I like to think of my financial situation as my “Financial Fitness”. Like our physical fitness, our Financial Fitness is something that improves or degenerates over time. It is simple decisions made repeatedly that will determine if we are physically fit or not and the same goes for our finances. It is easier to make the right decisions for our physical fitness if we are well educated on what improves or hurts our physical health and this also holds true with our finances. There is so much to know about finances but I will focus on the framework of my philosophy on personal finances to help you get started. I will share more on each pillar in the future but it is ultimately up to you do educate yourself on each area and how to best apply it to your life.
Pillar #1 – Tracking
“What gets measure gets managed.”
This old proverb is the basis for my first pillar. The best way to improve your Financial Fitness is to know where you are and where you want to go. To do this, you must have a budget. There are many different methods ranging in style and level of detail when it comes to budgets. It doesn’t matter what method you use. Having something that works for you and using it consistently is what is most important. I personally have an excel spreadsheet that I use which I populate with all the information from all my online accounts. This lets me budget on a monthly and yearly basis to include once a year expenses like holiday trips, car registration, etc. I break it into as many categories as possible so I know how much money is going where. Knowing where your money goes helps you decide what areas to cut back and what areas to increase.
Pillar #2 – Needs
Once you understand where your money is going each month, the next step is to identify what your absolute needs are. Things like Food, Shelter and Clothing come to mind but maybe eating out 5 times a week and buying a new dress every weekend is a bit of a stretch… Each person is different so you should sit down and really think about what is most important in your life. Focusing on your needs helps you decrease your spending in other area’s to make sure you have enough to live on. Once your needs are met you can then focus on what you really want. If traveling is important to you, should spending $200 a month on Starbucks coffee and trips to the movie theater be priorities in your budget?
Pillar #3 – Buffers
No matter how well we plan and budget, there are always going to be times in life where things don’t go as planned. I like to keep set amounts in my bank account that I don’t touch to account for emergencies or spur of the moment expense. Some of the categories you could have are:
- 6 Months Living Expenses (House, food, utility costs)
- Emergency Car Repair
- Spur of the moment vacation fund
I keep a line item in my budget for “Savings” and whenever any of my buffers get depleted, I pour all of my savings money into that account until I refill the full amount that I need.
Pillar #4 – Debt Reduction
“If you think nobody cares if you’re alive, try missing a couple of car payments.”
Debt is a debilitating line item in your budget. It comes before all other Needs because if you don’t pay, someone will come after you and steal your stuff. Paying down your debt is a great way to improve your financial health. Once all of your debt is gone you can take that monthly payment and apply it to other areas of your budget to have an even greater effect on your financial health. The absolute best method for paying down your debt is to focus on the highest interest rates first and work your way down. If you have a 20% interest credit card and a 5% student loan, pay off that card because you will end up saving yourself a lot of money in interest. I recommend keeping a set line item in your budget and once you pay off one debt, role that amount into your next highest interest rate debt to pay that one off even faster.
Pillar #5 – Investing in Assets
“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.” – Robert Kiyosaki
In a world with few pension plans and quickly vanishing Social Security, the only hope to ever retire is by investing in assets. An asset is anything that produces money, and a liability is anything that costs you money. Your job is an asset but it can be taken away from you. If you own a house you might think it’s an asset but it is actually a liability because it takes money OUT of your budget each month instead of putting money in. It may grow in value over time but if the growth in value is less than the costs (mortgage, insurance, taxes, etc.), it is still a liability. If your house is a rental property however and it generates more money than it costs, then it is truly an asset. Stocks can be assets or liabilities depending on which way the markets are going and whether or not they pay dividends. No matter what kind of asset you invest in, it is critical to your long term financial fitness that you dedicate money early and often to building a stockpile of assets that produce money on a monthly or yearly basis. This pillar, above all others, requires the most education and I encourage you to take it upon yourself to learn about the different types of assets (Stocks, bonds, gold, silver, real estate, businesses, and others).
In the future I will go more in depth on each pillar but here you have the framework of my philosophy on Financial Fitness.
I believe that the peak level of financial fitness is having the ability to decide whether or not you work another day in your life. If you could do what you love and not have to worry about getting paid for it, then you have obtained ultimate financial fitness.