Looking for fast financial fitness? These six steps will help. This post, adapted from ENRICH, appears in ValueWalk–the online hub for value investing.
Where does all our money go?
We ask ourselves that every time we look at our bank accounts. Some of it goes to the government, some goes to bills and utilities, and some of it… well, to be truthful, we have no idea where it goes.
Six Actionable Steps To Help You With Your Financial Fitness
Financial fitness is something that everyone wants, but few have. Especially in these times. Here are six actionable steps to help you get financially fit fast:
#1: Know Your Numbers
The most important step you can take toward fiscal fitness is to thoroughly understand your current financial situation, your assets and liabilities, your income, and expenses. Get a macro picture of how you spend your money. Grasp your money movements to develop confidence in your finances. The Big Picture Budget template can help.
#2: Save Before You Spend
There are three ways to increase savings:
- Increase your income
- Increase your ROI
- Decrease your spending
Boosting income and ROI are somewhat beyond your control, so concentrate on the area over which you have the most power: your spending.
The custom is to spend first, then save whatever remains. For financial fitness, target your desired savings level (which supports long-term financial priorities) and fit your spending to whatever remains. In other words, the variable should be your spending, not your savings.
Always be sure to pay yourself first.
#3: Automate and Find Joy in Saving
Be sure to always pay yourself first. The easiest way to ensure you habitually save before you spend is to automate your savings. Transfer savings from your paycheck into a dedicated account right after every pay period. Once you’ve automated, you will not miss the money, and your savings will be on autopilot.
As you incrementally progress toward financial goals, saving will become an enjoyable and motivating activity. Making progress toward any goal satisfies, especially when the aim is financial security.
#4: Live Below Your Means
If you spend less than you make, you will build wealth over time. As income rises, the temptation is to spend to your income level, not to your needs—that’s called lifestyle creep. Be vigilant against it.
Focus on the big-ticket items that move your cost structure needle. Don’t fret over the cappuccino vs. avocado toast.
Research reveals that underspending on housing is the most significant factor in boosting savings. TD Ameritrade looked at the spending habits of “Super savers”—those who save 20 percent or more of their income. Housing was the differentiating variable. Supersavers spend just 14 percent on housing, while the norm is 23 percent.
#5: The Six-Month Rule
A recent Federal Reserve survey reveals that about four out of every ten American households don’t have emergency savings to pay off an unexpected expense. Could you pay a sudden emergency expense? What would happen if you lost your job?
Building a cash cushion to cover unanticipated expenses is probably the single most important thing you can do to get into fiscal shape and reduce financial anxiety. You should aim to build up six months of salary as an emergency fund to help you absorb life’s potholes.
Make a plan to create that cash cushion. It doesn’t matter how small your starting point is, so long as you start and keep at it.
#6: Eliminate Debt
If you cannot afford it, do not buy it.
Financial fitness involves getting rid of all your debt, starting with excessive credit card balances. Only one-third of Americans pay off their credit card bills every month and do not carry a credit card balance. That’s insane. The average credit card interest is 15 percent and can sometimes be higher than 20 percent.
Use credit cards only as a convenience, and pay in cash whenever possible. Physically handing over money makes us think about making that transaction and is an effective deterrent to impulse purchases.
These are challenging economic conditions, for sure. But adopting these empowering financial habits will put you on a solid trajectory toward lasting financial fitness.
You can access the full article in ValueWalk here.