Achieving Financial Fitness
Many people create a plan to achieve physical fitness, so why not make one to create financial fitness? First, we must define financial fitness. Without an understanding of the basic fundamentals of personal finance, wealth that is quickly attained can quickly disappear. We can approach this topic in many ways, but first, let’s broadly define the term financial fitness. This enables you to make good financial decisions because you have developed the skills and knowledge to pursue goals that will enhance your wealth and secure your financial future.
It is not just about having a pile of money in a bank account or a big portfolio of stocks and bonds. Lottery winners often stumble into wealth without having much in the way of financial knowledge. A beneficiary of a large estate may know very little about financial matters. The same holds for successful college athletes who enter the world of professional sports. In other words, hitting the financial jackpot does not equate to financial fitness.
First, you must have goals and plans for what you want to accomplish. If you just spend money randomly, you will always be in financial chaos. You’ll never get a true handle on your finances if you don’t track your cash outlays. You know what your monthly mortgage is. But how much do you spend on restaurants, entertainment, fun, clothing, etc.? Do you budget for home and auto repairs or an upcoming vacation? You might be surprised by what you uncover after tracking cash outlays for two or three months.
Make sure that you have emergency funds to handle unforeseen situations. These can cause stress and ruin long term savings. Come up with a strategy that eliminates high-rate credit cards and personal loans. We recognize that debt can be used judicially for purchasing a home, home improvement and autos. But debt can also be an unwanted burden that interrupts shorter and longer-term financial goals.
A good thing to do may be, set up automatic transfers into savings, retirement, or for various goals you may have. Get into the habit of saving today, even if the steps you initially take are small. This can be one way to pay yourself first. If money is taken out of your bank every month, you will not forget and achieve dollar cost averaging at the same time.
Make sure that your investment allocation matches your risk tolerance and the time frame of when you need access to the money. Sequence of risk can ruin a retirement if the market suffers large losses right before or early in retirement. Normally, investors get more conservative as they get older. There is less time to make up for losses.
Make sure that tax planning is an integral part of your financial planning. While most people are thinking about 2023 taxes, sophisticated investors are already saving on their 2024 return. Decisions you make today have a huge impact on tomorrow. Remember, not all money is taxed the same. What types of accounts you invest in and which accounts you take needed distributions from can make a big difference.
To achieve overall financial fitness, it is best to have a written financial plan. This road map will help to ensure that you reach your final destination with optimal results. Isn’t that the goal of any journey?