In this post we will cover exactly what it means to be financially fit, and where to start!
Here you will learn tips for making sound financial decisions, developed through years of study and life experience. These proven habits will keep you in good financial shape throughout life.
If you are ready to take control of your finances and make good money decisions, then this post is for you!
Let’s get started…
The Path to Financial Fitness
Getting your personal finances in order is a must. Outside of your physical health & fitness, your finances may be the biggest factor that impacts your overall state of well-being.
Whether you are trying to live a simple life or not, your quality of life can improve dramatically by improving your financial fitness.
What does it mean to be Financially Fit?
Let's start with a financial fitness definition. Financial fitness refers to the complete state of your finances, with respect to your ability to make it through the ups and downs of life.
Although we will touch on many financial topics, this isn’t going to be your typical ‘budgeting’ or ‘investing’ article.
I’m simply going to share some financial fitness examples, what I’ve gained from years of experience and what I’ve learned from the dozens of books I’ve read on this subject.
1. The Unexpected Crisis (Reactive)
Being financially fit allows you to handle unforeseen life events. Things like:
- an accident or illness
- a major repair needed for your vehicle or home
- out of pocket costs you will be reimbursed for later
If you are in good financial shape, you can focus on the crisis itself (without the added financial stress). As the famous quote says:
If your problem can be solved by money, you don’t have a problem.
2. Having More Options (Proactive)
If you’re living paycheck to paycheck and don’t have an emergency fund, you are trapped. Financial fitness helps you escape this trap.
You won’t have to choose something solely based on the price. You have time to figure things out. You can focus on what’s important rather than what’s urgent. You will have more options.
Just A Quick Heads Up
This topic can be quite complex, so to keep things simple I’ll only be talking about your finances. You’ll need to do some further reading to cover things like insurance, estate planning, tax strategies, etc.
General financial advice can be applicable to a wide audience, but those other topics require specific tailoring to your individual situation. I’d recommend you use ‘just-in-time learning’ and only get any other specific information you need when you need it.
Why you need Financial Fitness
What you gain from financial fitness is pretty straightforward; more options in life, and being in a better position to handle a personal crisis.
But there are more risks to be aware of that could upset your financial progress. Proactively managing these risks will put you in the best possible position to grow and protect your wealth.
I’ve boiled it down to 4 categories of risk:
Maintaining good health is a must. A health emergency can be costly in time, stress, and money. Some people spend their entire life building up a big nest egg, just to spend it all trying to gain a few more years of life.
The good news is that most of the top causes of death are either avoidable or manageable with diet, exercise, and early detection.
Check out 4 Pillars of a Healthy Mind and Body for a deep dive on creating & maintaining lifelong health.
Beyond that, you can use things like health and/or long term care insurance to lessen the financial impact of a health crisis in your life.
The next risk to your financial fitness is the silent killer … inflation. Governments tend to spend more money each year, and much of this is done by expanding the money supply.
Adding more money into the economy means that each dollar is worth slightly less. Inflation is a hidden tax that you have to overcome, both with your investment returns and your income.
If you don’t account for this, you may end up increasing the amount of money you have without increasing your purchasing power.
Check out Economics in One Lesson for a better understanding of economics & monetary policy, and how they can impact your financial well-being.
The third risk to your financial fitness is tax. Most countries tax your income, investments, real estate, and other purchases.
A good tax strategy will minimize the amount of taxes due. There are plenty of legal options available to you. Things like corporations, trusts, retirement accounts, or even going offshore.
While inflation may slowly chip away at your wealth, a bad tax strategy may cost you half of your nest egg in one fell swoop.
The last thing to worry about is liability. It’s easy to find yourself entangled in a lawsuit, even through no fault of your own. Your money and property could all be compromised if you aren’t protected.
Luckily, this concern can be greatly reduced by insurance and by ‘placing’ your real and personal property in trusts and/or corporations.
This is less complicated than it seems, but get professional guidance for your situation.
The last thing I wanted to touch on before moving into the ‘how-to’ part of this post is retirement, or rather ‘redefining’ retirement.
The ‘conventional’ way of doing things used to be working hard and saving, then living out your old age on the pension or savings you’d accumulated throughout your working career.
This always seemed strange to me: trading away your youth for a more comfortable existence at the end of your life. What if something happens to you before retirement?
I think a better way of doing things would be staying productive your entire life while also setting aside time along the way for rest, leisure, and making memories.
Check out The 100 Year Lifestyle to learn about creating a good work/life balance as well as how to keep & maintain your health throughout your entire life.
Keep It Simple!
The key to improving your finances is keeping it simple. Focus on timeless fundamentals. You don’t need to follow the trends or get caught up in the latest fad.
You can make small changes that will add up over time, and in many cases, you can automate this process.
How to create Financial Fitness
On the path to financial fitness, you just need to focus on 3 key areas. These areas are Banking, Budgeting, and Investing.
Your banking situation is the foundation to your finances. Your bank is the place where you receive income and pay expenses. It is the most important tool at your disposal.
Qualities of a good bank
The first thing to look at when selecting a bank is their fee structure. Ideally, there will be low (or even no) fees associated with maintaining your account.
Watch out for ‘free checking’ accounts that are actually laden with fees. Things like:
- minimum balance fees
- ATM withdrawal fees
- foreign transaction fees
- card replacement fees
- overdraft fees
The next thing to look at is the ‘hassle’ factor. Often, you have to jump through hoops to reduce or eliminate some of the account fees. Things like:
- needing to fulfill a monthly transaction quota
- needing an active monthly direct deposit
- needing to link a savings or investment account
Lastly, a quality bank should give you a quality banking experience. Things like:
- a modern mobile app
- mobile check deposit
- fast transfers to external accounts
- ability to lock/unlock your card
We’ve been using Chime as our main bank since 2016. They have the best app of any bank we’ve tried, don’t charge any fees, and they have a large no-fee ATM network. They even release your direct deposit 1-2 days earlier than other banks.
Chime is actually a technology company that has partnered with a bank, which is how you end up with a modern banking experience in an industry that’s been slow to adapt to the modern era.
Switch to Chime Bank for a modern banking experience with no fees, free overdraft, and you'll even receive a bonus for signing up.
While you can adjust your budget to limit spending, it’s basically just a summary of your income & expenses. (The term ‘budget’ is often misused the same as the word ‘diet’, with the common misconception that it is all about restriction.)
When working on your finances, the changes made to your budget will yield the quickest results, but those changes often require the most effort.
The Ideal Budget
After years of research (and trial & error), we found an ideal budget that should be a good starting point for most households.
- 70% for everyday living expenses
- 20% for debt service and/or long term savings
- 10% for investments
This simple monthly breakdown covers both short and long term expenses, and doesn’t skip out on saving & investing. I actually find it best to work on this in reverse order: 10/20/70
The Richest Man in Babylon provides simple, timeless, financial advice. This short book has guided us throughout our financial journey.
10% - Investments
This amount should come right off the top. If you put this off until later, later may not come. In many cases, you can have this money automatically deducted for your pay.
We’ll talk about specific investments later in this post, but it’s important that you don’t skip this step. Start somewhere, even if it’s just at 1%.
20% - Debt service and/or long-term savings
In most cases, debt is your enemy. You are stealing from your future. Credit cards tend to be the worst offenders, but even loans without interest can be a hindrance to your financial fitness.
Using 20% of your income to pay down debt will yield a much greater return than 20%, since you’ll be reducing the interest due as well. But even if you don’t carry any consumer debt, there’s another good use for this money.
Once your debt is paid off, you can use this 20% of your income as long-term savings. You can use these savings for your vacation, a new car, giving gifts, or even a down-payment on property rather than borrowing.
The key is getting out of the habit of paying today for yesterday’s expenses. Don’t invest your money in debt.
70% - Living Expenses
It’s vital that your expenses do not exceed your income, but it’s a common trap with those living paycheck to paycheck.
Don’t fall victim to the mentality that things will be better in the future, and that you can put off saving & investing. The sooner you start living within your means, the better.
By building the habit of saving & investing first, the less likely you’ll be in financial trouble later. But even if you are following this budget, there is one more thing you need to take care of to prevent that financial trouble.
An Emergency Fund
Sometimes life happens. You can’t always expect the unexpected. Having an emergency fund can help ease the financial strain of a personal crisis.
Most financial ‘gurus’ will tell you to set aside 3 to 6 months of your living expenses into an emergency fund, either in cash or a savings account. Having that money set aside is great, but that 3 to 6 month number is arbitrary.
I find it’s more important to think about what type of emergency may happen, and then work toward setting aside enough money to cover that emergency.
The 3 main emergencies that come to mind for me would be:
- transportation issues
- housing issues
- a family emergency
The first two can be directly handled with money, while the third one may require unexpected time off as well as money.
Determine what this would look like for your situation, and then make that the target number for your emergency fund.
It’s important to set this money aside before investing or paying down debt, as you would likely have to cover these expenses by selling your investments or taking on more debt.
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Now that an ideal budget has been established, what does it look like in action? Well, following your budget should be mostly automatic.
You can set up most bills to be paid automatically, and most banks will let you do this with savings/investments as well.
We created a free guide called Simplify Your Bills to help you streamline & automate your recurring bills.
Since most transactions are handled electronically, it’s imperative that you have good security protocols in place. If even one retailer or vendor has a data breach, your card and banking information can be compromised.
One of the best tools we’ve found to solve this problem is Privacy. This free service keeps your card info safe and makes paying bills more convenient.
Privacy lets you create a ‘virtual’ credit card for each vendor/retailer you shop with online. These cards are locked to that merchant, and cannot be used anywhere else.
If their customer database is breached or stolen, your ‘virtual’ card cannot be used, and your real card and bank info is not compromised.
You can also set spending limits for each card, share cards with other people, and pause or delete cards whenever you want. This is especially helpful for those ‘free trials’ you sign up for, but forget to cancel in time. (This alone has saved us hundreds of dollars.)
Start protecting your online purchases today with Privacy. This free service secures your banking details by creating virtual cards at each place you spend online, or for each purchase.
Investing is an expansive topic, and everyone’s situation is different, but I’ll lay out an overview of our investing philosophy and the system that works for us below.
Here are a few characteristics we wanted for our investment portfolio:
- Easy to set up and maintain
- Not actively managed
- No fads/trends or market timing
- Safe and profitable
We treat our investment accounts like savings accounts. The first priority is that it is there if/when we need it. The second priority is that it grows.
We do have money that we use for speculation, real estate, and so on, but that is totally separate from the 10% of our income we set aside for investments.
Bad Investment Advice
There are so many problems with ‘traditional’ investment advice. The first thing that comes to mind is the incentive structure, as in who benefits from the advice. In many cases, the advice benefits the institution providing the advice more than it benefits you.
Next, there is this tendency to think that an individual can outsmart the market. In some markets at some times, this is true.
We found that this approach takes more time and effort, and creates more stress than necessary. We also found that we could get comparable results with much less effort.
We eventually discovered The Permanent Portfolio, and have been using this system for many years now. The idea behind this portfolio was developed in the early 80s, and has a good track record.
It puts a priority on Safety, Stability, and Simplicity. The main objective is that your money is actually there when you need it, but you don’t sacrifice too much growth potential in the process.
It consists of just 4 asset classes, divided evenly, and re-balanced each year. You don’t need to worry about what the markets or economy are doing, it is built to handle times of inflation/deflation and prosperity/recession.
If you already have an investment system that’s working for you, then keep doing it. But if you don’t know where to start, or aren’t happy with the results you’ve been getting, then it’s worth looking into The Permanent Portfolio.
The path to financial fitness doesn’t have to be hard, but it does take consistent effort. Remember to focus on all three areas: Banking, Budgeting, and Investing.
The type of life you want to design for yourself can be helped or hindered by your finances. All you need to do is:
- Know that it’s possible
- Start where you are
- Practice ‘just in time learning’
- Keep it simple
The Slight Edge is a book I would definitely recommend if you need the motivation to get started. It completely changed my perspective on 'simple' daily actions.
Our path towards financial fitness was a long, winding road, but the payoff was huge. Small, consistent actions really do add up to big results!
The hardest part for me was practicing ‘just in time learning’, and not taking in more information than I needed at the time..
What about you? Have you started your own path towards financial fitness?
Let us know by leaving a comment below!