Note: This is part one of our financial bootcamp series.
After each New Year, everyone seems to have diet or fitness goals, but I want to encourage more people to have financial goals each year.
When you picture your ideal life, what are you doing in it? Is the picture you imagine different from your reality today? That’s okay if it is, I know I’m personally not where I want to be yet. Hold close to that picture of your ideal life and use that for ongoing motivation.
The reality is we can all do things to improve our financial situation and in this article, we are going to break down how to become more financially fit.
Tracking Your Financial Fitness
Just like prepping for a workout, we’re going to get warmed up real quick. There are many metrics that those in the fitness industry use—such as BMI, the body, body mass index, your chest size, your weight, your percentage of fat. Those are all metrics that you initially use to track your progress.
From a financial standpoint, the key metrics include net worth, which we define as assets minus liabilities (or debts), and monthly net cash flow (income minus expenses).
A positive net cash flow means that you have money left over each month after paying off all your expenses. This means that if you have a monthly negative net cash flow, you’re spending more than you earn and could have a serious problem that needs to be addressed.
If you don’t know your starting point, you’ll find it hard to track measurable goals. Understanding your baseline metrics will provide you with the starting point you need to start tracking progress and ultimately improve your financial situation.
Getting Your Financial Core into Shape
In this first article, we’re going to focus on the core. They make up the three key areas that will help you get financially fit.
Let’s begin with the core acronym A.B.S. (pun intended:)…
- A – Automate
- B – Build
- S – Spending
When breaking this down, we are actually going to go backwards and start with the “S” first.
Spending with Purpose
As you consider the S for Spending, think about going to the grocery store. You can get frozen yogurt, or you can choose vegetables. We all have a choice in life to digest quality foods or choose foods that will yield long-term disadvantages for our overall health.
I personally don’t like to use the word “budgeting” because it sounds restrictive. I prefer to focus on “spending” because it feels more empowering and provides a sense of freedom that you have to spend your money however you’d like. And that’s the truth, you have a choice to spend your financial resources wherever you’d like.
To get extraordinary results from a spending perspective, you need to focus on the three P’s:
- Purpose: Everything starts with your underlying purpose. And I encourage you to ask yourself, “what aspects of my life do I receive the most fulfillment and satisfaction from?” This will help you decide where to focus your financial resources.
- Priority: Once you understand your purpose, you need to understand where your money is going. Make sure your spending aligns with your values. Just as you make decisions when dieting to cut out the bad fat and add more of the good, you will need to do the same with your spending. Cut out the spending that doesn’t bring value to your life and add to the spending categories that enhance your overall satisfaction from life.
- Productivity: To see results, you have to get started. Think of saving not as a sacrifice but as a choice and freedom that you have everyday. By saving, you aren’t restricting yourself, you’re simply providing more flexibility and empowerment for your future self to spend however you’d like. Once you begin, you’ll begin seeing the results over time just as you do when working out on a consistent basis.
Building Your Money Muscle
I like to use the analogy that you can only squeeze so much juice out of a lemon, and budgeting is the same way; you can only cut out so many expenses. Your true success lies in your earning power.
You work your money muscle by focusing on your earning potential and various income streams.
Just like when working out, there are two main ways you can build your money muscle:
- Investing = Cardio: While cardio trains your endurance, investing is also a long-term game and requires stamina that is built over time with the more experience you have.
- Earning Potential = Strength training: You have to invest in yourself and develop new skill sets to make yourself more valuable in the workplace. Find out what you enjoy, and find ways to make an income doing more of that. Similar to weight lifting, you can’t be intimidated by your end goal. You have to start with what you’re able to lift and as you persist and work muscles at different angles, you will continue to make gains.
Earnings don’t always have to come in the form of income. Often times, negotiation can be a great way to earn a higher salary or lower the amount spent on purchases. Every company knows it’s easier and less costly to keep an existing employee than to find a new one. So don’t forget that as an employee you have negotiating power. Make negotiation a regular practice, and it will become easier and more natural for you over time.
Automating Your Finances
The “A” in ABS stands for Automation. I define this as something you only have to do once, and then you’re able to passively enjoy the benefits moving forward, freeing up your mental capacity.
A terrific example of automation in practice is how the United States collects payroll taxes through paycheck withholding. Before automatic tax-withholding was a thing, the government relied on taxpayers to set aside their own cash for taxes owed the following year. The problem was, people had a tendency to spend whatever they could see and had access to, so taxpayers were coming up well-short once it was time to make payment to the US government. The government responded by paying themselves first in the form of automatic tax withholding from paychecks and issued refunds at the end of the year if they withheld too much. In this case, the government found an inefficiency (collecting taxes) and solved it through automation.
When you yourself think about automation in personal finance, you too can start by paying yourself first. This is the foundation of building your net worth and accumulating savings because if you don’t, you’ll likely end up spending all that you have. You can pay yourself first by automatically contributing money into your 401(k) with each paycheck.
You could also automate your finances through some of the following methods:
- Scheduling automatic bill payments
- Setting up a direct deposit into a high-interest savings account (i.e. 10% of each paycheck automatically gets transferred to your savings)
- Scheduling automatic contributions to other investment accounts
- Transferring a set amount each month to a separate account that is meant to fund a specific financial goal (i.e. traveling abroad, dream car, future home, etc.)
Join the Financial Fitness Challenge
I want to challenge you this year to take the time to sit down and build a decision framework around your spending so that you can spend with purpose.
Set boundaries, cut what you don’t need, automate what you can, and focus on what adds happiness and value to your life.