Episode: 06-13-2023 | Three Steps To Attain Financial Wellness

Hosted by Kevin J. Zywna, CFP® Dollars & Common Sense · Financial Wellness What Is Financial Wellness? Kevin Zywna, Wealthway Financial Advisors: Tonight, we’re going to talk about financial wellness. Financial wellness – what is it, how do you get it and how to keep it. So financial wellness is a state of being where […]

Hosted by Kevin J. Zywna, CFP®

What Is Financial Wellness?

Kevin Zywna, Wealthway Financial Advisors: Tonight, we’re going to talk about financial wellness. Financial wellness – what is it, how do you get it and how to keep it. So financial wellness is a state of being where a person can fully meet current and ongoing financial obligations, can feel secure in their financial future, and is able to make choices that allow the enjoyment of life.

How Financially Well Are Americans?

And the reason that financial wellness is so important is because the overwhelming majority of Americans are not financially well. It’s somewhat of a shame and a crime that in one of the wealthiest nations on the planet, more of us don’t feel financially well. In fact, according to a recent Federal Reserve Board survey, more than three quarters of US families report having debt and 45% of families carry credit card debt, with an average balance of $6,300. Among those families surveyed, 36% indicated they could not cover an emergency expense of even $400. And then more than 40% had not been able to save money over the previous year. So, when those are the conditions that exist in this country, most of us probably don’t feel financially well.

We’ll try to help you out here with some tips and techniques to do that tonight. Also, personal finances affect people emotionally. So, from a study from the American Psychological Association last year 65% of Americans surveyed say money is a significant source of stress. Money is a significant source of stress for people. Under the age of 43, that figure jumps to 82%.  The overwhelming majority of people below the age of 43 are stressed out. And of course, they are. Because they’ve got families and spouses and kids, and cars and houses and mortgages, and saving for college, perhaps, and trying to save for retirement, all these competing interests happening at once. And they feel like they can’t do it all.

Well, you can’t do it all at once. But you can take little bite sized pieces and put yourself on the path to financial wellness if you take the right steps. Americans say that personal finance issues affect their mental health, their physical health, sleep, self-esteem, relationships at home, and work productivity, and attendance. And we all know that it does. Because when we’re stressed out about money, then everything else seems more difficult and harder.

How Are Financial Literacy And Financial Wellness Impacted?

Now, financial wellness differs from financial literacy, or financial knowledge, I guess you could say financial literacy is about understanding the concepts and tools you can use to manage your money. So, it’s about knowing what to do. Financial wellness is a matter of taking steps to improve your financial life. So financial wellness has an action component to it. You have to do something. It’s not enough to just know what to do, you have to then actually do it. It’s not enough to know what weights to lift, you have to lift the weights. It’s not enough to know how far to run you’ve got to go out and run. It’s not enough to do the downward dog in yoga, right? You’ve got to do it, you’ve got to exercise. You’ve got to move if you want to be physically well. You’ve got to take action. Well, the same concept applies. For financial wellness, it’s about taking action on healthy financial activities.

Financial Wellness And Emotion Connections

Financial wellness is a more holistic approach than simply being financially literate. It encompasses more than an individual’s financial knowledge. It involves all of an individual’s feelings with regard to money. So, there’s an emotional component to financial wellness. When we are financially well, we feel emotionally well. All those other stressors tend to recede into the background. We sleep better. We’re more kind and compassionate to our family. We’re more productive at work when we are financially well. So, I’m going to talk about a few steps that you can take in order to get financially well. There are some specific concepts that we can deliver and some action steps that I can share with you about how to get there. Tonight we will talk about financial wellness, what is it, how to get it how to keep it financial wellness state of being where a person can fully meet current and ongoing financial obligations can feel secure in their financial future and is able to make choices that allow enjoyment of life and so before I get into some of the steps on how to achieve financial wellness. We have a caller on the line. We have Chuck in Norfolk. Good evening, Chuck. You’re on Dollars & Common Sense.

Understanding Medicare Premium Amounts Impacted by Tax Status

We have a caller on the line. We have Chuck in Norfolk. Good evening, Chuck. You’re on Dollars & Common Sense.

Caller: Hi, Kevin, thank you for taking my call. My question has to do with Medicare and the supplemental cost of it. Once you start using Medicare (and I know that it’s based on your income). So, for example, if you make below a certain amount, I think the cost this year is like $175 per month. The situation is I’m still working, my wife is still working, and our combined income would put us at the next level of Medicare payment. And it would be like, I don’t know, $375 a month for myself and 375 from my wife, because of our combined income. The question I have is when we retire, and we do not have that level of income. I know that. So, the Medicare people look back at your prior earnings to set the amount of money here to pay. Are you following me?

Kevin Zywna, Wealthway Financial Advisors:  Yes, yes, I know exactly what you’re talking about.

Caller: Okay. Now, with that being said, how long do you have, or how many years? Do you have to pay that when you’re not really making that? Does that make sense?

Kevin Zywna, Wealthway Financial Advisors:  Yes, so what they usually do is they base it off of your adjusted gross income that you file on your tax return. So, you file your tax return by April 15 of the year following the year in which you made all that income. And the year in which you made all that income, you are also paying a surcharge for the Medicare premium. So, when your income reduces your earned income, either is eliminated or reduced because you’re retired and not drawing a paycheck anymore. Then the following year, when you do your taxes, again, you’ll have a lower adjusted gross income. Medicare, Social Security can look at that, and then should automatically reduce the amount of the Medicare premium surcharge. However, if you know this is going on, it would happen naturally through the course of events, but there would be a rather long lag or delay before you would see a reduction. So, one of the things you can do in that year, if you know you’re going to have reduced income is petition Medicare Social Security Program, let them know that you have reduced income that year. And there’s a way to get that surcharge reduced sooner. I don’t have the intricate details on how to do that. But obviously, the Social Security Administration’s website is the best place to go to find out this information. So, it can be done.

Caller: So, you can basically petition them with the future. But it does still sound like there is going to be this lag time till your adjusted gross income falls back below that particular earnings.

Kevin Zywna, Wealthway Financial Advisors:  Well, yes. So, if you essentially certify that your income in a given year is going to be much lower than the previous year, they will reduce that premium much sooner. So, the lag time will be much shorter by going through this process.

Caller: Okay, all right. Well, thank you so much for answering my question.

Kevin Zywna, Wealthway Financial Advisors:  Yes. All right. You’re welcome, Chuck. Thanks for the call.

3 Steps To Attaining Financial Wellness

Today we are talking about financial wellness, what it is, how to get it, how to keep it. So, we’ve defined financial wellness. It has an emotional component. All money really has a strong emotional component. But when we feel good about our finances, then we feel good about a lot of other things in life. So how do we start doing that? Step one, you’ve got to take control of your finances. Step two, prepare for the unexpected. Step three, make progress towards your long term goals. You take those three steps, then you are going to be well on your way to financial wellness. Let’s jump into some of the details concerning each of those steps.

Step 1 To Financial Wellness: Take Control Of Your Finances

How To Take Control Of Your Finances: Create A Budget

Step one, take control of your finances. How do you do that? Well starts by creating a budget that works for you. I can hear everybody laughing across Hampton Roads right now. I know you’re not going to create a budget. 98% of people do not create or follow a budget. Since the reality situation is that is not going to happen for most people. What I usually suggest is that you create a rudimentary budget. One that at least does these two things. How much take home pay you have each month, on average. Then of that take home pay, how much are you committing to long term savings – like your company retirement plan, or IRA plans. Money that is truly saved for long term. Not money that just goes into the savings account that sits there for a few months until the trip to Cancun and then gets spent. That’s not savings, that’s delayed spending. I’m talking about actual long term savings. So just those two things – your net take home pay, and then you cannot wait until the end of the month to see what’s left over to try to save, you have to commit to savings first. And whatever is left over then you live within those means. So, for example, let’s say a household income is $10,000 a month, well, then, you know that through your company retirement plan and other long term saving vehicles, you’re saving $2,000 of that $10K each month. That means you’re spending $8,000 a month. There’s your budget. Okay, so that’s how simple budgeting can be. Just having control of those basic big picture numbers can go a long way to setting a good solid foundation towards fine financial wellness.

How To Take Control Of Your Finances: Maximize Employer Match

Then after you get those budgetary numbers in line, you want to do what I was just talking about – maximize your employer-matched savings or retirement plans. Most employers offer retirement plans, IRAs, 401Ks, 403Bs, TSPs, 457 plans, SIMPLE IRAs. Most employers that offer retirement plans also match, as an incentive, some of the employee’s contributions. The typical match that we see is that the employer will contribute 3% of the employee’s salary up to 6% of the employee’s contribution. So, if you contribute six, then your employer will match that with 3%. And you are effectively contributing 9% of your gross salary. So, make sure you are taking advantage of any company retirement plans that you have. It’s one of the easiest and best ways to get started on the path to take control of your finances. If you aren’t contributing to your company retirement plan, and you have one, that is your project for tomorrow morning. Go to payroll or go to human resources or go to the website that manages your paycheck and sign up and start contributing to your company retirement plan. If they have matching funds, you are leaving money on the table. You’re only hurting yourself if you aren’t taking advantage of a company retirement plan with matching funds.

How To Take Control Of Your Finances: Pay Bills On Time

Next, make sure you pay all your bills on time. pay at least the monthly minimum as this will reduce costs over time and improve your credit score. So one of the last things you want to do in order to create financial wellness is not pay your bills on time. Not paying your bills on time, not paying your debts on time will show up on your credit report. Not paying your credit card on time will show up on your credit report. Not paying your car loan will show up on your credit report. Not paying your utility bills won’t show up on your credit report initially. But if you skip out on rent or something like that with or a place where you’re living, and there’s still utilities out, that will go to collections and that will show up on your credit report. So, at a minimum you have to commit to paying all the bills on time. You don’t want them to go delinquent. Pay on time. Typically, you have 30 days past the due date before it would show up delinquent on a credit report. But make sure you are paying them on time. No matter how hard that feels some months, at least you have control of that aspect of your financial life. And you’re setting yourself up for success. And then finally, under

How To Take Control Of Your Finances: Avoid Debt

Avoid high interest debt, high interest, debt, credit cards, some personal loans, payday loans, stay away from high interest debt. It’s a death spiral when it comes to successful finances. It’s very hard to get out of debt once you get into it.

Kevin Zywna, Wealthway Financial Advisors:  We’re talking about financial wellness what it is, how to get it, how to keep it if you want to jump in on the conversation or have any questions about your own financial situation. So financial wellness, we said step one: take control of your finances. Create that budget or at least a very rudimentary budget to understand the big picture of where your money’s going. Maximize your employer retirement plans. Make sure you’re getting the matching funds that are available. Make sure you pay all bills on time and avoid high interest rate debt. That is taking control of the basics of your finances. That will put you on a good solid footing.

Step 2 To Financial Wellness: Prepare For The Unexpected

Step two, prepare for the unexpected after you have control of the basics. Know that life is always out there waiting to throw you a curveball. So, it can provide great amounts of peace of mind and serenity. Knowing that if life or I should say when life throws you a curveball, flat tire, broken radiator hole in the roof, water heater that doesn’t work, all those things that crop up from time to time that we don’t plan for. Knowing that you have reserves, and a plan in place to deal with those unexpected events in life, unexpected financial events, can help give you peace of mind – help you sleep easy at night, be better around your kids, be happier with your spouse, be more enjoyable at work – knowing that you’ve got the unexpected covered.

How To Prepare For The Unexpected: Establish An Emergency Fund

So how do you do that? Well, step number one, we’ve got to set up that emergency fund, right? At least have a couple 1000. This is the bare minimum, have a couple $1,000 of cash sitting around in a bank account. It’s not earning much these days in a true savings bank account. It’s not part of your checking account. It’s not something that you can get to as easily or as readily as your checking account. You can’t use your debit card, can’t set up an ACH. You know, go to Amazon and have it automatically deducted. Should set aside a little bit, at least a couple $1,000. That covers the bare minimum. But then beyond that, a true emergency fund as we define it in the financial planning profession, is to have about three to six months of expenses in that reserve emergency savings account. Completely liquid, easily accessed in the event of emergency but not too easily accessible that you’re liable to spend it.

And then you have to maintain the self-discipline to know that that’s not money for the trip to Cancun. That’s for true life emergencies. Three to six months of your regular expenses. So as my earlier example, in the show, let’s say your monthly household expenses are after your savings $8,000 a month. So, you want to have $24K to $36,000 of money set aside in a savings account to protect against true life emergencies. And some of those take the form of unexpected job loss, layoff, merger. Even though government employment is among the most reliable and stable, there still have been layoffs.

So you want to make sure you have three to six months of expenses built up in your savings account. And that prevents you from having to use expensive debt, like credit card debt, and keeps you out of using credit cards for convenience, use it for points if you do something like that. But you don’t want to carry your credit card balance over each month and incur an interest charge because that’s among the most expensive debt that you can incur and some of the highest costs, interest rates that you have to endure. That emergency fund protects that from happening.

How To Prepare For The Unexpected: Evaluate Your Insurance Needs

Then you want to evaluate your insurance needs, the coverages and the costs. So having insurance is a necessary and prudent part of a good financial plan. So, what types of insurance? You need health insurance? Right? Of course, you do. You need life insurance, for people who are dependent upon you for your income. You need disability insurance. In most cases, having some sort of disability insurance plan in place is proven, you are far more likely to be disabled for some period of time over your life, than you are to die prematurely. So, one can make the case that disability insurance is even more important, more likely to protect you than life insurance. Even though it is utilized much less than life insurance. And then of course, you want to have vehicle insurance. You have to have homeowner’s insurance, if you own a home. All these insurances are necessary. Some are required by either mortgage companies or the government. So, you want to make sure you have those insurances in place.

Evaluate Your Insurance Needs: Healthcare Insurance Is A Must

And, you know, for a time there before Obamacare, there were a lot of young people, especially young male people who would go without health insurance because they’re young and healthy and 10 feet tall and bulletproof and nothing was ever going to happen to them until it does until they twist an ankle playing beach volleyball or get into a car accident. When something like that happens, all it takes is one trip to the emergency room and you’re looking at least $10 to $15,000 of a bill without insurance. So having health insurance is extremely important. I usually say after your rent, or mortgage is taken care of, and all your other basic expense for food, utilities, and so forth, health insurance is one of the most important insurances you ought to have because it protects you against highly probable catastrophic losses. And due to the makeup of how we get health care in this country, regular routine office visits for wellness visits are also good for preventative measures. You’ve got to have certain types of insurance in place to protect against the catastrophic type of losses.

Evaluate Your Insurance Needs: Beware of Over-Insuring Small Losses

Now, one of the things we don’t want to do with insurance, or I should say, what we want to do with insurance is use it wisely. The primary purpose of insurance is to protect against those big, uncertain, disruptive, potentially catastrophic financial losses that one could occur: a fire in your house, that trip to the emergency room, or worse, those type of things can be financially ruinous. So that means insurance is a good use of protection in those cases. But what we don’t really want to do is ensure small losses, small events that can be absorbed out of our regular cash flow or out of our emergency fund. So, for a lot of people, that means not having too low of a deductible. We’re so used to getting an office visit to the doctor is like 20 bucks. You know, it’s not really 20 bucks. But that’s what we’ve been conditioned to think because we’ve had such low deductibles on a lot of health plans. But with higher Deductible Health Plans now you can pay more when you incur health care. So, an office visit might be 150 bucks, but then you can pay for that out of your emergency fund if you need to. And you still have coverage on the top end so that if you have a catastrophic issue, then that is covered. Use your deductibles wisely.

If you have a good solid emergency fund, you don’t need your deductibles to be that low. You don’t want to pay the insurance company for protection on the low end that you don’t need. Okay, so use insurance, but use it wisely.

How To Prepare For The Unexpected: Get Your Legal Documents In Order

And the last thing you can do to prepare for the unexpected, get your legal documents in order to ensure that your wishes are realized in the event of your death. I know nobody likes to think about this. And in fact, in our practice, this is usually the last thing that we get people to do. But take care of your estate plan. That means establishing wills, at a minimum. Get beneficiaries set up properly on your retirement account at work on your bank accounts, on IRAs. Any type of account that can have a beneficiary, make sure you add a beneficiary that can be more effective in many cases in the estate planning process than actually wills. Then also designate a power of attorney for finances and a power of attorney for healthcare so that if you are in a serious accident, you have somebody who can speak on your behalf to the medical providers, and also can conduct business if you were laid up in the hospital for some period of time with banks and with utility companies and other people that you have to pay. So get those legal documents in order in case something should happen to you. Either a premature death or a significant accident as well. All right. Step one. Take control of those finances. Step two, prepare for the unexpected. When we come back, we will talk about step three: make progress towards your long term goals.

Kevin Zywna, Wealthway Financial Advisors: Tonight, we’re talking about financial wellness, and what you can do to get it and keep it. Over the break there, Damian came up with the word I was searching for about what can happen to government employees that would cause you to tap that emergency fund. They could get furloughed. That’s the word, furloughed. You get furloughed – pay stops, no income comes in. That’s what you need that three to six month emergency fund for. To help prepare for the unexpected. Okay, financial wellness. Step one, take control of your finances. Step two, prepare for the unexpected.

Step 3 To Financial Wellness: Make Progress Towards Financial Goals

How To Make Progress Towards Financial Goals: Leverage Retirement Plan Accounts

Step three, make progress toward those long term short term goals. You do that by trying to increase your savings and make the most of any tax advantaged accounts. We talked earlier about company retirement plans. Those are almost all tax advantaged. Contributions to those types of plans go in tax deferred, so you get a tax break on the way into those accounts. They grow tax deferred as well. So, no taxation on the activity inside of company retirement plans. And that includes IRAs, so 401K’s, 403B’s, 457, TSP, the monies tax on the way out, but because you have deferral it can be a good tax savings tool along the way. After you’ve contributed to those plans, and especially if you could contribute the maximum to those plans, then you want to look at other types of long term retirement savings plans like an IRA, or a Roth IRA, that can get you some tax advantage as well.

How To Make Progress Towards Financial Goals: Utilize Health Savings Accounts

In addition to the contributions that you make to your company retirement plan, and then don’t forget about those health savings accounts. Now we are big fans of health savings accounts if you have a high deductible health plan. If your health plan qualifies as high deductible, then you are eligible to contribute to a health savings account. And some companies are getting savvy these days and are combining a high deductible health savings account with a health savings account so that you can, through your employer, pay for your health insurance, get a subsidy from your employer for the health insurance and contribute pre-tax money into your health savings account. If you have one for work, if you don’t have one for work, then much like an IRA. As long as the health insurance plan qualifies as high deductible, then you can open up a health savings account with another custodian who offers them. What is a high deductible health plan? Well, for tax year 2023, if you’re an individual, and your health plan has an annual deductible of $1,500 or greater then that qualifies. If you have more than one person on the health plan in your household that qualifies as a family plan. And then your annual deductible needs to be $3,000 or greater, in order to be qualified as a high deductible plan and then allow you to make contributions to a health savings account. So, increase those savings to the accounts that you already have in effect, and then try to add to other types of vehicles as finances permit.

How To Make Progress Towards Financial Goals: Utilize A Brokerage Investment Account

Then beyond that, you know, you can save additional money in what we consider a regular old brokerage investment account. It’s a taxable account. You don’t get a tax break for the money going into it and the tax activity, capital gains, dividend distributions. Those things are taxable in those accounts, or they’re not sheltered. But they also tax accept lower capital gains rates, as well. So, if you invest properly and wisely, you can be very tax efficient in those regular brokerage type of accounts. And you have the ability to use them for goals other than health, retirement, education, because those accounts I previously talked about are set up for that. This is money that functions more like a bank account. You can put it in, invest it for a while, and then take the money out, and then use it for whatever purpose you want, without penalty. Yes, there can be some tax implications. But again, depending on how you invest in the accounts, it can be done very tax efficiently.

How To Make Progress Towards Financial Goals: Pay Off Mid-Low Interest Rate Debt

After you take care of that, in order to make progress towards your long term goals, you want to make sure you consider paying off lower interest rate debt. Remember, I said earlier, step one taking control of finances, you’re going to avoid high interest rate debt to begin with. Try to pay off those credit cards monthly. Do not create a revolving balance. If you do have other debts that are relatively low interest, then you want to consider maybe paying those off. Now, I would say for almost a decade, this was probably not a good strategy. I mean, interest rates were so low, especially mortgage rates. When you get really low interest rates, not all debt is bad debt. And really low cost borrowing sometimes can be beneficial and can help you grow your net worth faster if you utilize it properly. But just beware that in order to make progress towards those long term goals, if you do have some lower costs interest that depending on how low it is, I would say anything below five, four or 5% is probably not something you need to rush to pay off. But anything five to 8% is still considered low in this environment, you might want to consider paying that off quicker. So maybe some car loans or personal loans would hit that level.

How To Make Progress Towards Financial Goals: Create A Strategy For Charitable Giving

And then finally, one of the things that you can do to help make yourself feel completely financially well, set a strategy for charitable giving. Think through the benefits, timings, and amount of gifts. Explore available ways to have the most impact. People who give of their time, their talents and their treasure are some of the happiest people around. That’s all the time we have for today.

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