Money is the number one cause of stress. Here’s why financial wellness is essential to your self-care routine.
This article is part of our Financial Series where we explore complicated money-related topics and their connection to our mental well-being, sustainability, and future. Read our first piece, How to Financially Prepare for Children.
It was Snoop Dogg who once said, “I got my mind on my money and my money on my mind.”
In the midst of a student debt crisis, a staggering racial wealth gap, and a skyrocketing inflation rate, that should come as no surprise. About 60 percent of Americans live paycheck to paycheck. And on average, Americans carry more than $6,000 in credit card debt and $93,000 in overall consumer debt, which includes credit cards, auto loans, mortgages, personal loans, and student loans. About 48 percent of hourly workers don’t have a single cent in emergency savings. The story is the same for those in their prime working years. Millennials earn, on average, about 20 percent less than baby boomers did at the stage of life.
“The debt-to-income ratio of Americans born in the 1980s is higher than any other birth group, making them especially vulnerable to financial setbacks,” writes Charlotte Cowes in the New York Times. “Now that most millennials are in their 30s, a point when many of their parents were able to own homes, they’re squeezed between the worst inflation rates of their lifetimes, eye-watering housing prices, and the precarious fallout of the pandemic.”
Regardless of your age, and in spite of the broader systems working against many Americans, there’s work you can do to feel more in control and less stressed about your financial situation.
Call it financial wellness, money positivity, or wealth care. Ellevest, an investment app whose mission is to get more money in the hands of women, defines financial wellness as “the idea that when you have a handle on your finances, know what to do next to achieve your goals, and regularly practice good money habits (aka financial self-care), you’re more likely to feel confident about where you are and where you’re going — your quality of life improves.”
It’s as simple as having a plan and feeling in control of your own personal financial situation. In the face of overwhelming financial barriers, how is that even possible? Here’s how to get started. For more detailed, personalized, and in-depth support, consult the professionals at Ellevest or another reputable financial institution.
Step 1: Track what you spend your money on.
How do you spend your money? Nearly every bank or credit card app will categorize your spending so you can track it on a weekly, monthly, or annual basis. This will give you an idea of where you might be able to cut back — do you really need to spend $500 a month shopping? — and help hold you accountable to your budget. Speaking of.
Step 2: Create a budget. Try to stick to it.
Start with your fixed expenses — the unavoidable stuff that stays the same each month like rent or the mortgage, a cell phone bill, subscriptions, car insurance, and car, medical, or student loan payments. Then, create a budget for everything else that’s more variable, such as groceries, shopping, gas, and eating out. After tabulating those expenses and comparing them to how much money you have coming in, determine how much you can save each month. The classic rule is 50/30/20, which stipulates that 50 percent of your income should go to your needs (like rent), 30 percent should be dedicated to wants (like, say, a new mattress), and 20 percent to savings.
Track your progress each month — apps like Mint can help. If you go over on groceries one week, try to make up for it the next week. And recognize that this is a practice. Life happens — cars break, unexpected bills show up, and your budget might never be perfect. Give yourself some grace when it’s not.
Step 3: Start an emergency fund.
The first place to put that savings? Start with an emergency fund that has at least a month’s worth of pay in it to fall back on so you’re prepared for the unexpected.
Step 4: Pay off your high-interest debt.
The last thing anyone wants to do is give banks more money for nothing in return. Financial experts recommend paying off your most expensive, high-interest debt first — anything more than 10 percent. For most people, this is their credit card. The average credit card interest rate is a massive 19 percent. That’s a lot — a nice chunk of money you could be investing.
Pro tip: If you’ve been steadily paying off credit card debt for a year or more but still have a ways to go, give your bank or credit card company a call. More often than not, if you’ve consistently made payments on time and pay more than the minimum balance, they’ll lower your interest rate by a percentage point or two — all you have to do is ask.
Step 5: Add to your emergency fund.
Once you’ve paid off your high-interest debt, Ellevest recommends padding that emergency fund so you have three to six months worth of pay in there. That way, you have something to support you — without relying on a credit card — in case of a family or health related crisis, or if you lose your job. Keep the money in a classic savings account, so the cash is readily available if you need it.
Step 6: Pay off your medium-interest debt.
After establishing that emergency fund, it’s time to tackle your medium-interest debt. That’s anything in the 5 to 10 percent range. Once you’ve offloaded that ball and chain, it’s time for the fun stuff.
Step 7: Invest.
Start small if you have to. But whatever you do, start. Because of compounding interest, time is your ally. And make it automatic. Most financial apps or brokers, like Betterment, will set up automatic withdrawals for you so you don’t even have to think about it — the investment is baked into every pay period. Financial experts recommend diversified index funds, which will give you a portfolio of stocks and bonds across the market, rather than trying to guess the whims of individual stocks. There will be years where your fund performs worse and years when it performs better, but the idea is that over time, your average rate of return significantly increases the amount you’ve saved. Though past results don’t foretell the future, the average annual returns of balanced funds since the Great Depression has been 8.5 percent.
Here’s why compounding interest is so effective at generating wealth. Let’s say you’re 30, you have $1,000 to make an initial investment, and you set up automatic withdrawals into the account for $100 every pay period, or $200 a month. Then, when you’re 40, and because your wages have likely increased in that time, you increase your investment to $400 a month for another 10 years. After another 10 years, you’re feeling pretty established, and double the investment again, so it’s $800 a month in your 50s. And finally, when you’re 60, you increase it to $1,600 a month for the last 10 years of your career. At that point, you will be 70. You will have invested $360,000 of your cash, and, given a relatively modest 6 percent annual average rate of return, that will have turned into $913,000. That’s the power of compounding interest.
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