How does being financially savvy improve well-being? Why do people who manage their finances well have better physical and mental health? What are the mental patterns and behaviours that connect health to financial well-being? What do people who manage their finances well do that others do not? What can you do to improve your health and financial well-being?
Charles Dickens’s character, Wilkins Micawber, famously said: “Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”
In contemporary language, if you spend more than you earn, the result is misery. If you earn more than you spend, the result is happiness.
As wise as such words are, they express being financially savvy at too high a level to be useful. Let’s take a look at the specific behaviours of people who are pound- and penny-wise.
- Budgeting. The financially savvy create a budget and track their income and expenses. They do not spend more than they earn. When they do spend, it is only when they know that they can cover their expenses. Live below your means. Spending less money than you earn will allow you to save and invest for the future.
- Pay bills on time. Those in control of their finances pay all their bills on time and in full to avoid late fees and interest charges.
- Avoid debt. They avoid taking on unnecessary debt, such as credit card debt. If they do have debt, they make a plan to pay it off as quickly as possible. “Credit buying is much like being drunk. The buzz happens immediately and gives you a lift… The hangover comes the day after,” said Joyce Brothers.
- Get out of debt. If you have debt, focus on paying it off as quickly as possible. This will free up more of your income to save and invest. “A man [person] in debt is so far a slave,” said Ralph Waldo Emerson. Getting out of debt gives people more control of their lives. “Money equals freedom,” said Kevin O’Leary.
Avoid buying depreciating-value items with debt
Why? Because it cost a huge amount more. For example, if a person has bought a car using debt, they will be paying above the base interest rate. If they bought a car for X, they will be paying X plus the interest per year, for however many years. Let’s use three years as an example.
Depending on the interest rate charged, that could end up costing 30–50% more than the car was worth at the time of purchase. Over the next three years, the value of the car, based on averages, will have depreciated by 50%.
That is, the car is worth half of what it was bought for, and buying it with debt increased the overall cost by 50%. That is why people with financial savvy avoid buying any depreciating asset on finance (unless the income generated by that asset is substantially greater than the extra costs).
They also buy assets after the largest depreciation has taken place – not new.
- Delayed gratification. When faced with a choice between short-term pleasure and long-term financial well-being, financially savvy people choose the latter.
- Saving. Those who are financially wise regularly set aside money for savings. Why? They know that “things go wrong”. Equipment reaches the end of its financially viable repair life. Accidents happen. Unexpected events of all sorts can take place. Each of those challenges requires access to finance to resolve.
- Build an emergency fund. Aim to save enough money to cover at least three to six months of living expenses in case of an emergency or multiple crises emerging at the same time.
- Create a financial plan. This will help you to identify your financial goals and develop a plan to achieve them. “Planning is bringing the future into the present so that you can do something about it now,” said Alan Lakein.
- Invest for the future. Investing your savings to grow your money over time will help you reach your financial goals. “If you want to reap financial blessings, you have to sow financially,” said Joel Osteen. Some people spend their time worrying about their financial future, while the savvy are using time to create theirs. This next comment sounds odd but is nonetheless true: the only time we can change our future is in the present. That means that our financial future can only be improved now. And only action now can change the future. “Let our advance worrying become advance thinking and planning,” said Winston Churchill.
Develop an awareness of value
Caveat emptor is the Latin phrase enshrined in the laws of many countries, which means, Let the buyer beware. In practical terms, that means that it is the reasonable responsibility of the buyer of any product or service to check that they are not being “ripped off”.
People who are “financial smart” know that sellers will try to get whatever they can for their goods and services, even if that means massively overcharging the buyer or selling goods that are not fit for purpose. All over the world, thousands of times a day, there are court cases to that effect. People who are financially wise check the value of what they are buying. They ensure they are not buying a pig’s ear dressed up as a silk purse.
Developing a sense of value is wise when selling too. You may have come across the (mythical?) story of the old engineer. A cargo ship is stuck in a harbour. None of the resident engineers can get the ship’s engines to work. Days go by. Costs are huge. Lage numbers of staff are being paid while the ship sits doing nothing, transporting no cargo.
The cargo is perishing with each passing minute. If the cargo is lost, so will the company. Eventually, the old engineer is called. The shipping company tells her, “We don’t care what it costs; just get the ship running.” She goes into the vast engine room. After asking a few questions and looking at the records and logs, a handful of gauges, a few pipes, and a few wires, she takes a hammer and strikes a valve. Immediately, the whole engine system springs into life.
The ship quickly set sail. The entire crew and company were hugely grateful, and she was asked to send her invoice. She did. It was for an amount that would take a chief engineer five years to earn. The company challenged the invoice and asked for a breakdown.
It read: “For dislodging a jammed valve with a hammer, 1 minute of labour time. For saving the cargo and the company, and for the time taken to learn which valve was jammed, 35 years of labour, discounted by 30 years, is a good will gesture.”
People who are financially savvy and run their own finances do not charge per hour, per day, or per contract; they charge for the value they add.
- Get role models. People who develop financial savvy almost always have mentors, or role models. For some, that was their parents or teachers. For others, it was books or a work colleague.
How does financial irresponsibility harm well-being?
Being financially responsible is not always easy, particularly if a person has grown up in an environment with no positive role models.
Lack of financial savvy can and does have a significant negative impact on health and well-being. It can lead to social, physical, and mental health problems such as social isolation, relationship breakdown, sleep disturbance, concentration difficulties, stress, anxiety, depression, high blood pressure, heart disease, stroke, and even cancer.
People who are in financial difficulty are more likely to smoke, drink heavily, overeat, eat unhealthy diets, not exercise, and engage in risky behaviours. When a lack of financial savvy has led to health decline, it can become an accelerating, vicious downward spiral, which makes it harder and harder to reverse the financial problems.
How does financial savvy benefit well-being?
Budgeting gives us a sense of financial control. It makes it less likely that we will succumb to impulse purchases. That in turn boosts our sense of self-control and gives us optimism that we can make even more improvements to our financial situation.
Saving even a small amount of money each month helps. Regular saving becomes a habit, and that habit sends a self-signal of financial responsibility. When we observe ourselves being financially responsible and see positive results for having done so, we become more likely to take further financially responsible action.
Having savings gives us a better sense of security. With some savings behind us, we feel better able to cope with life’s unexpected events. That reduces our stress levels, which in turn enables us to think more clearly, which again makes it more likely that we can take action to improve our finances yet further.
Having a financial plan gives people a focus, and that has positive effects on mental health, including a greater sense of control, less stress, higher levels of optimism, and higher perceptions of self-worth.
When people can delay gratification, it compounds in a positive direction, in a virtuous cycle. The money they don’t spend on transient joys can be used to create much greater, more enduring benefits and longer-term happiness.
How a person acquires one or more role models seems less important than what they do. Their role models can be real or virtual: pages, people, buddies, or books. What matters is that the person makes a commitment to learn about financial well-being.
When people have their finances under control, they are less likely to experience stress, anxiety, and depression. They can afford to eat healthily, exercise, and engage in health protection activities, all of which make it more likely that they are capable of improving their levels of financial savvy even further. Financial health improves social, physical, and mental well-being. Social, physical, and mental well-being improve financial well-being. It becomes a virtuous cycle.
It doesn’t seem to matter where we start the virtuous cycle; what matters is that we start and continue.
What steps will you take today to improve your financial well-being?
Professor Nigel MacLennan runs the performance coaching practice PsyPerform.