Wednesday, April 15, 2015

Six Traits of the Financially Fit

Everyone is unique and everyone has their own financial habits - plus most people do not like being told how to spend their hard earned income.

That being said, there are several traits that the financially fit (wealthy) share – and you could possibly imitate to achieve your own high-level of financial fitness.

To be clear, income doesn't equal wealth, as many people have large incomes but no assets, investments, net worth or real wealth.

Six Traits

  1. The first trait is to “live well below your means.”

Living below your means has the obvious benefit of a cash surplus – fewer expenses than income – but it also means that you need less in retirement.

Spending less money than you bring in removes financial stress. You’re not worried about having enough money to pay your bills, the mortgage, or purchase groceries. This is a huge relief!

In addition, you have excess money (the difference between your monthly income and your monthly expenses) to apply towards your financial priorities (retirement/financial independence, a home purchase, paying off debt).

This will also help you to retire (possibly early), as you will need less income than others (those spendy folks) to fund your lifestyle.

  1. The second trait is to “purchase modestly.”

Modest homes (and owning for years). Modest vehicles (and owning for years). Purchasing toys with cash, not credit.

Being comfortable with living and owning reasonably, allows you the freedom to focus money into other priorities. Let’s say home-ownership is important to you, but so is financial independence. If you purchase a modest priced home, and have a reasonable monthly mortgage payment, then you’ll be in position to still focus on financial independence. The reverse occurs if you have a lofty mortgage payment, which requires you to use all of your excess dollars to make the payment – little else on your financial priority list can be accomplished if this is the route you choose.

  1. The third trait of the financially fit is to “invest a significant portion of your income.”

Note that owning more is not the same as investing. You should be investing in appreciating assets (stocks, bonds, businesses), not in depreciating assets (cars, electronics, items with a limited life).

You’re looking for appreciating assets here - investments that will gain in value (a true investment), not depreciate over time. (There is no guarantee of investments increasing over time, but historically, some investments have performed better than others.)

Investing in stocks and bonds, as well as private (maybe self-owned) businesses or real estate, can be wise investments for your money. Investing in education and training to develop your professional skills can be good investments.

Owning toys or assets that have a short lifespan (but using the excuse that they’re investments) will not pay off in the long-run.

  1. The fourth trait is to “allocate time and money to building wealth.”

Without focus, you will not be able to have a plan and work towards completing your plan. But even having a plan doesn't guarantee results. This requires action! And action requires significant resources – and in this case, it’s time and money.

Make sure you set aside time regularly to review your finances and your priorities. Review whether you’re still on track or if you need to make adjustments. Awareness is key to improvement.

  1. The fifth trait is to “believe financial independence is more important than keeping up with the Jones.”

The latest trends, social pressure, what the cool kids are wearing/owning/using, are all ways for you to part with your dollars. You have to buck the trend to reach your financial goals, no one said this was easy – and obviously not everyone is doing this.

If you’re more concerned about what others think about you (or what you own/look like), then you’re going to spend money on trying to meet their expectations. Here’s a secret, they’ll probably still find something lacking. You’ll spend your life trying to measure up, only to find that you haven’t been focused on the right financial path.

  1. The sixth (and last) trait of the financially fit is to “view your adult children as economically self-reliant.”

Children can be expensive, but completely worth every penny. They are your responsibility and you take that accountability seriously…but what about when they’re adults? At what point should your work have developed them into mature, self-reliant citizens?

Provide financial education to your adult children, help them emotionally, but be weary of the financial support. Are you hurting them or helping them when you provide economic support to grown, capable children? What you are doing, is taking funds away from your own financial independence (a.k.a. retirement).

The financially fit know that there has to be a balance between supporting themselves (being a little selfish) and supporting others.

Mimic Others

Similar to being physically fit and mentally fit, being financially fit can be a lot of work and daunting (and possibly involve some sweat). You have to work hard, have an end goal, and take action.

You might find that you already have several of the habits, but are lacking in a few. Continue to flex your financial muscles by tip-toeing into the other traits.

You don’t have to start from scratch. You have the tools and habits of others to mimic. By modeling others who already have the traits of the financially fit, you have a edge to reach your goals.

Do you portray any of the financially fit traits? Which ones?