Hey everyone! I'm enjoying some time in New York City right now for a panel discussion on reaching millennials (I'll share more about this on my next income report). They ALREADY have the New Year's countdown timer, which means it's time to start thinking about 2017. Crazy, right? Jason Goldstein from Penn Mutual has another great post for the site today! Enjoy ~M$M
As the new year is set to begin, along with making resolutions to get in better physical shape, I suggest making a serious commitment to improving your financial fitness. A little bit of extra financial muscle developed today will compound over time to help you win the financial marathon of life. Your older self will definitely thank your younger self for getting financially fit.
There are five key components for financial fitness:
1. Know your cash flow.
You have to know what you make and what you spend every month. There are few things more powerful in this life than a positive cash flow, as it gives you the financial leverage to do so many things.
Start tracking your cash flow now, while you’re young and have relatively few expenses to track. It becomes a good habit for a lifetime. It’s not necessary to count every dollar, but you should have a solid idea of how much you have coming in and going out.
2. Build up your emergency savings.
Living paycheck to paycheck is dangerous, because you don’t have any cushion against the ups and downs of life. You want money roughly equal to six months of expenses in an easily accessible place like a checking or savings account. If your cash flow shows you spend $3,000 a month, then you should have $18,000 available.
Here’s why this is important: A Bureau of Labor Statistics study tracked a group of people from age 18 to 48, and these folks experienced an average of 5.6 spells of unemployment during that time. As of October, the average duration of unemployment for someone out of work was 27 weeks. There is no way that credit cards can help you weather 27 weeks of unemployment.
3. Save 15 to 20 percent of your salary for the long term.
Once your emergency savings is in shape, the next area of financial fitness to attack is your long-term savings. This can be a combination of things – a 401K, the company match on your 401K, an investment account, a cash-value life insurance policy. The point is start socking it away early so that you get the power of compound interest working for you.
You should save a minimum of 15 percent of your gross salary. If you’re making $100,000, you should be putting $15,000 away per year. Of course, saving more is even better.
4. Maximize your protection with insurance.
There are some times when emergency savings isn’t enough, and for that you need insurance. That includes car, renter’s or homeowner’s, life, health, disability and umbrella liability insurance. All these things are interconnected, covering for those catastrophic events that can cost into the millions of dollars.
Life insurance is especially important. Know your human life value, also known as your economic replacement cost, so that you know how much insurance you need. If you plan on having a family or buying a house at any time in your life, consider getting life insurance now while you are young and healthy, because it’s generally far cheaper. Premiums are based on a number of things, including your health and age, so the longer you wait, the more expensive it can be. Getting permanent life insurance now also gives you more time to build up the cash value.
5. Know your net worth.
Studies have shown that the more that people know about where they are financially, the better they do financially. I recommend taking five minutes a week to think about what you are doing and the impact on your net worth. Tools like eMoney or Personal Capital can help track your net worth by aggregating student loans, your mortgage or rent, all of your brokerage accounts, your 401Ks, your life insurance, and credit card debt. They pull it all into one stream and you can monitor it quickly and easily.
Life happens, and it’s guaranteed that there will be bumps in the road. Being financially fit will keep you nimble, cushion you from the jolts, and help prepare you for both good times and bad. If you don’t get financially fit now, your older self is going to yell at your younger self later. So, get going.
For informational purposes only. The opinions expressed of those of the author only. Please talk to a licensed tax or legal professional regarding your specific situation.
Live differently. Your bank accounts will thank me later. ~M$M