A 3-step financial wellness framework: Help employees take action toward financial goals

Although the pandemic may be over, many Americans are struggling to get their financial houses back in order.

More than three-quarters of U.S. families report having debt and 45% of families carry credit card debt, with an average debt of $6,300, according to Vanguard. About one-third would have trouble covering an emergency expense of $400, and more than 40% haven’t saved any money during the previous year.

The emotional impact of those financial burdens can be overwhelming. Two-thirds of Americans surveyed say money is a significant source of stress, and for people under age 43, that figure jumps to 82%. Personal finance issues can affect mental and physical health, sleep, self-esteem, relationships at home and work productivity and attendance.

“Money matters create a lot of stress for individuals, and we see this in the plan sponsor participant space as well,” says Maria Bruno, head of U.S. wealth planning research for Vanguard. “The more we can do to help participants become better investors, the more it increases their happiness, their financial well-being and their productivity and engagement.”

Bruno discussed a comprehensive guide, Vanguard’s Guide to Financial Wellness, during a January 13 media roundtable. She said the guide can be a valuable tool for advisors to share with clients.

Related: 39% of workers have less than $1,000 in savings (or no savings at all)

“Some people don’t like to go to an advisor, because they feel like they are not equipped and are scared they may ask dumb questions,” says Bruno. “It’s a good education piece when they ask, `how can I get smart so I can have a good conversation when I meet with an advisor?’ So it’s a good reference manual to help you understand where you are and where you want to go deeper.”

The guide offers three steps to help people achieve their financial goals:

#1: Take control of finances

This will enable households to create an effective budget and take advantage of high-reward opportunities, such as paying the minimum on all debts, taking full advantage of employer match opportunities and paying down high-interest debt such as payday loans and credit cards.

“The big thing is, how do you allocate resources?” she says. “This includes things such as taking full use of the employer match. If not, you are leaving money on the table. About a third of participants don’t contribute up to the match, so we know there is a real opportunity there to change those behaviors.”

#2: Prepare for the unexpected

Households can benefit from setting aside emergency savings to cover modest, unexpected expenses; creating a contingency fund in case of job loss; and evaluating insurance and legal document needs.

“The first thing is how we think about emergency savings,” Bruno said. “This is where we see people get themselves into trouble when they don’t have ample funds when an emergency comes up. We look at it in terms of household liquidity and not so much emergency savings. We recommend having a minimum of $2,000 set aside for spending shocks and three to six months’ worth of accessible money for income shocks, such as a job loss.”

#3: Make progress toward goals

It is possible to invest more in tax-advantaged accounts (retirement, health and education) and in taxable accounts for preretirement-age goals (home, car and vacations, among others) while paying down lower-interest debt (student loans, mortgage and car loans) and consider giving strategies

The key thing is making sure employees “are taking advantage of tax-advantaged accounts, whether they are employer-sponsored plans supplemented by IRA investments, health savings accounts or 529s,” she said. “Health savings accounts are a big one as more plans embrace high-deductible plans. There are a lot of opportunities for individuals to open a plan and invest that money as well.” Bruno encourages advisors to use the guide to start financial conversations with clients.

“You don’t want to say, `go read this and then come back and we will talk about it,’ but it can be valuable to do it with them,’” she said. “There is a lot of goal discovery that can be done with this type of paper, particularly where you have households where you have to align both individuals’ goals. It can help you understand where people are and where they want to go, and then meet them there. You can learn about your clients by going through this type of framework.”

The Vanguard’s Guide to Financial Wellness is available at Vanguard’s guide to financial wellness.