Plan Performance Direct

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Q: How Do You Become Financially Fit?

Here are the steps you must take to become financially fit.

 

How do you become financially fit? There are several steps you need to follow.

First, set goals that make sense for you. This means focusing on where you want to end up. Do you want to pay off your house? Do you not want to worry about auto payments anymore? Maybe you want to retire with millions of dollars. No matter what, you have to set goals. If you don’t know where you’re going, you’ll never get there—except by dumb luck (not a strategy we recommend for anyone).

Next, take stock of what your balance sheets look like. What are your assets and liabilities? Moreover, what do your income and expenses look like? Are you paying for a lot of subscriptions for things you don’t need? In terms of your debt payments, are you maximizing where you spend your dollars?

Remember that your home mortgage should be about 28% of your gross income and your auto payments should be about 10%. If you have two auto payments, they shouldn’t exceed 10%. If they do, you should consider refinancing options. Rates are incredibly low right now, so refinancing a mortgage, a car, or student loan payment can make a lot of sense. There are very few situations where refinancing an auto or student loan for a lower rate wouldn’t make sense. The idea being, the money you save could be used elsewhere.

Make sure you know what your costs are, how you’re invested, and that those investments are tied to your goals.      

 

After reviewing your debt payments and potential refinancing options, make sure to focus next on your insurance coverage. Specifically, look first at your property & casualty insurance (home and auto). Many clients we’ve worked with discovered that they were paying too much for too little coverage, and that’s usually the case if you work with a national carrier. If it has been a while since you’ve reviewed coverage here, we recommend reaching out to us or an experienced broker to make sure you have the right coverage at the right price. Look next at your life insurance. Do you have the right amount? Is the pricing competitive? If your life insurance is through your employer, you’re probably paying too much without knowing it. Consider a term policy outside of work as a more cost-effective option to provide you with coverage.

Insurance is ultimately about protecting your legacy, and so is estate planning. You’ve worked hard to earn what you have. Make sure it is protected. Do you have a will or a trust? Do you have health care and financial power of attorney? You should have all of these things and they should be up to date. But first, make sure your beneficiaries are listed on your retirement accounts. We’ve spent a lot of time making sure these financial cornerstones are in place for our clients because they’re vital when life changes unexpectedly.

After freeing up extra cash flow (saving money on an auto payment, for example), consider putting that money directly into your savings account. As a baseline, your savings account should comprise about three to six months’ worth of expenses. Assuming your savings account is healthy, make sure you’re saving in your retirement plan. Take advantage of any dollars that would be matched by an employer and consider both Roth and regular savings if the plan allows it. If you’ve maxed out the retirement plan, make sure to save in a brokerage account.

As to how to invest, remember that there is an entire profession dedicated to helping you know where and how to invest your savings. The key is to make sure you know what your costs are and how you’re invested to meet your financial goals.

If you need help with getting financially fit, don’t hesitate to contact one of our Henry+Horne Wealth Management professional advisers. Personal finances are our passion and we’d love to help you meet every goal you set for yourself.