Financial Fitness: Developing and Maintaining Money Muscles

Millions of Americans spend substantial time and money in pursuit of physical fitness. Hours and dollars at the gym are designed to get results, and people want returns on that investment. They develop a plan, work the plan, and success generally comes to those who are committed.

However, most people don't stick to those plans. According to a Forbes Health/One Poll survey, nearly 50% of people said their 2024 New Year's resolution was to improve physical fitness. The study also revealed that two out of three people don't make it past four months when it comes to resolutions—they lack the commitment.

Financial Fitness

Just like physical health, financial health is critical for a bright future and quality of life. Being financially fit is far more than just having enough money to cover expenses. It's the mental strength and awareness to understand what you can spend today while saving for tomorrow.

Read more: CDs vs. High-Yield Savings Account

Financial fitness is having a comprehensive understanding of your money. It includes budgeting, saving, investing, managing debt, and planning for the future. Flexibility is required, as adjustments are always necessary. You can't simply set it and forget it.

Achieving financial fitness requires financial literacy. You have to understand money. Knowledge is literally power for personal financial success. Financially fit individuals don't just have a tight grip on their money. They make informed financial decisions and are prepared to face emergencies and unexpected expenses.

Managing money is a big responsibility. It requires knowledge, discipline, and constant learning. Financially fit people are always students, as it's a lifelong journey. Financial fitness needs a strong and committed mental mindset—these are Money Muscles. They need to be toned and stay that way.

Financial literacy equals smart money, and making smart and responsible financial decisions can greatly influence the success of your journey through life.

Getting Started

1. Make a plan.

Goals can't be reached if they aren't set. Would you believe people spend more time planning vacations than they do planning retirement? Yogi Berra had it right: "If you don't know where you're going, you might end up someplace else."

2. Keep it simple to start.

Have an income, spend less than you make, and save what you can. Create a budget and include both needs and wants. Think of it this way: Every dollar has a destination. Track your spending, consistently measure it against your budget, and fully grasp total costs. Don't forget to pay attention to taxes, surcharges, and hidden fees—they can be sneaky and costly.

3. Start saving now.

Time is your friend, so start saving for retirement immediately. The destination for those dollars is your golden years. Get acquainted with the concept of compound interest. Albert Einstein called it the "eighth wonder of the world." He was a genius, but you don't have to be to benefit from it.

Read more: Average Savings Account Rates

4. Invest for the long term.

The sooner you start saving, the higher the probability of success. Master the Rule of 72—the calculation that estimates the time it takes to double your money. Historically, the stock market has generated an annualized 10% rate of return. With it, the Rule of 72 suggests you double your money every 7.2 years. But the stock market can be volatile and it's not for everyone. A more conservative approach could model a 5% annualized return in which the 72 Rule suggests your money will double every 14.4 years.

5. Participate in your employer's retirement plan.

401(k)s are the most common. Save what you can. Contributions are pre-tax dollars and they grow tax-deferred. At the very minimum, contribute up to your employer match, if offered. Employer match equals free money!

No employer retirement plan? Open an Individual Retirement Account (IRA). You can contribute up to $7,000 in 2024, and you can add an additional $1,000 if you're 50 or over. It grows tax-free until you make withdrawals.

If you qualify, open a Roth IRA. The contribution limits are the same, but the growth is tax-free. Compound interest with tax-free growth is like a superpower.

Measuring Financial Fitness

There are a number of ways to measure your financial health and well-being. The simplest is your net worth, which is obtained by calculating total assets minus liabilities. This provides a snapshot of overall financial health. Comparing income to expenses also determines financial fitness.

There's also the official measurement: your credit score. Banks and lenders use them to determine the financial health and creditworthiness of borrowers. Your credit score reflects your ability to live within your means, and higher credit scores result in lower borrowing costs.

There's also a non-mathematical measurement in which you want a lower score. The measure: stress. According to Capital One, 73% of Americans rank money issues as their number one stressor. Measuring stress and anxiety provides insight into overall financial health and well-being. Exercise is considered a stress reliever, and financial fitness helps prevent stress too.

You Don't Have to Do It Alone

The pursuit of physical fitness often requires assistance to stay on track. People work with trainers to help achieve their goals, and financial fitness is no different. Seeking counsel and coaching is encouraged. Registered investment advisors (RIA) are financial trainers and strategic thinkers. They're highly personal and fiercely independent.

A daily Frappuccino isn't good for physical fitness. It's not good for financial fitness either. Spending on empty calories eats away at both physical and financial health. If you simply cut back one day per week on that high-caloric drink and invest the savings regularly, you might be surprised at the results. $6 per week equals $24 per month. If you had $1,000 in an account, added those savings every month, and compounded it at 10% for 10 years, you'd have over $7,600. If you really cut back, eliminating four $6 beverages per week with the same investment strategy, you'd be looking at nearly $23,000 in a decade. Oh, the power of compounding returns.

Conclusion

A commitment to financial fitness requires a plan and constant measurement. Consistently tracking and evaluating financial metrics shows progress and identifies issues before they become problems. This can help you re-evaluate situations and make necessary adjustments to improve your financial fitness. Little things definitely lead to big things.