Financial wellness is climbing the ladder as a top concern for organizations seeking to improve the health and wellbeing of their workforces. Without it, stress runs rampant through the ranks and may cost global companies a combined $300 billion per year. But financially confident, stable employees stick around longer, come to work more often, and are even more productive once they get there.
One critical first step to cultivating personal financial wellness is understanding the current state of our finances so we can effectively plan the pathway between here, and where we want to go. But money is complex, and for the 36 percent of Americans who believe themselves to be financially illiterate, the task of understanding their financial realities (let alone strategizing for the future) may be monumental without some basic metrics to work with.
That’s where the financial wellness score comes in. Even for more confident financiers, a FWS simplifies the task of understanding every aspect of our monetary lives – from income and savings, to debt and daily expenses – so we can set better goals and begin to work towards them. Let’s dive in.
What is financial wellness?
First, let’s establish a baseline definition of financial wellness.
Financial wellness describes the sense of confidence, stability, and security that comes from intelligent money management. On a practical level, financial wellness can include:
A comfortable income-to-expense ratio.
Filling and maintaining an emergency savings account to address unexpected expenses.
Establishing a retirement account, and other future financial support systems.
A comfortable debt-to-income ratio.
Maintaining a higher credit score.
Setting financial goals and working consistently to meet them.
All of these factors come together to enable individuals to live comfortably according to their own standards. Financial wellness is not a possibility without adequate income, however it is possible at a variety of different income levels. Financial wellness will rarely be universally measured against a singular dollar amount, but is instead a matter of balance, and the comfort of the individual.
What is a financial wellness score?
Practical financial wellness is a complex network of financial factors which are unique to the group or individual who holds them. A financial wellness score offers one method to simplify these factors into a digestible measurement so that the person or people holding the score can understand, analyze, and address their financial reality more easily.
Most financial wellness calculation methods include the following elements:
Income – this is your current annual income, from all sources.
Emergency savings – this is the amount of money you have saved for emergency expenses only.
Retirement savings – this is the amount of money you have saved for retirement, or the percentage of your income you allocate for retirement per year.
Daily expenses – this is the amount you spend on expected, obligatory expenses in the day-to-day.
Debt – this is the amount you owe to external financial institutions, and includes credit debt, student loans, etc.
Insurance – most often this means the dollar value of your own life insurance policy.
Some methods will also consider age as a critical factor in your total score. For example, how close you are to retirement may increase or deplete the total value of your savings.
Additional considerations include inflation, ROI on any savings kept in a generative account, investments, etc.
Why is a financial wellness score important?
A financial wellness score can help to establish a clear baseline of your current financial situation. It might not be fun to look at, at first, but having this metric in your pocket will allow you to better understand which elements of their overall financial wellness scores are working, and which ones need some attention.
Once you have this information, it becomes easier to plan a pathway between your current financial reality and the long and short term goals you set for yourself. Having this baseline will also enable you to measure your progress as you get closer to reaching those objectives.
How to calculate your financial wellness score
A number of basic and more complex financial wellness calculators calculation methods exist that will either place your score within an established index (similar to a credit score) or give you a percentage-based score which rates your financial wellness out of 100. In all cases, your score will be measured against ideal ratios established by financial experts – these ratios may be different depending on which expert or institution is delivering the ideal.
For this article, we’re borrowing standards from Credit Donkey’s basic financial wellness calculator. Here’s how it works.
Emergency savings: This standard says that you should have an equivalent amount to 6 months of income in your savings account. If this is true for you, give yourself 100%. For anything lower than this amount, calculate your percentage using this formula: Amount saved/6x monthly income = % score.
Debt: The lower your debt, the higher your score will be for this factor. Ideally, your debt will amount to no more than 1 year of your total income. To calculate your debt-to-income ratio, use this formula: Total debt/1x annual income = # If your resulting number is 1 or more, your score will be 0%. If your result is lower than 1, your score will be 100%.
Retirement funds: First you need to establish a retirement savings goal. The more you have saved towards that goal, the higher your score will be. You can calculate that score using this formula: Current amount saved/Total retirement goal = % It is important to note that other calculators may score this point based on the amount of your income you are able to save each month, rather than the total you have saved so far. This number may be more useful for younger individuals, or those further away from retirement.
Life insurance: An ideal life insurance coverage amount is around 10 times the amount of your annual income. If your life insurance coverage is greater than 10 times your annual income, your percentage will be 100. If it is less, use this formula: (10 x annual income)/Life insurance coverage amount = %
Each of these factors represents 25% of your total score. To understand your score as a percentage, add your 4 scores together and divide them by 4 to get a percentage amount. Higher numbers means a high degree of financial wellness, while lower numbers indicate some work may need to be done.
So you have your financial wellness score: what’s next?
Remember: a financial wellness score is an indicator: not a signal for despair, or an excuse to ignore your budget. Whatever your score may be, it’s important to use it as a signpost to guide you towards the next step in your financial journey. For some individuals, that may mean paying down debt or getting serious about saving for retirement. For others, it may mean creating a pathway towards your next big financial objective, like saving for a downpayment on a house.
Or, your next step may be simply learning more about finances so you can better manage your money. And Origin is one employee benefit that can help make this happen. Origin helps organizations to improve holistic financial wellness with practical and educational resources that empower employees to build holistic financial wellness for themselves and their families.