Financial wellbeing, or peoples’ own perspectives on their financial situation, is sometimes referred to as the ultimate measure to evaluate financial health. Financial wellbeing centres around having a sense of financial security and an absence of distress, by having enough income to meet your needs. Here we will map out how you can take steps to improve your overall financial wellbeing.
- Understanding your financial situation will lead you to the right path
- Knowledge is wealth
- Consider diversifying your income streams
Research from the Consumer Financial Protection Bureau (CFPB) defined financial wellbeing as a state of being wherein a person:
- Has control over day-to-day, month-to-month finances;
- Has the capacity to absorb a financial shock;
- Is on track to meet financial goals; and
- Has the financial freedom to make the choices that allow him or her to enjoy life.
So how can you make sure all of your financial bases are covered?
Understand your financial situation
Achieving financial freedom starts with assessing your current situation. If you only have a vague idea of where you are starting, then you cannot properly formulate a plan to move forward. Knowing your financial situation is the essential first step in the right direction.
Firstly, compile a list of all of your debts. This includes: mortgage payments, student loans, credit cards, car loans or things that you know need paying off.
Secondly, take a look at your savings. This may include stocks/shares you own, savings accounts, retirement plans (company matching retirement plans), and any other cash you’ve accumulated over the years.
Thirdly: consider your income (whether active or passive)
By doing this you are mapping out what needs to be managed and what needs the most attention. Knowing this can help you determine the next steps you need to take in managing your personal finances.
Change the Way you View Money
The way we view money varies from person to person, as we all have different goals in life, different levels of understanding and different thought processes.
Recent research surrounding the pandemic has shown that individuals with a less pessimistic view regarding the impact of COVID-19, on private economic situation, displayed higher financial wellbeing. Additionally, it has been seen that individuals with greater financial ignorance (the tendency to neglect and avoid relevant, freely available financial information) have more negative financial wellbeing. Therefore, it would appear when it comes to money, ignorance is not bliss!
Taking an active approach to processing financial information could offset, to some extent, the perceived negative effect of the impact of COVID-19 on financial wellbeing.
Plan for your Financial Future
To be financially healthy differs from person to person, as the things that make you feel safe and happy will be different from those of someone else. Creating financial goals and aspirations can lay the groundwork for the future as “contextual factors and personal aspects shape financial wellbeing during turbulent and stressful times.”
If you are considering making investments in stocks or shares, there are plenty of resources you can use to gain knowledge. Conventionally, it would be a good idea to consult a financial advisor on your steps going forward, however, this is expensive and not for everyone. Nowadays, financial advice is easier to come by as investment firms like Vanguard and Fidelity offer “Robo-Advisors”. Robo Advisors give you advice from mathematical algorithms with little to no human intervention making them a good starting point.
To diversify your income means adding multiple streams of revenue to supplement your current job. This could ease financial anxiety, increase perceived financial security and lead to financial freedom.
With uncertainty in the economy at the moment, now might be a good time to sure-up existing income streams or start to diversify, to manage external risks and give greater capacity to absorb a financial shock. If you already have multiple streams of income, the goal should always be to maximize the potential returns in each income category you have.
So, if you have ever thought of diversifying your income, you might ask – how do I start?
Your income can be is split up into four main categories: primary salary, secondary salary/spouse’s salary, investments and rental property, and hobbies/online business. These can be further divided up into active and passive income streams. Active income is earned from a job, typically with an employer or running a business. Passive incomes can come from a number of different sources such as investments, royalties – basically, it’s money that pays even when you are sleeping. Passive income is the typical route for many people when considering income diversification. Although remember, initially it takes a lot of work to get the project set up and running. Here are some ideas:
- Start a passion project on web-based platforms such as Shopify & Wix;
- Look into diversifying your investment portfolio – you could look at Domestic stocks, bonds, index funds, and ETFs as a starting point;
- Sell the skills you already have through teaching!
These ideas can be a great starting point, but there are hundreds of different projects or plans that can be created. To approach diversifying your income, the internet can be your best friend. Find something that sparks your interest and stick with it. Doing this could give more freedom to live life to full and possibly alleviate the stresses and worries that financial pressures can put on you.
Taking steps to improve your financial wellbeing now can lead to an all-around healthier and happier life for the future.
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