What is financial fitness? Briefly, financial fitness describes your overall financial well-being, akin to how physical fitness pertains to your physical health.
The American Medical Association says, “Regular physical exercise is one of the single most important contributors to a healthy lifestyle and delivers benefits which extend far beyond the doctor's office.”
We aren’t doctors, personal trainers (unless you want to talk kettlebells), or physical therapists. We will defer to the specialists in their respective fields for advice on maintaining a healthy lifestyle.
Notwithstanding the different fields of study, financial fitness, much like physical fitness, can yield benefits that endure well into the future.
Let’s dig a little deeper and better define financial fitness. Financial fitness encompasses the skills, knowledge, and tools that enable you to make sound financial decisions.
It’s not only about wealth or just investing. Enhancing your financial fitness provides you with valuable insights, boosts your knowledge of financial matters, and empowers you to make informed decisions regarding your finances.
That is, a financially fit individual possesses a solid understanding of their finances, which provides the confidence and knowledge needed to manage basic money matters.
Benefits include:
More Clarity
More Confidence
Less Stress
The six habits of financially fit people
1. Set financial goals. So while this may seem old hat, it is so important to write down your goals. These are the targets you have set your sights on. They are not your neighbors’ goals. They are not your best friend’s goals. They are yours. Nothing could be worse than pinning your efforts to someone else’s wall. Take some time and think it through.
Choose goals that motivate you, encourage you, and give you a sense of purpose as you achieve them. While goals can and should be challenging, they aren’t pie in the sky. Don’t just shoot for the stars and settle for the moon. You’re more likely to get discouraged and give up. Think incrementally and don’t overlook small changes that make a big impact. This is more than just giving up a daily coffee or habitual treat, look at what is important to you and consider what would really make a difference to you or someone you care about.
2. What are your financial values? These are the principles that guide your finances and help you define your goals. Create a list of what’s important to you. How does this align with your spouse or family? What commonalities do you share?
More importantly, do your financial outlays line up with your financial values? A quick review of someone’s checkbook, Visa statement, or financial spreadsheet will quickly reveal what’s important to them.
3. Create and adhere to a spending plan. Some might call this a… bu.. call this a bud. (clears throat) A BUDGET! There, I said it. Budget! By the way, budgets are not just for poor people. (I had someone actually say that to me once) They are part of any successful household or organization. A budget must be realistic and include a savings plan.
Build up an emergency reserve if you don’t already have one. You can even create savings “buckets” for items such as vacations and emergency repairs. Already past this step? Maybe think about benevolence and giving then. Legacy planning can be a lot of fun and encouraging but only happens with a clear idea of what is needed to provide for your own personal needs first. (ugh, budgets)
4. It’s not simply enough to have a spending plan. Keep track of your expenditures and stay organized. You can create a tracking system on a spreadsheet, a budgeting app (more on this later), or even a spiral notebook. Keeping track of your expenses and comparing them to your budget will help maintain discipline and ensure you stay on course toward your goals.
You might be surprised at how much you spend on incidentals and subscriptions. I have no idea about such things, but I hear it can really creep up on you.
5. Financially fit people live within and below their means. Do you want money at the end of your month or month at the end of your money? According to the Corporate Finance Institute, 78% of us live paycheck to paycheck. A layoff or financial emergency can be devastating. Those who are financially fit have prepared for the unexpected and have reserves that help cushion unforeseen financial blows.
There may be times in life where this seems impossible, and if you are in one of those times right now, please do not skip the other steps thinking things will sort themselves out on their own with just a little more money. You really must keep score and pay attention to what is going on with your money so when the tide turns, you are not still living in a “stuck” mindset. It may not be easy, but I know you can do it.
6. The financially fit commit to a financial plan. A financial plan serves as your roadmap, guiding you from today to wherever you want your finances to take you. The plan should reflect you and be a source of encouragement. Think back to a time where you really worked toward something. You laid out a vision, adjusted as you went and then reached that objective! It is an amazing feeling to get on the other side of a complex plan and win. The same holds true with your finances.
Like physical fitness, financial fitness requires discipline and patience, but that does not mean you cannot see results right away. The sense of accomplishment in organizing your: companies benefits, estate documents, cash accounts, retirement contributions, debt service, charitable giving, risk management, education savings, digital estate, beneficiary confirmation, asset consolidation and the all the rest, bring tremendous peace and clarity without taking a long time to complete. The burst of effort (and it does take some effort) pays a huge dividend and can propel you toward some of the tough behavioral changes like new spending and saving targets.
While it may take weeks for those old jeans to feel looser, it may only take a few well-structured meetings to make a lot of progress in your plan.
How do we implement and track your financial fitness?
Step one is a personal evaluation of where you are right now. An unvarnished and honest assessment including:
An income statement - A personal income statement is a tool that lists various sources of income along with the estimated monthly and annual totals for an individual or household. It helps in tracking financial health over time and can be useful before making significant financial decisions.
This statement typically includes income from sources like salaries, wages, bonuses, and other forms of income. Additionally, we often make money non-linearly. For example, we may have annual or quarterly bonuses that impact our short-term cash flow and debt picture. We may have income that is only for a season of life, like child support. We may be starting a new company and have to bootstrap for a year or two. Mapping that out over the long term creates a more realistic picture than just the current years figure.
A balance sheet: This is a financial document that lists your assets and liabilities to calculate your net worth. It provides a snapshot of your financial position at a specific point in time and helps you determine your net worth by subtracting your total liabilities from your total assets.
Defined Assumptions: This is often a misunderstood part of the process. We regularly underestimate how many assumptions we make about our financial future. We assume we will get to choose how long we will work, or where we will work. We assume rates of inflation and taxation and return. We often make these assumptions so frequently that they no longer feel like assumptions but rather some sort of given or law of nature. But as we know, that is just not so.
Far be it from me to dip my toe into the dramatic, but this is where the financial game is often won or lost. The more we can identify these assumptions and treat them as such, the better our projections will resonate with us. In the end it is just math, but we have to understand the formula, and the assumptions there in, for it to have deeper relevance.
Realtime Collaborative Planning Process
As the old commercial goes, we have an app for that. We at D’Andrea Financial have been writing financial plans for over 25 years, but never have we had better collection of tools to establish, track and collaborate on your plan. Having the ability to document and quantify all the critical touchpoints of our financial wellness in one place and track the plan as we go, creates the best of scenarios for planner and client.
A real-time, collaborative, financial planning environment allows for quicker decision making, immediate what-if scenario computations and clear pivots when needed. This reduces stress and can promote behavioral change for better outcomes.
Many of you are already in the process but if you would like to be more engaged with your financial health and the Realtime-Collaborative Planning process, I would be thrilled to get you onboard.
Chat soon,
Mike
Mike D’Andrea, ChFC®
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