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How’s Your Financial Fitness?

Jan. 22, 2014
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By Lisa Hay

Learn more about Lisa on NerdWallet’s Ask an Advisor

6 Benchmarks of Optimal Financial Health

Do you have a healthy emergency fund, take your lunch to work, clip coupons and max out your 401(k) plan? Congratulations! These are common recommendations for improving your financial health, along with others such as reducing your debt and diversifying your portfolio.

However, you can be following all these rules, and still not really be in optimal financial health.

The following are some additional benchmarks you can use to know if you’re really on the right track to top financial shape.

1. If you’re a dual-income couple, you can cover your fixed expenses with one income.

You can pay for all your fixed costs – mortgage, cell phone bill, utilities, groceries, insurance payments, child care, etc. – with using just one income.  The second income can be used for discretionary expenses, like vacations and going out to eat.

Granted, when you’re starting out in your 20s and 30s, this may be difficult.  But make it a goal to achieve as soon as possible, and don’t take on new expenses when one of you receives a raise.

2. You live below your means

This is related to the last comment in the previous section.  Rather than increasing your standard of living to your income level, increase your level of savings. Otherwise, when your income keeps rising, saving the commonly cited 10% doesn’t really get you to your goal.

Why?  Because your standard of living is rising too fast for your prior savings to keep up.

For example, if you start out saving 10% of your $40,000 salary in your 20s, but get some big promotions and suddenly are making $100,000 a year in your 30s, saving 10% on $40,000 the prior decade barely makes a dent in setting up a retirement for what’s now a $100,000 standard of living.

3. You don’t have a car payment

You have paid off your car(s) and save in a “car replacement” savings account each month for the purchase of your next car.

4. Your aren’t “house poor”

Most financial planners will recommend that your home’s value should not exceed 2 to 2.5 times your income, and your mortgage should be no more than 80% of the value.

For instance, if your income is $100,000, your home’s value shouldn’t exceed $250,000.
An added bonus to putting down 20% on your home, is avoiding costly Private Mortgage Insurance (PMI).

6. You have a will and other legal documents in place

Estate planning isn’t just for wealthy people. At a minimum, every adult should have a will and a durable power of attorney for finances and health care. And if you have children under 18, ensuring you have guardianship provisions in place for them from day one will set you ahead of most people.

7. You give at least 5% of your income to charity.

Charitable giving indicates a healthy relationship to money. It means you have margin in your life and your finances, and helps you keep the focus of money in its place.

Although the benchmarks above may seem unattainable, with some discipline and hard work, they can become a reality!  In my experience of working with clients, there is very little correlation between income level and financial fitness. In fact, financial “gluttony” is a struggle for many with significant resources.

Like physical fitness, I have observed that financial fitness is more about changing behavior, than about head knowledge. So what will you do to improve your level of financial fitness in 2014?