financial Literacy Is Generally Lacking
Unfortunately, financial literacy and financial responsibility are not regularly taught in the United States’ education system. Unless one has parents who have good financial knowledge and skills and instill these upon us, or unless one has the initiative, opportunity, and drive to work to become financially smart, one will likely eventually find oneself in a financially precarious situation.
Individuals lacking financial literacy and financial responsibility might not save for retirement. They might not think to save for a home, or they might not know how to use credit cards wisely. Likewise, they might not seek the education or skills that lead to higher paying jobs, or be able to distinguish a good investment from a bad one. The resulting difficulty with finances usually causes familial stress and strained relationships.
Three Steps To Become Financially Smart
Fortunately, there are ways to take control of your finances and become financially smart. The first step to become financially smart is to recognize the need to make positive financial changes in one’s life. After that, you need to put in the time and effort needed to effect these changes. Following are three basic steps you can take in your quest to become financially smart:
1. Live below your means.
You don’t have to spend all the money that you earn, and much less money that you have not earned. Don’t gauge your lifestyle based on what everyone else seems to be doing. Just because they spend a lot of money does not mean they can actually afford it. Or perhaps they have a very different financial situation than you and can therefore afford a lot more than you can. Instead of comparing your spending habits against those of others, be honest with yourself in terms of what you are comfortable spending.
Also, keep in mind that buying more than you need can lead to problems. Buy too big a house, and you will have to deal with a bigger mortgage and higher maintenance costs. Purchase a luxury vehicle and you will have to pay more for any replacement parts or repairs. Of course, buying cheap things is not always the good thing either. This is especially true if their quality is so poor that its life expectancy or effectiveness of the item will not serve your needs well.
In short, do your research. Put in a good amount of thought into your purchases to determine what type of purchase will be just right to satisfy your needs—not less, not more.
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2. Pay yourself first.
You should set aside some money from each paycheck to put into you saving account. Your goal should be to create an emergency fund by saving enough money to sustain your basic expenses in case you are without income. Your saving should be enough to sustain you for a few months, and, preferably, a year. Plan the amount that you will pay yourself ahead of time and stick to this amount. You should treat these contributions as seriously as if you were paying an actual bill. Of course, when choosing your savings account, try to find one that does not have monthly fees, and one which provides you a competitive interest rate. This way your savings account will work with you and not against you.
Apart of paying yourself by regularly contributing to your savings account, becoming financially smart would mean making sure you are adequately insured. For example, you should invest in life insurance if others depend on you. You should also invest in health insurance, because everyone gets sick at some point. Other types of insurance you should consider are disability insurance and personal liability umbrella insurance.
Securing an emergency fund and insurance are ways that you can create a security net. This will provide peace of mind not only for you but also for those close to you.
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3. Invest wisely.
Invest in ways that can save or earn you money in the long run. For example, investing in your education can lead to more career options apart down the line, or help you stand out in your current job. Brewing your own coffee can save you the money you otherwise would spend buying coffee each day. Purchasing a house would allow you to own your home after a finite amount of payments versus infinite rent payments. Owning a washer and a dryer will cost you less on a weekly basis than if you have to make trips to the laundromat.
Once you have made a good amount of contributions toward your emergency fund (perhaps several months worth of living expenses), you should consider starting to simultaneously invest into diversified investment vehicles, such as mutual funds or exchange traded funds. Putting your money into these types of investments is riskier than putting your money into a savings account, but it also opens you to possibly earning you more money in the long run.
Make sure you think through the long-term consequences of your investments and get advice from a financial professional as needed. As with the “pay yourself first” step of becoming financially smart, making smart financial investments should increase your confidence in your financial future.
As Barbara Ehrenreich, author of Nickel and Dimed: On (Not) Getting By in America, very well puts it: “it is expensive to be poor.” (2014) If you are poor you have difficulty buying what you want or need, financing unexpected situations, and investing in things that would be beneficial in the future. This means you don’t have much peace of mind, and are unable to benefit passive income of investing. Even worse, it often means you often have to pay fees for not being able to pay things in full.
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However, everyone, even people who are in a financially trying situation, can overcome that state through persistence and hard work. As you get momentum financially, finances in general will become less burdensome, and you will have more opportunities to save at your disposal. By working towards becoming financially smart, you will set a good path for yourself and your family and possibly also increase your peace of mind and well-being.
Ehrenreich, B. (2014, Jan. 13). It Is Expensive to Be Poor. The Atlantic. Retrieved from https://www.theatlantic.com/business/archive/2014/01/it-is-expensive-to-be-poor/282979/
Khullar, D, & Chokshi, D.A. (2018, Oct. 4). Health, Income, And Poverty: Where We Are And What Could Help. Health Affairs Health Policy Brief. doi : 10.1377/hpb20180817.901935.
Larrimore, J. (2011). Does a higher income have positive health effects?: Using the earned income tax credit to explore the income-health gradient. The Milbank Quarterly, 89(4), 694-727. doi:10.1111/j.1468-0009.2011.00647.x
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