No different from spiritual or physical fitness, financial fitness does not happen by accident. Now, with financial markets moving in nanoseconds rather than days, weeks and months, it is more important than ever to have a plan for pursuing financial fitness. While personal finances may seem complicated, it really comes down to four good habits: Save money, reduce or avoid debt, invest wisely and protect your wealth against emergencies or hardships.
Once goals are defined, it is essential to begin to save. Saving toward goals starts with knowing what you spend. Understanding where you spend your money is a good first step to changing spending habits.
A solid financial plan includes “paying yourself first.” Said another way, you pay yourself when you invest toward your goals. It’s nice to stop every day and get your favorite coffee from a national chain, but $3-$4 per day adds up to over $1,000 per year that could go toward goals.
We can all recite what our large expenses are — mortgage, car payments, property taxes, insurances, etc. — but it is the small expenses, like a quick lunch out or cash back at the grocery store, that we lose track of. Start by creating a detailed list of expenditures. The easiest way to do this is to review 12 months’ worth of credit card and bank account statements. This will help you capture exactly where the money is going and help you identify those “discretionary” expenses you may be able to do without. Once you have identified what you can save, the next step is to save it wisely and in a tax efficient manner.
Reduce or avoid debt
Reducing and avoiding debt ensures that more of what you make goes toward your financial goals rather than interest charges. Do not charge more than you can pay off each month. In the event you need to carry a balance on your credit card, shop around for cards that have the lowest interest rate and may come with a rewards program that actually pays you to use the card.
Eliminating or keeping your balances low will improve your credit score. Lending institutions are not the only ones using your credit score to determine your eligibility for their programs. Auto and home insurance companies, prospective employers, institutions of higher learning and others are all using your credit score to determine your ability to participate in their programs or use their services.
One way to monitor your credit report is to subscribe to a credit monitoring service offered by the three major credit rating agencies. Although this will cost a fee, it is a comprehensive way to keep track of your credit and to get notified if new credit or derogatory information appears on your credit report.
A less expensive way to monitor your credit is to obtain a free credit report from each of the three agencies (Experian, Equifax and TransUnion). Each of these agencies is required to provide you with a free credit report once per 12-month period. Request a report from one of the agencies every 4 months. Throughout the year, you will obtain three credit reports for free. This is a less comprehensive way to monitor your credit, however, because you will not know about new credit or derogatory information for up to four months or longer as not all information is reported to all three agencies at the same time.
Now, this is where it gets a little more complicated. There are employer-sponsored plans, IRAs, non-qualified accounts, annuities, stocks, bonds, 529s (for education accounts), Roth IRAs, and so on. Not all of these investment vehicles will be suitable for everyone. There are a number of factors to take into consideration such as your risk tolerance, time horizon, investment experience and overall net worth. Working with your advisor to understand these vehicles and determine which are most appropriate for you is a sound course of action.
Protect your wealth against emergencies or hardship
Establishing an emergency fund is a sound principle used in financial planning and a good step toward financial fitness. These funds should only be used for emergencies, such as expensive home and auto repairs or loss of a job. A good rule of thumb is to set aside six months of committed expenses. These dollars should be held in high yield savings accounts. You would not want to have these dollars invested in variable investments that are subject to market fluctuation because you need to know they will be available and immediately liquid in the event of an emergency. Also, having this emergency fund will limit the need to access retirement or education savings or using credit cards in the event of an emergency, all of which could result in additional costs such as interest charges or early withdrawal penalties.
Protecting your wealth against hardship is equally important. Having the appropriate level and type of life, disability and long term care insurance will depend largely on your personal circumstances. Factors such as how many wage earners are in the household, living expenses of survivors that need to be provided for, other sources of income in the event of death or disability, and the impact a death or disability will have on the overall financial plan are just a few factors that should be taken into account. The insurance industry has become more and more complex over the years. Not understanding insurance is never an acceptable reason to avoid it. Work with your advisor to determine which insurances you should carry and at what levels. Remember, it makes little sense to build a nest egg if you are not willing to protect it.
A good approach to financial fitness is to begin with a financial checkup. As you plan for the year ahead, is an investment checkup leading your list of resolutions? Taking time for a detailed financial review — including retirement planning, college savings, and your tax situation — may help you progress toward your long-term goals.
One more: Working with a financial advisor
When you think of spiritual fitness, you consult a member of the clergy or a spiritual advisor; when working toward physical fitness, you consult a personal trainer or doctor. It should be no different with financial fitness. Working with a financial advisor you trust should increase the probability that you will reach your goals and help make you financially fit.
No matter your level of investment experience or sophistication, you may benefit from developing a relationship with a financial advisor. Why? Because a qualified financial advisor is trained to analyze your personal financial situation and prepare a program designed to help you address your financial goals and objectives.
Most people can benefit from professional guidance when they venture into the complex and confusing world of managing their financial affairs. A financial advisor will be able to assess your risk tolerance, analyze your resources and current asset allocation, take into account your tax liability and make investment recommendations in the form of a written financial plan that will help you pursue your goals. The plan may help ensure that your current and future assets are used to their best advantage given your current financial situation and your financial goals.
Brian Schultz is a financial advisor and president of Choice Point Advisors in East Syracuse and a parishioner of Holy Cross Church in DeWitt.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to purchasing investment products or insurance. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Information offered by Brian. M. Schultz, President of Choice Point Advisors, LLC. Readers are encouraged to do their own research. Send questions to firstname.lastname@example.org, or 6320 Fly Rd, Suite 102, E. Syracuse, NY 13057 or visit www.choicepointadvisors.com Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Private Advisor Group, a registered investment advisor. Private Advisor Group and Choice Point Advisors are separate entities from LPL Financial.