Who says you can only make resolutions at the beginning of the year? Sure, we’re more than a few months into 2020, but there’s no time like the present to tackle a serious issue that many people are turning a blind eye to – their financial fitness.
Do you think you’re in perfect financial shape? Or, could you stand to do a few financial burpees and squats? The truth is that you may not be as aware of your real relationship with money as you think you are. Check out the tips below to begin the rest of the year off right. Remember, you can restart your day, week, month or year anytime you want to.
Gauge Your Financial Fitness
If you’re not exactly sure where you fall into the world of financial fitness, use this simple formula:
How much you earn – How much you spend = The amount you can invest
If the amount you can invest is a negative number, then you need to work out your finances.
If you don’t have the exact numbers, just look at your last bank statement and start tracking back. Even if you find that you are well into the zero or negative, don’t get discouraged. Instead, spring into action by following the rest of the tips.
Calculating & Cutting Fixed & Variable Expenses
Fixed expenses are those that are the same every month, such as car payments, rent or mortgage payments, and cell phone bills. These could also include streaming costs or the cost of your gym membership, as well – anything that doesn’t change from month to month.
Alternatively, your variable expenses are those that you can’t anticipate to the exact cent. Some of these are regular bills – such as a utility bill that fluctuates depending on your energy usage. But, most often, variable expenses are those that you choose to make throughout the month. This would include going to happy hour with friends, shopping for new clothes or getting a daily latte.
Reducing your fixed costs is often more difficult than cutting your variable costs, but the effect can be significant. For example, if you can reduce your mortgage payment by refinancing, you could save thousands of dollars over the course of your loan. However, variable costs are often cut by merely saying no to purchases that aren’t necessary and don’t contribute to your financial goals.
Pay Off Consumer Debt Before Investing
It can be tempting to start investing as soon as possible. But, in most cases, it makes sense to pay off your debt first. Think of it this way: unless your return on investment is higher than the highest interest rate of your debt, you’ll save more in the long run by paying off debt rather than investing. While this isn’t quite as satisfying as writing a check to invest in the stock market, it is the smart choice in the long run.
Increase Investments as Your Salary Increases
A problem we refer to as “lifestyle creep” is pervasive – and leads to some seriously unfit financial folks. It happens like this: You have a budget that is excellent for you. Then, you get a raise, or a bonus or somehow come into some money. It seems like the perfect time to invest but, instead, you do just the opposite – you creep into a more luxurious lifestyle. Now, all of your extra cash is spent without any investments to show for it.
Does this mean that you can’t lead a better life as your finances improve? No, but it does mean you should be mindful. If you decide you want a more expensive car and work it into the budget, it may mean you’re able to put less money in investments, but it is a conscious decision you’re making. Along the same lines, you may decide that you want to spend 25% of your bonus on a fabulous trip. Have fun – just make sure you’re realistic about the cost.
The key is not to say goodbye to fun – just as the key to fitness is not spending 100% of your time at the gym and eating only lettuce. In the end, the key to financial fitness is making wise choices with your eyes wide open.