When it comes to finance, the reason many of us get into trouble is because we overlook or ignore the warning signs that something isn’t quite right. In the same way that we often ignore the implications of our clothes getting a little more snug, until the day we can’t actually do up a zipper or a button; so to, we often ignore the financial “danger signals” that should clue us in to the fact we’re on a fast-track to somewhere not very pleasant. Sometimes, we ignore the signs because we honestly have no idea how to change our situation for the better. Sometimes, it’s because we’re taking an “ignorance is bliss” approach. Whatever the reason, ignoring the symptoms and not trying to find a solution is a choice that will inevitably backfire on us in spectacular style if we’re not careful.
What is Financial Fitness?
Financial fitness is simply a measure of your ability to meet your regular financial obligations, as well as your ability to weather a financial “storm” such as an unexpected expense or a drop in income due to illness or job loss. In an ideal situation, you would have more than enough money coming in each month to cover all of your monthly bills, as well as your savings goals; and enough money set aside in a savings account to cover unexpected expenses and replace 3-6 months of income in the event of a job loss or illness. (Note: If your emergency fund is a line of credit, your RRSPs or a credit card then that’s not financially fit – the last thing you want to do in an emergency is put yourself into debt, it makes a bad situation far worse.)
How Do You Measure Financial Fitness?
Take a look at the following three questions and choose the answer that best applies to you:
Q1. How would you describe your current debt levels?
- I don’t have any consumer debt and my mortgage is paid off.
- Aside from my mortgage I have no debt. I pay off my credit cards in full every month.
- I have some consumer debt, but I pay more than the minimum payments each month and I am on track to get all my consumer debts paid off within the next 3 years.
- I only pay the minimum amount on my debts each month. Sometimes I struggle to make my payments and most of my cards are at, or close to, their limit.
- I don’t know. I don’t open my statements.
Q2. How would you describe your current income levels?
- I earn significantly more than I spend. I have more than enough to cover all my regular expenses and save at least 15% of my gross income.
- I’d like to make more but my current income is enough to cover my expenses and savings goals.
- My current income is enough to cover my expenses most of the time. I don’t have much left for savings.
- There’s usually too much month and not enough money. Saving is almost impossible.
Q3. If you missed two paycheques in a row, how would that impact your finances?
- I wouldn’t like it but I have enough savings that it wouldn’t really impact my lifestyle.
- It would make me nervous, but I have enough saved to get by.
- It would make things tough, but if I cut back my spending and only made the minimum payments I think I could manage. I could always use my line of credit/credit cards if I didn’t have enough.
- I wouldn’t be able to pay my bills. I might be in danger of losing my home.
Mostly A’s: Your finances are in tip-top shape. Keep up the good work!
Mostly B’s: Your finances are in good shape. Boosting your savings rate will help take you to the next level.
Mostly C’s: Your financial fitness levels are hovering in the “caution zone,” making you vulnerable to unexpected expenses or a drop in income. Look for ways to reduce your debt levels and boost your savings rate in order to strengthen your situation.
Mostly D’s & E’s: You’re firmly in the financial “danger zone”. It’s time to take some action to get rid of your debt so your finances are working for you, rather than against you.
How Can I Boost My Financial Fitness?
Boosting your financial fitness is a matter of arming yourself with some basic knowledge, creating good habits and then having the discipline to stick to them. In my next post, I’ll give you some strategies for improving your financial fitness levels and strengthening your wealth building power.
In the meantime, why not spend some time over the next couple of weeks taking an objective look at your finances. Where are your strengths? Where are your biggest areas of challenge? What could you do today/this week/this month that would make a positive difference to your situation?
I’ve said before that money management and wealth building are built on simple principles but that simple doesn’t necessarily mean easy. However, if you’ve had enough of your current situation and you’re ready to take things to the next level, then I think you’ll find the information in the next post really helpful.