The Art of Business

Financial Wellness: The Seven Steps
How to Achieve Good Financial Health

After physical health, good financial health—or financial wellness—is one of our most important goals. We strive to achieve a certain level of security in our financial lives and often find the achievement of this goal a struggle. While everybody’s situation is different, the basics for achieving financial wellness start with some simple rules.

Live within your means. I find one of the biggest problems that clients face is managing their spending. The first step is a written budget that should list what you expect to spend each month on living expenses and what you actually spend. I advise clients to engage in this process for at least six months to accurately account for all spending. Don’t let the ATM withdrawal slips go unaccounted for. While the ease with which we can all access cash 24 hours a day is terrific, it wreaks havoc on our budgets. Habitually, we all tend to spend more as we earn more. Keep a tight rein on spending and try not to spend your hard-earned raises. If you get a raise, allocate it to savings and investments, not to buying yourself presents. My best piece of advice—don’t worry about what the Jones’ are doing.

Don’t spend money you don’t have. Credit cards are one of American’s biggest problems. This is where the depression-generation has it right—you don’t buy things if you can’t pay cash—period. No savings plan can work effectively if you’re buried in debt. And it just doesn’t make sense to make minimum payments on credit cards charging you 15.9 percent while you add to your savings account that pays you 2 percent! Pay down your debts first and then start a savings plan. While it’s a risk that something might happen that requires emergency funds (i.e., the furnace needs work, the refrigerator breaks, or the kids need braces) while you’re paying down your debt, the math still makes sense. Get rid of high interest rate debt first, not the smallest balance. What if the smallest balance is charging you 9.9 percent while the highest is charging you 19.9 percent? You’re working against yourself if you’re paying off the lower-interest rate card faster.

Pay yourself first. Out of every paycheck, put a fixed amount or fixed percentage toward your savings and investment plan. You’ve heard this time and again. Do It! You should save between 10 to 15 percent of your gross income (including retirement plan investments). If you wait to pay yourself until last, you’ll never have a savings plan and will always be struggling to play catch up. Again simple math gives us the answer—the sooner you get started putting aside for the future the more you’ll have later. (If you’ve got credit card debt, see the rule above.) Hot Tip: Contribute the maximum to your 401(k); not just what your employer matches.

Establish a Contingency Fund. Some call this an emergency fund or a rainy day fund. Whatever you call it, get one. You should be able to cover your living expenses for a three-to-six-month period, depending on the stability of your job or security of your income. Assuming your debt is paid off (excluding your mortgage and automobile payment), you should have a Rainy Day Fund so you don’t turn to the credit cards when your refrigerator breaks, the roof leaks, or you need a root canal! If you use money from the Rainy Day Fund (which should be for emergencies only, not buying a new 36-inch TV!), replenish it as soon as possible.

Saving and investing are two different things. Saving is for short-term needs; investing is for long-term needs. That’s the bottom line. You don’t buy stocks if you’ll need the money in three years to buy a house, and you don’t save for your retirement in a savings account. Always, always, always utilize no-load mutual funds. There is no point in paying 5 to 5.75 percent, whether it is an up-front or deferred charge (AKA A shares or B shares), to own a mutual fund. If you can’t find one on your own through www.morningstar.com, find a fee-only advisor who can tell you where you can get one.

Get a second opinion. If something about an investment or savings program sounds fishy, it probably is. Get a second professional opinion. Don’t necessarily trust your best friend or your pal from work because they might not know either. When trying to find a financial advisor, go to www.cfp-board.org or www.napfa.org to download questionnaires that you can use to interview prospective advisors. To check on the disciplinary history of your stockbroker (if they’re not a fee-only planner, but work for commissions), go to www.nasdr.com.

Learn about it. Don’t entrust somebody else to manage your entire financial future. Get involved with your money and your own financial wellness. That old saying that “an educated consumer is the best customer” is 100 percent correct. You should get involved and you should educate yourself. Take classes, subscribe to Smart Money magazine and read the Wall Street Journal—you’d be surprised how much you can learn about this very important aspect of your life.

—Robin Vaccai-Yess

Robin Vaccai-Yess is a Certified Financial Planner and a Certified Divorce Planner. She is the founder of Center for Financial Wellness, Inc., a fee-only financial planning and advisory services firm based in Highland, New York. Visit her on the web at www.financiallywell.com. 691-9700.