9 Concepts You Actually Need to Understand to Boost Your Financial Health
April is Financial Literacy Month! And while we could give you a list of technical finance terms to know—like amortization, margin, and Sharpe ratios—we thought we’d shed some light on financial concepts that most of us will encounter throughout our lives.
Whether you’re a young entrepreneur or retired, divorced or married, or anything in between, these 9 concepts can serve as a foundation for your financial literacy. If you don’t know much about these concepts yet, that’s okay. We’ll help you learn the basics and understand why they matter.
Below are 9 personal finance concepts that everyone can understand to increase their financial wellness.
You may have heard of a Rainy Day Fund or an Emergency Fund. You can consider a cash cushion to cover both of these. It’s a separate fund where you set aside money solely for covering unexpected expenses, losses, repairs, etc. Set aside enough cash to cover 3–6 months worth of expenses for your cash cushion, but you may want more, pending personal comfort.
Your cash cushion account is specifically for life’s rainy days and emergencies; it’s not expected to be a high income-earning account. Many people use high-yield savings accounts for their cash cushion.
Think of a cash cushion as your safety net for when life invariably throws you a curveball. If the pandemic taught us one thing, it’s that life’s curveballs are not a matter of if, but when.
Life is unpredictable. Having a cash cushion that you can turn to when your refrigerator breaks down, you unexpectedly need new tires, you lose a job, or a family member a medical emergency is critical for your financial wellness.
A 2019 study conducted by the Federal Reserve found that approximately 4 in 10 Americans couldn’t come up with $400 in a financial emergency. And unfortunately, this can force many Americans to turn to loans and credit cards to pay for unexpected expenses, which can then put them in debt.
With a cash cushion, you’ll be more in control, no matter what happens in life.
Risk includes the possibility of loss that can affect personal property, financial legacy, and your dependents. When it comes to our personal finances, we all face risks. From losing your income, to the financial risks of the market, it’s important to understand the dangers that can result in your loss.
You can think of risk management as the process of identifying your risks, analyzing how you want to accept or mitigate them, and implementing a strategy to do so.
The goal of personal risk management is to protect what you create: your goals, dreams, wealth, and wellbeing.
Ways you can help manage your risks are having things in place like:
While we can’t eliminate all risk, there are ways to avoid, minimize, or protect yourself and your family. With clarity and planning, you can manage your risks and better prepare for unexpected life events, safeguard your financial status, and protect your loved ones.
Wealth is often thought about in absolute terms: $1 million, $10 million, $1 billion.
But real wealth is most often about freedom: Money freedom, Time freedom, Relationship freedom, Spiritual freedom, Physical freedom. Wealth is relative, and so is freedom.
“Wealth is the ability to fully experience life.”
—Henry David Thoreau
Wealth depends on your interests, your stage of life, and your values. Every person defines it differently, but ultimately, true wealth is freedom.
Ask yourself, “What makes me feel wealthy?” Is it having control over your time and schedule? Or feeling unburdened by worry or stressful relationships? Or maybe it’s just being able to sip a latte while reading a book.
Whatever it is, defining what true wealth means to you can give you clarity on the goals you should set—goals that will allow you to live the life you envision.
Spending less can be an effective way of managing your cash flow. But you will always have expenses. Maintaining control of your money isn’t necessarily about spending less—it’s about spending smartly.
Spending smartly means you understand your cash flow and align your values with your spending. In other words, it means how you spend is in line with what you value, as well as how much money you have and are bringing in.
If you build your financial wellness strategy only around cutting costs, you can end up focusing your efforts solely on earning and keeping.
The truth? Spending smartly is about spending money on what matters to you. And by not spending smartly, you could be spending on things that you don’t value—which can lead to more financial stress and anxiety.
By knowing how to spend smartly, you’ll have a better picture of where your money is going and feel on top of what your money is doing for you.
The COVID-19 pandemic has fueled our desire for “contactless” transactions and digital payment methods. Even paying for food at a restaurant can now be done from the table on your phone—no cash or physical credit card required.
Other examples include payments with credit card on a website, Apple Pay, Google Pay, and tap-and-go payments with your credit card.
As we move into this cashless era, it’s become easier to disengage with our spending. Subscription programs are a major contributor to this unconscious spending. While subscriptions can make it easier for us to get products and services on an ongoing basis, these costs can quickly add up if you don’t total them up and review the annual impact on your expenses.
If the cash you once physically carried in your wallet or purse helped you to be more conscious in your spending, you’ll need to find new ways to become financially aware—like regularly reviewing credit card statements and subscriptions.
Credit is how much you can borrow, and debt is how much you owe.
Credit allows you to borrow money (or access goods or services) with the understanding that you’ll pay later. When you use credit, you take on debt—the money you borrowed. Debt management refers to the process of organizing and regulating (i.e., reducing or eliminating) your debts.
When buying anything with credit, from a home to a pair of shoes, you agree that you’ll pay back the amount borrowed and the interest over a specified period of time. Using credit creates debt, but your ability to use credit responsibly can also help you qualify for better loans and save money.
Many Americans take on loans such as auto loans, student loans, and mortgages. Knowing the basics about credit and debt is important because your credit rating can affect your ability to get favorable loans: whether you are qualified, the amount you can receive, and the interest rate. Generally, loan applicants with a higher credit rating can qualify for larger loan amounts with lower interest rates.
Your credit may also affect your mortgage rates, credit card approvals, apartment requests, insurance policies, cell phone plans, and job applications. Since your credit can be defined by how you’ve paid (or not paid) your bills in the past, many businesses—landlords, mortgage lenders, utility providers, and even employers—may use your credit information to predict your future financial responsibility.
With active credit and debt management, you can remain more in control. Do you know your credit score? When was the last time you looked at your credit report?
Conversations around money can make us feel vulnerable or uncomfortable. But having open conversations with your partner, parents, siblings, and children help you and your loved ones become more financially healthy.
Discussion topics might include:
If you’re not sure how to start the conversation with your loved ones, try sharing with them a personal money goal you want to work towards: paying down your debt, saving for a vacation, or looking for a new job.
Being honest with your family about expenses, income, financial hardships, and other money-related questions can boost your financial health—and your bonds to each other.
Plus, teaching children to be financially responsible early on can help them cope with challenges like setting limits, planning a budget, and resisting impulse buys. They will also better understand the core tenets of personal finance: Saving, Spending, and Sharing.
Charitable giving is one way to support a specific cause or organization that’s close to your heart. You can give money directly (via check or online) and through a donor-advised fund, a private or family foundation, or a giving circle. You can also donate items in need, such as food, clothing, and furnishings, as well as your time.
Did you know that giving money to your favorite charity can actually lower your blood pressure? Charitable giving can be good for you, for the recipient(s), and for your family. Other health benefits associated with giving can include:
Another added bonus for you: Through tax deductions, minimized capital gains, and reduced tax exposure, charitable giving can also be a valuable addition to your wealth management strategy.
Lastly, by developing a giving plan with your family, you’re opening up the conversation about wealth, aligning your values and ideals for giving, and demonstrating model behavior for your future generations.
A financial legacy can often refer to a gift, such as an inheritance, a family business, or property in a will. But it’s not always limited to tangible items.
Financial legacies can also include intangibles like:
Leaving behind a financial legacy is only possible when you start building a strong financial foundation. With a secure foundation, you can be a great benefit to your heirs, even aiding them in the events immediately following your passing.
Now that you have more confidence and clarity around these 9 financial concepts, you can take your financial health to the next level. While these concepts directly impact each person’s financial wellness, the specific ways that they impact your life will be completely unique to you.
That’s why we recommend working with a financial life coach who can walk you through each of these concepts—and how they apply to your specific situation—in greater detail.
Willow certified coaches can help you craft your vision and goals, align your finances with your personal values, build healthy habits and useful systems, stay accountable, and adapt your financial plans when life changes.
You can get matched with a financial life coach and get a free 15-minute consultation here.
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