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Wellbeing is defined as a general state of comfort, health and happiness. It is vital for functioning well in life, emanating from your thoughts, actions and experiences. Whilst wellbeing is very much an internal dynamic (in our minds), our financial circumstances play an important role in determining how we feel about ourselves and our surroundings.
This is where the notion of “financial wellbeing” comes into play. Below, our financial planners at Scottsdale explore what the concept is, how it affects our lives and whether budgeting is more important for maximising it (compared to income growth).
We hope these insights are useful. If you want to discuss your financial plan with a member of our team, please get in touch to arrange a no-obligation financial consultation, at our expense:
+34 966 460 407
info@scottsdale.eu
Defining financial wellbeing
Many people believe that if they earned “enough” money, they would be happy. Money does indeed make us happy when we can cover our basic needs. However, afterwards the law of diminishing returns sets in. Instead, focusing on financial wellbeing can be more worthwhile.
Financial wellbeing has many definitions. However, this is a popular one comprising four main components:
- Learning how to budget
- Becoming “financially literate”
- Spending within your means
- Contributing to savings
In short, this definition largely defines financial wellbeing as “becoming financially disciplined with daily/monthly spending”. Long-term goals, such as saving for retirement, are given less importance.
This highlights an important discussion. What is more important – your immediate financial needs or those in your future? After all, your answer will heavily influence how you spend your money. It plays a huge role in determining whether you are a “spender” or a “saver”.
As financial planners, we take a more balanced approach to this whole discussion. Your immediate needs are certainly important. You need to cover your bills. There is nothing wrong with spending on leisure. However, it is also foolish to ignore your future and not prepare for it.
Financial wellbeing, therefore, is primarily about building a deep sense of security and control over your current and future finances.
Gaining security and control
How can you nurture this kind of financial wellbeing?
Here, it can help to ask another question. Should you focus on budgeting (curbing your spending) to build security and control right now? Or, is it better to concentrate on increasing income – a longer-term effort which might involve “moving up” in your career, or building investments which can help provide for your future needs (such as a pension)?
Some writers emphasise that budgeting is most important to financial wellbeing. Others stress “income planning” instead. At Scottsdale, we believe that a “one-size-fits-all” approach is unlikely to always work. Rather, each person (or couple or household) needs to examine their own unique financial goals, circumstances and values before building a financial plan.
For instance, each individual has a unique “starting point” when examining their financial position. Person A may be heavily in debt. High interest payments not only erode his monthly real income, but also destabilise his sense of financial security and control.
Here, financial wellbeing is likely better pursued by focusing on budgeting and getting the debt cleared responsibly. After that, Person A has more freedom and headspace to consider income planning options – e.g. starting an online side business or building up his pension.
Person B, by contrast, has no unpaid credit cards or personal loans. She has a well-paid job and a strong set of cash savings after receiving a recent inheritance. However, her sense of financial wellbeing is not deeply rooted. She does not know how to put her money “to work” through investing. Although her basic needs are met, she lacks any deep sense of purpose with her financial goals – simply drifting month to month.
Here, financial wellbeing could be attained by discussing her long-term vision with a financial adviser. Where does she see herself in 10, 20 or more years? What is she doing and who is she with? Does she want more “financial freedom”, time with family or opportunities to travel? Would she like to retire early?
These questions move beyond a vague habit of saving for its own sake or living within one’s means, they drive at matters of purpose and values. Where do you want your life journey to go, and how can money help you “get there”?
In our minds, this is where financial wellbeing brings the individual to a new level. Budgeting is vital, and it is important to regularly review your income and expenses to ensure maximum security and control in the short term. However, this is only one side of the coin. The next step is to set a financial foundation to build your vision on. Here at Scottsdale, we would love to speak with you if you’d like to explore a holistic financial plan for yourself.
Invitation
If you are interested in discussing your own financial plan, investments or tax strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
+34 966 460 407
info@scottsdale.eu