Becoming financially fit, and staying there, is an endeavor many people spend most of their lives achieving. To be fair, landing an excellent full-time job, covering rent or a mortgage, paying many other bills, and still funneling enough cash into vacation and retirement funds is already a full plate. Add to that the challenge of avoiding massive debt, being prepared for the unknown, looking after children, and having disposable income, and it’s no wonder finances can be a source of prolonged stress.
Fortunately, with an educated perspective on crucial aspects of financial health, you can tackle any money issue that comes your way. To determine if you’re living with financial fitness, ask yourself the following five questions:
Do I have an emergency fund?
To create financial peace-of-mind and ensure you won’t be broke during unforeseen events, an emergency fund is of highest importance. Generally speaking, an emergency fund is at least $1,000 that you keep locked in a savings account, that’s only used for true emergencies. You never know when a car, house, medical, or personal issue will arise, and having some cash available to pay for it is safety net number one.
Do I have a financial plan for my life?
As rudimentary as it sounds, having a basic financial plan for your life is one of the strongest indicators of financial health. Sitting down to map out your current cash flow, savings, and investments isn’t always the most exciting thing to do, but it’s the most important step for long-term success.
While there’s no one-size-fits-all for financial plans, a good initial question to ask is: “Am I on track to be where I want to be in three to five years?” If the answer is yes, you’re already doing well, and may consider funneling extra income into investments. If the answer is no, it’s worth diving into the details of your monthly cash flow, to analyze where you may be overspending, and establish a new route towards income growth. Also, talking with a financial coach can help you identify blind spots, and generate recommendations for addressing them.
Am I regularly paying down debt?
If debt isn’t affecting your financial roadmap presently, it will be at some point. Debt is extremely challenging to avoid, and the average American adult carries $38,000 of debt with them, 25 percent of which is from credit cards. Many financial advocates will recommend your debt-to-income (DTI) ratio be within 36 to 43 percent. We always recommend doing whatever you can to live a debt-free lifestyle. To get your DTI, divide your monthly debt payments by your monthly income.
An effective way to tackle debt is set your obligations on autopay, at more than the monthly requirement (if possible). This ensures you won’t forget a payment, and your credit score can improve in tandem. If you can lower your DTI to zero, that’s even better.
Do I use credit for specific purposes only?
There are many ways that people choose to use credit. Whether they’re buying gas for their car, grabbing some groceries, or going on a date night, sometimes just swiping the card is the easiest way to pay. That being said, using credit cards can quickly result in piles of debt that are difficult and painful to get rid of.
An old saying from the Good$ense era at Willow had three rules for using a credit card; 1) Never put something on a credit card that you didn’t have in your budget, 2) Pay your credit card balance in full each month, 3) If you didn’t follow rules 1 & 2, close down the card. This concept has tremendous wisdom, so next time you get ready to use your credit card, consider these rules and act accordingly.
Do I sleep soundly each night?
One aspect of financial health never to be overlooked is whether you have stress or peace on a daily basis. Getting a good night’s sleep may not seem directly tied to financial fitness, but it’s an indicator of whether or not your financial habits produce positive results.
When a new month is starting, are you fretting about being able to cover all your bills, or are you enjoying confidence day-to-day, knowing your income can adequately cover all that you’ve planned? If your life too frequently looks like the former, your budget may have gaps in it – if you’re using one at all.
Surprisingly, 33 percent of American families don’t have a budget, and that is never conducive to financial success. Looking at your monthly income and expenses can be uncomfortable and even embarrassing at times, but it’s a must-have in order to grow financially strong and achieve your goals. Consider attending a class at Willow to learn how to put together a budget. You could also try using an automated, low-cost budget tracker like Tiller if you want to skip the headache of putting together your own budget.
Financial fitness takes work – just like anything else worth achieving in life. There are no shortcuts to financial success, but the rewards are great. Use these principles to guide you towards financial health, and remember to lean on the wise counsel of God’s Word and other mature adults in the midst of any season.
Written by Financial Stewardship Volunteer Brad Johnson.