Download: Are you Financially Fit
Are You Financially Fit?
Are you financially fit? Financial fitness is similar to physical fitness in so far as we generally have an idea as to what it takes to attain but it can be easy to say and difficult to do. We know that in order to achieve or maintain physical fitness we need to eat right, exercise regularly and get sufficient sleep; however, unless we discipline ourselves with a clear and workable plan we can fall short of our overall goals. Financial fitness is much the same. In general, we know we need to earn, save consistently and spend wisely in order to achieve a level of financial success but if we want to increase our chances of success it is wise to carefully consider a plan of action.
- Start with a goal in mind: Consider your overall financial goals. For example: eliminating debt, saving for retirement, making a major purchase, saving for your children’s education, etc. Then, begin to quantify those goals. How much debt do you have? How much will it take to retire how and when you want? Etc. Much like if/when you decide that you want to get physically fit it helps to have an end point in mind. I want to fit into that dress/suit in 6 months. I want to lose 20 pounds. I want to run a 5k in the spring. The more detail that you add around your financial goal the more tangible it becomes. I want to be debt free in one year. I want to send my 3 year old to my alma mater when they are ready for college. I want 100k in income and to retire at 65.
- Build a Budget: Regardless of your current level of income and expenses it is important to understand what resources you have coming in and what expenses draw money out. If your expenses are greater than your income, a good and honest look at your spending may illuminate places that you can cut back. If you have a great surplus month to month are you allocating that surplus towards future goals or is it remaining idle? On a physical fitness journey you may be asked to record or journal what you eat so that you can identify your current intake. You may also be asked to record your level of activity such as time in the gym/spent exercising. These two processes are much the same in that they seek for the individual to become more conscious of their actions and to make adjustments to their lifestyle as steps towards their stated goals.
- Create an Emergency Fund & Protect your Credit: You should have in between 3 and 6 months of living expenses in order to cover unexpected expenses that may come up. Ask yourself, if you have a car repair, broken appliance, medical bill, and had to pay it today, how would you go about paying it? For many the answer might be that they would have to access credit in order to pay for the unexpected. Having money set aside for these unexpected but seemingly inevitable expenses will save you the interest charges of accessing credit. Speaking of credit, ensure that you are monitoring your credit on a periodic basis. You are entitled to a copy of your credit report at no cost from each of the three major credit reporting companies annually. Ensure that you are only accessing credit sparingly. Carrying a balance on credit cards can sink money into interest charges as opposed to goods/services. Monitoring your credit profile regularly and keeping your credit score high can save you money in the long run. You may get more advantageous terms when accessing credit is unavoidable such as in the purchase of a new car or home
- Take Action: With the goals that you have in mind, the information that you have gathered from previous steps and the buffer that you have secured by creating a reserve, take action towards your goal(s). Prioritize your course of action and use the resources around you. If you are saving for retirement, are you maximizing the opportunity that you may have at a workplace retirement savings program? Is it time to open up an individual retirement account? If you are saving for your children’s education, have you researched different savings/investment vehicles available to you? If you are saving for a major purchase have you considered different options or investment vehicles to help get you towards your goals? Once you have identified the appropriate vehicle set up systematic savings that will come out of your bank account or paycheck on a regular basis. Start with what you believe to be a reasonable amount and re-evaluate every 6 months to see if you have the ability to increase your contributions. Even small but consistent amounts can add up over time.
The Power of $10
Account Balance After:
Weekly Plan Contribution 5 Years 10 Years 20 Years 30 Years 40 Years
$10 $3,102 $7,500 $22,573 $52,865 $113,742
$20 $6,205 $15,001 $45,147 $105,731 $227,484
$30 $9,307 $22,501 $67,720 $158,596 $341,226
$40 $12,409 $30,001 $90,294 $211,462 $454,968
Source: DST Systems, Inc. These are hypothetical examples involving participants who consistently make weekly contributions over various time periods and earn a 7% average annual investment return (compounded monthly). The illustration does not represent any specific investment product offered by your plan and does not include any investment fees and expenses. Your investment returns will differ, and it is unlikely that your contribution amount will remain the same over a long period. Pretax contributions and related plan earnings will be subject to ordinary income taxes and a possible additional tax for early withdrawal upon distribution.
- Review: Ensure that you are taking a look at the “big picture” on at least an annual basis. Have your goals changed? How much progress have you made? Can you push harder or might you need to scale back? An honest evaluation of “where am I?” is an important part of the process.
If you are able to clearly identify and quantify your goals, understand the resources that you have available, protect yourself from the unexpected, take action and regularly review your progress, you are well along your way to achieve financial fitness. Like a person that is serious about fitness or any athlete that desires to be at peak performance it may be beneficial to engage a coach or consultant along the way. Consider seeking a professional opinion to help you develop or execute a plan of action. There are a wide array of options available and having an advisor that can help you navigate the development and/or execution of your plan can be of great benefit. That advisor should get to know you and your goals, gain an understanding of the resources that you have available, understand your risk tolerance and present options that may fit your individual situation. Financial fitness, much like physical fitness takes time, discipline and action. Take the first steps to getting financially fit today.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through JOHN BAILEY FINANCIAL, a registered investment advisor and separate entity from LPL Financial
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