Are you financially fit? What does that even mean? Just like physical fitness, financial fitness is different for everyone. A workout and nutrition plan for one person doesn’t always work for another. The same is true with your finances. However, financial fitness is achieved the same way physical fitness is achieved. In order to be fit, you must create a plan that helps you accomplish your goals. That plan must include guidelines and rules. When you follow the rules and execute your plan, typically you will see progress. Like physical fitness, financial fitness is a journey. Wellness doesn’t happen overnight.
To help you achieve financial wellness, consider these strategies:
1. It’s not always about how much you make, it’s about how much you spend.
Living within your means is essential to becoming financially fit. When you create a budget for your family, you can begin to understand where the money goes every month. Sometimes folks find themselves surprised at how much they spend in certain areas or categories. Once you become aware of where the money is being spent, you can work to curtail and eliminate unnecessary spending, which may free up money to help you achieve your financial goals.
Consider the 50/30/20 budget framework to get started. After-tax income is allocated into three groups:
• 50 percent living expenses (housing, utilities, food, and transportation)
• 30 percent discretionary spending (hobbies, eating out, shopping, and giving)
• 20 percent savings goals (retirement, emergency fund, and large purchases)
2. Pay yourself first.
You, your future, and your family’s future should be paid first. Treat your savings goal as a bill that you must pay each month. Open a high-yield savings account and set up reoccurring monthly transfers. It’s important to build up savings, so emergencies, large purchases, and home repairs don’t sidetrack your goals.
For retirement planning, saving through an employer-sponsored retirement plan, if available, is an excellent way to save for the future. Some companies even provide a matching contribution. Don’t leave money on the table; make sure you are contributing to receive your full match. That is a 100% return on your money. For those with no employer-sponsored option, you can open a traditional or Roth IRA and contribute up to $6,500 a year (2023 limit). Those over fifty can contribute an additional $1,000.
3. Establish a cash reserve.
Aim to have three to six months’ earnings set aside for a rainy day. Emergencies will always arise. This fund helps prepare you for the unexpected and allows you to keep your financial goals on track.
4. Start saving now for life’s major milestones.
Once your cash reserve is established, keep saving that money, but for another goal – like a family event or trip, higher education costs, weddings, or future medical expenses. Consider looking into savings vehicles like a 529 plan or a health savings account.
5. Know the difference between good debt and bad debt.
At some point, most of us will have to assume some debt. When well-managed, that doesn’t have to be a bad thing. Some debt is an investment in your future or the future of your kids. However, it is important to not bite off more than you can chew. Here are two key considerations:
- Avoid carrying high-interest debt, like the kind that’s accrued from credit card overuse. If or when you do have high-interest debt, map out a plan to pay it off as quickly as you can. Could you pay off that debt if there was no interest for eighteen months? There are credit cards that offer balance transfer and 0% APR for up to eighteen months or longer.
- Know your limit. Generally speaking, strive for a debt-to-income ratio of 28% or less. To calculate your ratio – add up all your monthly liability payments and divide that by your gross (pre-tax) monthly income.
6. Monitor your cost of housing.
Do you rent or own your home? Assess which option may be right for you based on the current market conditions. Are interest rates high? If you want to own a home, focus on your budget and becoming pre-qualified for a loan. What can you afford based on your budget? Know your credit score. Learn about mortgage insurance so you can accurately calculate the cost of owning a home versus renting.
7. Protect it all.
Once you have worked so hard to save for the near- and long-term future, don’t risk losing it. Evaluate your current insurance needs and make sure you have the appropriate amount of coverage to protect you and your family in a time of need. Insurances that may benefit your financial wellness include, but are not limited to: health insurance, life insurance, disability insurance, car insurance, homeowners or renters insurance, limited liability insurance, and long-term care insurance, among others.
8. Examine your taxes.
Taxes can impact your financial investment and savings outcomes, even outside of tax filing. It’s important to understand the overall impact taxes play on your financial income before and in retirement. There are three ways to be taxed: now, later, or never. When you diversify your savings into these three tax buckets, you can achieve flexibility when it comes to your financial goals.
9. Estate planning isn’t just for the rich and famous.
Your legacy and estate plan are important parts of your ongoing financial planning process, especially if you have a family. It’s important to map out how your property and assets will be divided in the event of your death. Do you have a will? Do you need a trust? Have you named beneficiaries? Do you want to gift or transfer assets to a cause that you’re passionate about while minimizing the tax impact? Estate planning helps you preserve what you have worked hard to obtain.
Just like your fitness journey, your financial wellness journey may experience ups and downs. Allow yourself a little grace and keep focusing on the day-to-day small wins – they add up. Try not to compare yourself to others as personal finances are just that – personal.
If you find that you can’t seem to stay on track, consider working with a certified financial planner to help you establish your goals and hold you accountable to meeting them. Financial advisors are like personal trainers, they can make a difference in your overall success.
This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon, and risk tolerance. Past performance does not guarantee future results and no forecast should be considered a guarantee either. Ameriprise Financial does not offer tax or legal advice. Consult your tax advisor or attorney.
