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Your Financial Health, Just Like Your Physical Health, Needs Regular Training

At this point, we are all pretty much aware of the benefits of regular exercise for our physical health.

The key to staying in shape is making it a priority and scheduling time in your week to train. Few, even those who have enviable physical training regimens, seem to be conscious of the fact that financial health requires a similar training schedule.

The good news is the same principles of prioritization, scheduling and repetition required for physical health translate directly to improving your financial health.

Here are a couple of critical “financial exercises” to add to your new financial fitness routine.

1. Cash Flow Review

Frequency: Monthly (or 12 reps annually)

At each month end, after all of the bills are paid, spend a couple of hours comparing how much was spent (and on what) to what was expected.

An understanding of what was expected to be spent is implied here. This is most commonly referred to as “The B word” or Budget. A budget is only slightly less hated than a “diet” its equivalent in the fitness world. The hate comes from the restrictive connotation, but without having an expectation of what will be spent, you really have no basis for a financial plan. It would be like getting on the road on a Holiday weekend with no destination in mind. You are not likely to end up in your ideal place and probably end up paying a lot more for it.

If you don’t have a budget, create one by reviewing historical monthly costs and determining the trend. Examine these costs at a level of granularity that allows you to answer the question, “am I spending my money in accordance with the things I value or is there a lot of thoughtless spending.” If needed set goals to reduce thoughtless spending. In future months compare what you actually spent to the plan. Adjust as necessary.

2. Update Your Net Worth

Frequency: At least quarterly

(or 4 reps annually)

My clients know it because I say it all the time, but Net Worth is the equivalent of heart rate, blood pressure and body fat combined in the fitness world. It is the most important gauge of progress toward financial fitness. Many people don’t know what Net Worth is much less how to calculate it on their own so here is a quick explanation: Net worth is the total of all the assets you own (bank accounts, investments, cars, homes etc) minus all of the debts that you owe (credit cards, car loans, mortgages).

Completing this calculation can be simple to complex depending on how widespread your financial life is (based on the number of bank/investment/credit card accounts you have). Simple is elegant so the fewer the better.

At the close of each quarter, spend an hour (to a couple of hours) updating the balances of all accounts and holdings to measure the growth (or decline) of this most critical indicator of financial health. Regardless of direction try to figure out the driving factor for any changes and determine if course corrections are necessary (save more, spend less, look at your investment allocation).

If your finances are comingled with a significant other, this process should be done jointly or at least reviewed and discussed together. It may be worth alternating the duties of preparation of the analysis so that each individual knows where all accounts are held and how this is calculated.

3. Review Your Credit

Frequency: At least every 6 Months (more frequently if you anticipate a need for credit)

You will be surprised what can happen to your credit in a short period of time and the negative consequences you will experience at the least opportune of times. I have personally experienced medical providers inexplicably sending their bills to the wrong address and not hearing about it until the collection ended up on my credit report. Most recently this happened to a new client who hadn’t been checking their credit and their notification came when applying for a mortgage on a new home purchase. This lack of diligence caused them real dollars in the form of a higher interest rate on their 30 year mortgage.

You can get a free credit report from each of the bureaus once annually so many suggest to request a report from one bureau every 4 months to stay on top of things. As busy as people are, my suggestion is to pull one at least every 6 months to make sure everything remains on the up and up. If you know you will have a need for new credit in the near future, make it a priority to move that review up to quarterly. Another mechanism would be to utilize on of the many credit monitoring services, but I wouldn’t recommend one you have to pay for.

Like a good fitness regimen of diet, strength training and cardio, completing these three activities in the prescribed repetition will improve your financial health. If you are just too busy or need help someone to hold you accountable to your financial fitness regimen, these are just a couple of activities we help clients with. Remember just like working out, you are less likely to miss a workout if you have a partner!

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