The 5 Fundamentals of Financial Fitness

Some things are fundamental. They are the basic skills and habits that should be mastered before moving on to more complex things.

Every doctor will promote a well-balanced diet and exercise as part of the fundamentals for healthy living. Eating well and a consistent exercise program can go a long way towards reducing or eliminating the chance of many potential health issues.

Financial planning follows the same premise. By becoming masters of the fundamentals, we can head off most of the common financial issues before they become a problem. By ignoring the good habits needed to foster a healthy financial lifestyle, we stack the deck against ourselves.

Here are the 5 Fundamentals of Financial Fitness:

  1. Pay Yourself First

Each year save at least 10% of your income. This includes retirement savings. Begin by creating a cash reserve (see below), then direct savings toward building and balancing your portfolio. Take advantage of tax-deferred plans, especially if your employer matches contributions.

  1. Have Sufficient Cash

Wage earners should have 10% of their annual income in a Ready Cash reserve. Self-employed and retired individuals will need more. Everyone should have 20% of their mortgage balance in an Emergency reserve.

  1. Pay off Consumer Debt

Learn the difference between good debt, acceptable debt and bad debt. Avoid the bad, use the acceptable wisely and take advantage of the leverage offered by good debt.

  1. Own the Right-Sized Home

For most people a home is their single largest investment and a mortgage their single largest debt. Buy a home worth 2-2½ times your annual income. Make a 20% down payment and make sure your mortgage is at least 50% of your home’s value.

  1. Invest in Yourself

Your greatest financial asset is your human capital: the education, skills and experience you use to earn money. Continue to invest in yourself to increase that capital and enhance your earning potential.

These 5 fundamentals are meant to be lifelong habits. Each one builds off of and reinforces the other. Just like we cannot go for a run today and then sit on the couch for the rest of the year, or only choose between “diet or exercise”, implementing all 5 fundamentals will build financial resiliency. You become able to withstand most shocks that life will throw at you. Although it will take time and might be tough to get started, the longer you practice the fundamentals the easier they become.

If you want to know more or would like help in implementing the 5 Fundamentals of Financial Fitness, please reach out to us by selecting the “Schedule a call with Galen” or “Schedule a call with Steve” buttons on the right side of the screen. We look forward to helping you begin your journey to financial health.

Now that you understand what the fundamentals are, one of the next steps to consider is investing your money. Click here to read our article on Key Questions for the Long-Term Investor.

It is also important to know what not to do. Here is another link that explains the difficulty in trying to time the ups and downs of the stock market.