A Simple Plan for Financial Fitness
Most of us are not financially fit. We are not completely aware of how our money is being spent. We have too much debt and don’t spend our money intentionally.
There is no single, correct path to financial prosperity. Different solutions work for different people.
While there are multiple paths, there are some steps that are critical, regardless of the path followed:
1. Know where your money is being spent. Many people only have a vague idea about how much money they make and where it goes. The first step to financial fitness is knowing exactly how much you’re taking home and where it’s being spent.
· Websites such as Mint.com make it easy to track how every penny is being spent each month. There are other, similar, services. You do not need to continually track your money if your accounts are set up properly, but you do need to get a handle on your “baseline”.
2. Set short-term and long-term goals. Set a few goals that will cover the next month, year, and five years. How are you going to make these goals come to fruition?
3. Allocate your spending wisely. A few simple guidelines may be helpful, but realize they are only guidelines. If you’re already in a good place financially, these guidelines will help you to stay there:
· Keep your fixed expenses to 50% or less of your take-home pay. This includes things like rent or mortgage payments, utilities, car payments, gas, and food. Basically, the things you must spend money on each month.
· Use 20% of your take-home pay to build an emergency fund, pay off your debt, and save for your retirement. It is recommended that your emergency fund be able to cover your fixed expenses for 6-9 months so that you won’t be reaching for your credit card when there is an emergency. How the money is split between your retirement, debt, and emergency fund will depend on your situation.
· The remaining 30% can be used as you see fit. This is the money you can spend on vacations, eating out, or hiring a landscaper. This money can also be put towards the previous category, but be sure to enjoy your life along the way.
4. Eliminate your debt. Debt is a major obstacle to your financial fitness.
· Be aware of your credit score. There’s no need to ever pay to get your credit score. There are many free options available, like CreditKarma.com.
· Be careful with your credit cards. It’s always best to be cautious about whipping out the credit card. It’s important to use your credit card only for pre-funded purchases like a vacation and to set your credit card(s) to auto-pay so that they are paid in full every month.
5. Get adequate insurance. Protect your assets and limit your liability, including insurance for your pets.
Reaching a point of financial fitness is an important goal for everyone. Not only does it give you the opportunity to relax and enjoy your life, but it also makes your future much more secure. Allocating your funds properly helps to ensure that you have enough.
Get started today and become financially fit.