Have you ever made the decision that it was time to get into better shape? If so, you know what that entails. On a consistent basis you need to exercise, eat right, get enough sleep, and drink enough water. You know that your body isn’t going to transform overnight and that one 5-mile run won’t make the numbers on the scale go down, nor will eating a few extra helpings of kale and celery. Getting fit requires a change of mindset and discipline on a daily basis.
You can lift your foot off the gas every once in a while, but it’s really about consistency.
It struck home with me the other night that the psychology of how we go about transforming our bodies to get physically fit is very similar to how we need to train to our minds to get financially fit. I was attending a back-to-school evening for my two oldest sons when one of the moms approached me and said, “keep posting your financial articles on About.com and LinkedIn…they are a great reminder to keep me on track!” At that moment it occurred to me that to get really financially fit, it takes no one article, book or lesson.
Rather, it’s the totality of advice, council, and discipline over time that makes financial success possible.
Chances are, the majority of us (as in 99.99%!) won’t get rich from winning the lottery or becoming the founder of the next Facebook. Instead, we will need to find wealthy methodically. Vincent Van Gogh said, “Great things are done by a series of small things brought together.” This is exactly the path to financial success. Here are a series of four small but very important things that if done correctly, can result in a lifetime of financial fitness:
1. Start saving early. We all intellectually know the importance of saving early, but a new survey really drills the point home!
According to a USA Today/Bank of America Better Money Habits survey, both parents and children agree that advice to start saving as soon as possible is the most critical financial tip parents have given their Millennial offspring.
2. Remember the Rich Ratio. The Rich Ratio is a ratio that I created for individuals and families to give them an easy way to understand their money.
Simply put, the Rich Ratio is the amount of money you have in relation to the amount of money you need. Any ratio over 1 is fantastic and any ratio below 1 indicates that you may have some work to do. To calculate your Rich Ratio, take the monthly income you have (or if you are entering retirement, the income you will have) coming in (social security +pension+ any other income streams), including what your nest egg should produce, and divide it by what you expect to spend each month. The equation is Have/Need = Rich Ratio.
3. Find the right balance of spending and saving using TSL. TSL is short for taxes, savings, and life. I encourage people to adopt a TSL-driven budget that contains the three buckets where most of our dollars go and a split that looks like this:
- Taxes: 30% to federal and state taxes (adjust accordingly to tax bracket).
- Savings: 20% to a 401(k) plan or to pay down debt.
- Life: 50% for food, housing, fun, and everything else.
4. Invest! Harness the power of compounding. Every dollar that you start saving today will be beneficial to your long term financial stability. The power of saving early is very real. Take a look (each example assumes a 7% annual return):
- If you put $1 away at age 20, that dollar will be worth $21 by age 65.
- If you wait until you are 30 to invest that same $1, it will be worth $10.68.
- If you wait until you are 40 to invest that same $1, it will be worth $5.42.
- If you wait until you are 50 to invest that same $1 and you’ll get a measly $2.76. This means that a dollar invested at age 20 is nearly twice as powerful as a dollar invested at 30 and 7.5 times more powerful than a $1 that is invested at 50.
Are you financially fit? If not, sit down and write down some goals to help you get there. Don’t forget that true financial fitness can be reached with discipline and consistency.