There are lots of ways to become financially fit, and different definitions of success such as:
- Having the money you need, when you need it
- Living within your means
- Being debt-free
- Having savings and investing funds
- Having enough money to retire
- Having enough money to leave to your heirs
And there are many different strategies to become financially fit, including incorporating a budget to track your cash flow so that you can see where your money is coming from and where it’s going; creating a savings, investing, retirement, insurance, and estate plan; and conjuring up specific financial goals—maybe that trip to Europe you’ve been dreaming about, paying for your grandchildren’s education, helping your son start a business, or developing a long-term care plan for your golden years.
Our goal here at Financial Freedom is to assist you with all of those tasks, proceeding toward the ultimate goal of becoming financially fit, so that you never (or almost never) have to worry about money.
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But there is also another, very important reason to become financially fit—and that is to protect and preserve your emotional and physical health.
Just think about the times in your life when you’ve been stressed over not having enough money. It’s like a sock in the gut, an all-consuming train of thought, that can make you physically very ill.
Most of us have probably been in that position—where you just can’t think of anything else except how to get out from under a huge debt load. If that’s the case, you are not alone.
As of February 2021, according to the thebalance.com, U.S. consumer debt increased at an annual rate of 7.9% to slightly above $4.2 trillion. That’s after no change in January.
The chart below shows you how consumer debt in America has risen in less than a year—thanks to COVID’s choke on the economy.
And, if you include all debt (including mortgages), the picture is even worse.
Thanks to mortgage debt climbing over $10 trillion for the first time, that figure reached a record high of $14.6 trillion at the end of last year. The total outstanding U.S. consumer debt balance grew $800 billion, also to a record high of $14.88 trillion, up 6% since the beginning of 2020, according to Experian.
And, as you might expect, the largest growth in debt was by the younger Generation Z (18-23), who saw their debt rise by 67.2%, to an average of $16,043.
The good news is that credit card debt is down by 9%, to $756 billion, but student debt climbed 10%, mortgage debt was up 7%, auto loan debt rose 4.8%, and personal loan debt was up 6%.
COVID has helped to create this bleak debt picture. Although the stimulus checks have helped, there are still 114 million folks worldwide who lost their jobs in 2020, according to the International Labour Organization. That means most Americans will have to play ‘catch-up’ with their finances after COVID recedes.
And that is very worrisome. This data, sourced from JAPA, NIMH, and Shift Processing gives some insight into how these financial stresses can hurt us further by impacting our health:
- 80% of Americans have consumer debt.
- Approximately 2 in 3 adults say that money is a significant source of stress in their life.
- 52% of Americans say they have experienced negative financial impacts due to COVID-19.
- 73% of Americans with a household income of less than $50,000 report that money is a significant stress source.
These stresses can result in headaches, anxiety/panic attacks, Type II diabetes, even heart attacks and strokes. According to an Associated Press-AOL Health poll, “about 27% of those in debt had ulcers or digestive-tract problems, compared with 8% of those with low levels of debt stress, and 44% percent had migraines or other headaches, compared with 15% of people with low debt stress.”
And while you may feel like you don’t have much control of your finances right now, there are still some steps you can take to put you on the path to becoming financially fit—starting with a budget.
No one likes to budget (except maybe accountants), but budgeting is the most effective strategy in your toolbox to taking the steps that can define your entire financial condition.
And it’s not hard at all. You don’t even need a computer (although things will go a lot faster if you use one). And if you do, a simple Excel spreadsheet will serve you well. Some of the available financial software like Quicken, is also inexpensive, and automates a lot of tasks so that you don’t have to do much more than enter your income and expenses into the system.
In a recent article of my Financial Freedom newsletter, I listed these steps for creating a budget. I think you’ll find them useful:
5 Easy Steps to Become Financially Fit with Budgeting
Create a budget. There are five steps to developing a budget:
Calculate your net income. Most of us know how much money is coming in. Of course, if you are self-employed, or commission-based, that varies month-to-month. So, you can start with what your minimum monthly intake will be.
List monthly expenses. What are you buying? The best way to figure this out is to keep a record of all your expenses for a minimum of one month. You’ll be surprised and amazed at where your money is going. Write it all down: $5 at Starbucks, $10 at the grocery store for impulse buys (that’s why you need to make a grocery list—before you go shopping!), $17.99 for Netflix, $80 for your hair cut and style, $40 for that scarf you didn’t need, utilities, auto and health insurance, gas, auto repair, HVAC tune-up, childcare, gym memberships, dining out, entertainment, and loan and mortgage payments—yes; write it all down—no matter how small!
Label which expenses are fixed, and which are variable. Fixed expenses are just like they sound; you have to pay them. These are bills like rent/mortgage, utilities, transportation, insurance, food, and repaying loans. Variable expenses are items that you may not need, like your daily Starbucks run, eating out three times a week (like we used to, pre-COVID!), or the gym membership that you don’t use, or those regular shopping sprees to make you feel better. In other words, these are the expenses that give you opportunities to reduce or eliminate completely, and can be the source of your new savings/investing initiative.
Determine average monthly costs for each expense. Your fixed expenses should be about the same each month. But things like groceries and utilities may vary. So, if you have the patience, look at your checking account and see how much you’ve spent on these items in the last year, and average them out. Then put that number into your budget. Some months, you’ll be ahead and some, you won’t.
Make adjustments and start saving. If you’re outspending your net income, you’ll need to find some expenses that can be reduced or cut completely. And this is also where you will allocate your monthly savings. If you are spending less than you make, drop the overage into savings. You can set up one or more savings vehicles—for vacations, education, and retirement.
Why don’t you start with budgeting? I guarantee you that once you take this first step, you will begin to feel as if you have more control of your finances, and that will lessen your stress and help you become financially fit.