When I was young—much younger—we lived next door to a family
whose breadwinner was a physician, and the mother stayed home with the kids.
I recall Mom telling us that when her husband was in medical
school, she would shop for groceries with a price counter. When she put an item
in the shopping cart, she’d enter the price—click, click, click—as it kept a
running total.
Staying within a budget was critical. Go over, and the risk
of a bounced check was real. Remember when shoppers wrote checks at the grocery
store? Today, you don’t see it often.
Jump ahead a few years. He had established a successful
private practice, and the counter was no longer there. I recall her mentioning
that she freely added anything she desired to the shopping basket.
I didn’t perceive this as bravado. The family’s financial
situation had significantly improved, giving them financial breathing room.
Let’s ask a simple question. Which version of the couple was
“financially fit”? We don’t have enough information to definitively answer the
question.
In some respects, the couple living on a shoestring budget
was disciplined. Yet, when day-to-day expenses were no longer an issue, we
could assume that the family was much more inclined to plan financially for the
future, from college savings to retirement.
So, what is financial fitness, and how do we achieve it? For
our purposes, let’s develop a working definition.
Financial fitness is the confidence that comes from knowing
how to manage your money, meet your current needs, build and grow short- and
long-term savings, create a path to the future, and move toward your goals.
Financial fitness grows through consistent habits such as
budgeting, reducing and eliminating debt, saving, and planning for the future.
In turn, stress is reduced, and you build lasting financial strength.
The fundamentals are the foundation
Financial literacy is a close cousin of
financial fitness.
Financial literacy allows you to use your financial skills
to make informed decisions about money. It includes knowing how money works,
managing it, and planning for both short-term needs and long-term goals.
A helpful analogy is that literacy is knowing what it takes
to be healthy, while fitness is actually doing it, like eating well and
exercising. Put another way, “I know I need a budget,” so I put this knowledge
into practice by developing a spending plan and adhering to it.
6 steps to financial fitness
Some of these steps may seem rudimentary and simple. But
understanding the basics allows us to build upon a solid foundation. Some of
these steps may be well worth sharing with your children.
1. Develop a spending plan (budget). A very good
friend tracked his family’s expenses for decades. He could tell you how much he
and his wife spent on gasoline in May 2003.
He set up categories on a spreadsheet and entered
expenditures each month. He also had a savings category. Think of it like
paying yourself each month. He and his wife not only developed the plan, but
they also had the discipline to stick to it.
Seems extreme? Well, he retired six years ago at 58.
2. Manage your debt. By itself, debt isn’t
necessarily bad. You may have a mortgage that you can manage. You might have a
car payment that you can comfortably pay off within a reasonable amount of
time. But what if you carry credit card balances at a high interest rate month
after month?
Financially fit individuals and families pay off their
credit card balances every month. They understand that lifestyle choices will
immediately impact finances. They avoid superfluous purchases. They save for
vacations and family outings.
If you are struggling with credit card debt, pay off
high-rate credit cards first. When you’ve paid the first one off, roll that
payment into the next card, and continue until credit balances are at zero. As
you make progress toward your goals, reward yourself along the way.
Be leery of taking out home equity loans to pay off credit
card debt. For starters, you’ve just transferred unsecured debt to your home.
Besides, experience tells me that some folks will simply run up debt on the
credit cards that were just paid off.
3. Saving and investing. Develop a short-term and
long-term plan. We suggest at least six months of easily accessible savings. A
simple money market account that pays a market rate of interest is not only
accessible, but you’ll also earn a modest return and have funds in the event of
an emergency.
Long-term goals may include saving for college and
retirement. College savings vehicles have been created to help you reach your
goals, including 529 plans, prepaid tuition plans, Coverdell education savings
accounts, and Uniform Gifts to Minors (UGMA) accounts.
They offer tax advantages, and we’d be happy to help you get
started if you have questions.
As with college savings, there are numerous options that are
available to help you save toward your retirement goals.
In order to establish a realistic retirement plan and track
your progress, we will include any additional income streams, including
pensions and Social Security.
4. Tax planning. Don’t get caught off guard.
Understand withholding and estimated tax payments if you are self-employed.
Understand what common deductions and tax credits are available to you.
We’ve written on this before, but we’d be happy to provide a
refresher for you—just ask. When dealing with taxes, don’t hesitate to consult
your tax advisor.
5. Teach kids about money. Start early and give them
a small allowance. Teach them about savings versus spending. Let them set goals
and use a portion of their savings to make purchases. Encourage them to set
aside a small amount for their favorite charity.
As they get older, teach them about credit and the
importance of avoiding trouble that can arise with credit. More importantly,
model proper behavior. Your kids are astute. They are watching what you’re
doing.
6. Legacy. Estate planning isn’t just for the
wealthy. Don’t leave this one aspect of financial fitness to chance. It’s a
loose end you don’t want to leave untied.
It’s for anyone who wants to protect family assets and their
legacy. A will and estate documents provide clarity, prevent conflict, and
ensure your assets and decisions are handled the way you intend.
But we want to caution that this concept extends well beyond
the scope of the article. As with tax planning, we would love to answer your
questions, but we also encourage you to speak with an estate planning attorney,
too.
Financial fitness is about building healthy money habits
that will improve financial stability and reduce stress. If you attempt to
conquer the mountain all at once, you may be overwhelmed. But small, consistent
steps will strengthen confidence and resilience over time and put you on the
path toward financial fitness.
