How to Improve Financial Wellness by Adjusting Your Expenses

Every year, a staggering 380,000 people are forced to declare bankruptcy because of hefty mortgage payments, mounting medical expenses, and excessive spending. And to make the issue worse, over 77% of American households carry an average debt of $58,604. 

These alarming statistics highlight the urgent need for people to reevaluate and adjust their living expenses to reach financial stability and avoid the pitfalls of overwhelming debt. But how can you do that?

Let’s take a look at five ways you can achieve financial wellness. 

1. Create a Budget

how to improve your financial wellness with some easy steps (Source: Shutterstock)

Spending your paycheck the moment you receive it on three dresses you loved while doom-scrolling on Instagram, five tools you’ll never use, and ceramic car polishes that cost an arm and a leg is not the way to financial health. 

If you’re actually looking to wrangle your finances into shape, budgeting is the best way to encourage financial well-being. And it has a simple rule: don’t spend a penny more than you earn. 

Here’s how to start budgeting: 

1. Look at the after-tax amount on your pay stub to find out your take-home pay. 
2. Calculate your expenses, such as food, utilities, transportation costs, insurance, education, car loans, medical bills, mortgage payments, and miscellaneous expenditures. This article from Westpac can take you through the process in detail.
3. Subtract your expenses from your take-home pay. If you end up with a negative number, you need to reduce your expenditure. But if you’re spending way less, try to save half of what you don’t spend. 

Once you have an idea of your monthly income and spending, arrange your expenses in order of importance and cut anything that isn’t absolutely necessary, such as too many subscriptions or weekly take-out. 

2. Set Savings Goals

Negotiating a $20,000 raise or bonus doesn’t mean you should start maxing out your credit or living beyond your means. Instead, saving every penny you can — it doesn’t matter if it’s $100 or $1,000 per month — is the best way to financial well-being. 

Why? Because your rainy day fund can make the difference between disaster and financial resilience during expected emergencies. 

However, don’t put your hard-earned money in your current account or wallet. Instead, place it in a high-yield checking or saving account, short-term bond, certificate of deposit (CD), or treasury bill. This way, your savings will earn anywhere from 5% to 10% interest every year. 

3. Pay Off Your Debt

Figuring out expenses and debt can be hard but not impossible (Source: Shutterstock)

According to a GOBankingRates survey, around 14 million Americans have over $10,000 of credit card debt. And it isn’t going anywhere soon. Debt is notoriously hard to shed, especially because it multiplies every year. So, the longer you let it go, the bigger your debt mountain gets. 

For instance, let’s say you have $1,000 of credit card debt at 20% interest per year. Your minimum payment is 5%, which is $50/month and $600/year. However, you’ll also pay 20% interest on your $1,000 debt, which is $200. 

In reality, you paid only $400 toward your debt, leaving $600 outstanding at the end of the year. And at this rate, it’ll take you more than five years to clear the debt, and you’ll pay around $600+ of interest during that time. That’s more than half of what you got! 

So, limit or stop using your credit cards. You don’t have to close them. Instead, put a ban on the credit you currently have to make sure you can pay the outstanding amount per month. You can do that by sticking to a budget or eliminating certain expenses from your monthly bills. 

Once you’ve decided to pay off your debt, you can use two ways to start: 

• Avalanche Method – This method requires you to pay off debt with the highest rate first. It helps you save on interest and enable you to pay off your debt quickly. However, you may not have as much cash on hand while making your debt repayments. 
• Snowball Method – This method asks you to pay off the smallest debt first. Once that’s off your chest, you can start on the next smallest and continue to the largest. 

4. Nip Compulsive Spending in the Bud

While spending on things that make you feel good about yourself isn’t a crime, it does become one when you overdo it so much that you end up in debt. However, compulsive spending isn’t unique to you. It’s an issue for over 40% of Americans, according to a LendingTree survey. 

Controlling your spending behavior isn’t easy, but you can do it. Here’s how to start: 

• Start using cash when going for grocery runs, and take only enough to get your basic groceries done. 
• Avoid stores where you have a tendency to overspend. And if you can’t stop yourself, ask a friend to go with you to stop you from buying things on a whim. 
• Ask yourself whether you need an item before buying it and how much use you’ll get out of it. 
• Sleep on it. Wait for at least a day before buying something. This will give you enough time to think about whether you’re splurging or making a justified purchase. 

5. Plan for Retirement 

You never know what’s going to happen 30 years down the lane. That’s where your employer-sponsored 401(k) and Roth IRAs come in. These are some of the best ways to make sure your retirement is cushy. 

For 2023, you’re limited to $22,500/year on your 401(k), and your employer can match that amount if they want. However, most employers pay 50 cents/dollar and go as high as 3% of your salary. This is essentially free money with a guaranteed return. So, invest as much as possible. 

Plus, if you’re 50 or older, you can invest up to $7,500 per year, up from $6,500 in 2022, and get a higher employer match to boot.