A workout plan for those financial wellness muscles

“Just like when getting physically fit, there are core principles that everyone can follow in the pursuit of financial wellness,” said Clifford S. Felton, Vanguard wealth planning researcher and co-author of Vanguard’s Guide to Financial Wellness. “Knowing what steps to take next, and in which order, can help improve a person’s financial situation, but also—and perhaps more importantly—their combined financial and emotional well-being.”

That’s the main idea behind the newly released guide: how to approach your financial situation and the subsequent journey toward achieving goals using a series of simple, rational steps. Most households want to be financially well, but many just aren’t sure how to get there or how to go about it in the most effective way. This guide was created to help navigate families through the journey.

Everyone is on their own financial journey, with specific ambitions and challenges. Yet there are three distinct steps that often serve as common jumping-off points for most households. The guide breaks down the financial journey into three simple steps that almost everyone can take in pursuing financial wellness.

More than three-quarters of U.S. families carry debt, much of it on credit cards, and a whopping four in 10 aren’t adding to savings accounts, according to a recent Federal Reserve Bulletin.¹ That’s why the first step of Vanguard’s financial wellness framework focuses on debt-reducing and savings-boosting strategies that can offer you the greatest bang for your buck. This step focuses on what actions to take and the best ways to approach them, given your goals and personal preferences. There’s a work-around for budget haters (we feel your pain!), for example, and a range of payback strategies for people with high-interest vs. so-called safer low-interest debts.

More than one-third of Americans can’t cover an emergency expense of $400, according to the Fed research, but a little pre-planning can help keep an unexpected emergency from derailing a long-term financial plan. Although the details of unbudgeted costs may vary (a flat tire, a leaky water heater, a sick child), most savers can expect at some point to run into a surprise expense. That’s why the second step helps investors build an emergency buffer to safeguard their savings against spending shocks, be they the cost of a minor household repair, income protection in case of job loss, or insurance against catastrophic accident or illness.

Money isn’t just an issue for the pocketbook. About 65% of Americans are stressed out about money (82% for those age 42 or younger),² and this affects their mental and physical health, sleep, self-esteem, relationships at home, and even work productivity and attendance.³ A lot of that stress can be relieved by figuring out when—and in which order—to tackle more complex financial goals. That may include saving for college or long-term health costs, taxable investing, or paying off lower-interest debt. This third step guides investors through the often-complicated financial decision-making process by identifying longer-term goals, prioritizing them, and developing an ordered strategy for working toward each one.

Vanguard’s guide to financial wellness takes on the financial challenges that most people will face at some point in their lifetimes, regardless of financial status. The three foundational steps act as a scaffold that can be climbed vertically or horizontally, as current needs dictate.

“Within the guide, we’ve built a series of next best actions, which should be followed consistently,” Felton said. “Many of the steps are easy to implement, but investors should maintain patience. Some of the steps may take some time to complete. Financial wellness is a journey.”

The steps outlined in the guide take a personalized yet comprehensive approach to mastering the accumulation phase of an investor’s financial journey. An investor who can get their finances under control, prepare for the unexpected, and expand savings capacity is better prepared to meet financial challenges and be financially well. By taking a few small steps at a time, and by maintaining consistency, more and more investors may build financial confidence, wellness, and eventually freedom.

• Vanguard's guide to financial wellness (52-page PDF, issued January 2023)
• Three small yet essential steps for financial wellness (article, issued January 2023)
• A wellspring of resources to guide your financial journey