10-Step Financial Fitness Workout

Getting financially fit is a lot cheaper than getting physically fit: there are no gym membership fees, no fancy “breathable” workout clothes, and you definitely don’t have to deal with “that guy” grunting and hogging all of the machines. In fact, getting financially fit pays you back in the long run.

Deciding to become financially fit doesn’t have to be overwhelming either. Even if you commit to just taking Step 1, you’ll be making great progress.

So get off that emotional hamster wheel of thinking that your money situation is out of control (or going nowhere), and go “lift some weights” off your shoulders by becoming financially fit.

OTTERWIZE’S 10-STEP FINANCIAL FITNESS WORKOUT 

1. Take control of your finances.

• You’re in charge of your financial health. Nobody else can do this for you. (Well, they can, but if it’s in a runaway situation, you are the one who needs to apply the brakes.)
• Define your financial goals.
  • Saving for retirement? A house? That dream vacation? Eliminating crippling student debt?
• If you’re married or in a relationship where your finances are commingled, don’t let your partner handle everything. Discuss your joint finances together, be involved in all financial decisions, and know where your money goes.

2. Track your spending so you know where your money is going.

(See Otterwize’s tracking and budgeting tool or other ways to monitor your spending. You can also track your income and expenses with plain paper and pencil.)

• Track and monitor your total monthly net income and total monthly expenses to see where your money is going and where you can cut back.
• For monthly net income, look at your pay stubs and use the take-home pay amount (after taxes and other deductions) or use an estimate if self-employed.
  • Include income from any side hustles.
• For monthly expenses, look at the itemized listing on all your credit-card statements and add in any other monthly bills that are paid by check or online. Also, include an estimate for cash spent each month on smaller items. Make sure to include a pro-rated monthly amount for any bills paid once a year, such as some insurance premiums.
• Spend less than you earn. (See #3 below for ways to help you do this.)
  • Subtract your total monthly expenses from your total monthly net income.
  • If this number is negative, you need to either spend less or earn more (or both).

3. Spend less than you earn.

• Develop a money-saving mindset.
• Pay yourself first every month.
• Start with a manageable savings rate and increase this in small increments so that you don’t feel the pinch to your bank account as much.
• Find ways to lower your housing, transportation, and food expenses (the 3 largest categories of expenses):
  • Consider a lower-priced apartment/house or a less expensive car.
  • Just because a lender will approve a mortgage or car loan of $X doesn’t mean that amount will fit within your budget.
  • Reduce restaurant, take-out, and prepared food expenses.
  • Eliminate other unnecessary expenses (unused or underused subscription services, memberships, purchases that you don’t really need, etc.)
• Contact utility providers, insurance companies, lenders, etc. to ask for lower rates or lower-priced plans.
• Sign up for and use loyalty and rewards programs, rebate apps, coupon apps, etc.
• See Saving 101 for lots of other ways to save money as well as ways to earn extra income by taking on a side hustle.
• Automate your savings.

4. Eliminate consumer debt and student-loan debt as soon as possible.

• Make a list of all your consumer and student-loan debt. Include balance due, creditor, interest rate, minimum monthly payment, and type of loan (credit card, student, auto, consumer loan, in-store financing, etc.).
• Rank the debt in order from highest interest rate to lowest interest rate, and start to pay off the highest-interest debt first.
  • Some people prefer to rank the debt from the highest to the lowest balance and to pay off the lowest balance first so they can see progress. If you need that adrenaline boost then OK, but you’ll save more money if you knock out the high-interest debt first, then the next-highest, on down the line.
• Call your credit-card company to see if you can negotiate a lower rate.
  • Mention your strong on-time payment history, if you have one. (and try your best to have one)
  • If you have a small amount of credit-card debt, consider a balance transfer to a lower-rate credit card. (But remember there is a transfer fee, and the rate will shoot up if you don’t pay off the balance before the introductory period is up, so read the fine print carefully.)
  • Consider consolidating or refinancing your debt at a lower rate. (But if you have student debt, make sure you evaluate the possible loss of federal benefits before you consolidate or refinance.)
  • Save more (see ways to save money) and use your extra savings to pay down your principal balance even faster.
• Consider taking on a side hustle and putting that extra income (or a significant percentage of it) towards your outstanding debt balance. This is another way to expedite your debt-free journey.
• When you have finally paid off your credit-card debt, resist the temptation to slip back into the spending mindset that got you into debt in the first place. (For more detail on paying off consumer and student-loan debt, check out our article on paying off debt.)

5. After you’ve paid off all your credit-card debt (or if you never had any), pay your credit-card bill in full and on time every month going forward.

• Don’t purchase an item if you can’t afford to pay for it in full at the end of the month (although there are a few exceptions).
• Don’t be misled into thinking that you can just pay the minimum and be OK. Pay that card in full. If you can’t, find a way to pay it off as quickly as possible.
• Compounding works to your advantage when you are investing but can destroy you when you are carrying a balance from month to month on your credit cards. You will be paying interest on the interest every single month. Your balances will skyrocket. Your credit-card company will be thrilled. Don’t give them a reason to celebrate.
• Paying very high credit-card interest on everyday purchases means you will end up paying way more for these things than you even realize.
• Again, pay all your bills on time every month.

6. Save for an emergency fund of at least 6-9+ months of expenses.

• Set up a separate savings account as your “emergency fund” that you will only touch in cases of true financial need, such as job loss, health issues, or other real financial emergencies.
  • The amount you need could be more than 6-9 months depending on your own circumstances such as how long you think it would take you to replace your income in the event of a job loss or other disruption in your income stream.
• You should save an additional $1,000 as a cushion for unexpected but necessary large expenses like new tires, a broken device, etc.
• Do not touch these funds for any other reasons.
  • Going on an expensive vacation or wanting the latest jeans are not financial emergencies.
• Ideally, you should pay off all your credit-card debt before you establish an emergency fund. The interest you would otherwise pay on your credit card debt would be much higher than the interest you could earn on your emergency fund savings.

7. Start saving and investing for retirement as early as possible.

• Start early—ideally in your 20s—as long as you have an emergency fund in place and have at least paid off all your (high interest) non-mortgage debt. (See our discussion of issues to consider if you have debt.)
• Compounding can be your best financial friend, but it needs long periods of time to work its mathematical magic. (See “Investing 101/Before Your Invest/Starting to invest early.”)
  • The longer you wait to start saving for retirement, the more money you’ll need to save each month to reach your goals. (See the previous point.)
  • If you can’t afford to save that much, start with a smaller savings rate and try to increase the percentage by 1% or more every year. Starting small is better than not starting at all.
  • Your optimal savings rate depends upon many factors, including how early you start saving for retirement.
  • If you have access to an employer-sponsored retirement plan, many financial professionals would recommend that you sign up as soon as you are eligible.
• Aim to save at least 10-20% of your gross income for retirement. These percentages include the amount you are contributing through any 401(k) plan plus any employer match.
  • • If the plan includes an employer match, try to contribute at least enough to qualify for the maximum match amount.
  • • After you have contributed up to the full match, your ultimate goal (after contributing to any Roth IRA you may also have) would be to increase your contributions slowly until you have maxed out the 401(k) each year (i.e., contributed up to the full amount allowed per year.)
  • In addition to participating in the 401(k) plan, you can also open an IRA, but the deductibility of any traditional IRA contributions may be limited if you or your spouse are covered by a retirement plan at work (see Retirement Accounts/Traditional IRA). (The IRS has a nifty comparison chart.)
  • If you don’t have access to an employer-sponsored retirement plan, consider opening an IRA (Roth, traditional, SEP, etc.).
    • Your ultimate goal is to max out your IRA contributions each year.
• One plan could be to apply savings to your retirement accounts in this order, as applicable:
  • Contribute to your 401(k) plan up to the maximum employer match.
  • Contribute to your Roth retirement account (Roth IRA and/or Roth 401(k) if you qualify) up to the maximum.
  • Contribute to your traditional 401(k) and/or traditional IRA up to the total maximum amount.
• For 401(k) accounts and IRAs, if you can’t contribute enough to reach the maximum amounts right away, contribute as much as you can afford and aim to increase your contribution percentage by a set percentage (like 1%, e.g.) every year or portion of a year until you reach the maximum amount each year.
• See step 8 below and Investing 101 for discussion of other issues to consider when investing.

8. After you have maxed out your tax-advantaged options (or if you need more flexibility), consider opening a brokerage (non-retirement) account.

• If you have maxed out any employer-sponsored plans and IRAs, then you might consider looking into investing in a brokerage account (non-retirement account).
  • • This assumes that you have paid off all of your non-mortgage debt, you have an emergency fund in place, and you have a cushion for other unexpected expenses (see step 6 above).
  • Some people would say to wait until all your non-mortgage debt is paid off, and others would say to wait until all your high-interest non-mortgage debt is paid off. This is a personal choice to make based on factors unique to your own financial situation.
  • Some people choose to invest in a taxable account to give themselves some flexibility that they wouldn’t get with a retirement account (such as no upper limit on the amount invested and no restrictions on the timing of withdrawals).
  • Make sure you understand what it is you are investing in before you invest.
  • Expect markets to go up and down. If you have the benefit of time (10 years or more before you’ll need the money), take a long view towards investing and don’t panic when markets are in a downturn.
  • Choose a stock-to-bond allocation that matches your risk tolerance and time horizon.
  • Diversify your investments so that a decrease in one asset class won’t overwhelm your portfolio.
    • One way to diversify is to invest in low-cost index mutual funds or ETFs that allow you to gain broad exposure to the market by owning an interest in many individual stocks, bonds, etc.
  • If you aren’t sure how to manage your investments, consider an investment advisor or a low-cost robo-advisor.
  • Rebalance and realign your portfolio periodically to account for your age, time until retirement, changes in asset class percentages due to different market conditions, and other factors.
• Don’t invest in anything that sounds too good to be true.
• See Investing 101 for more information.

9. Make sure you have proper insurance.

• Don’t skimp on insurance; it’s your backup plan for when you need it.
• Make sure you have sufficient health insurance, renter’s or homeowner’s insurance, car insurance, disability insurance (short-term and long-term), and life insurance if there are others who depend on your income. (See here for more information.)

10. Take a financial snapshot of where you stand today.

• Calculate your Net Worth (total assets minus total liabilities)
  • • See Otterwize’s Net Worth post.
  • • Total assets include the total of all bank account balances, retirement accounts, brokerage accounts plus the fair market value of other large assets such as real estate and personal property.
  • Total liabilities (total debt) include the full outstanding balance due on credit cards, student loans, mortgages, car loans, and other consumer loans.
    • This is not the minimum due each month; it is the total amount of outstanding debt.
  • If you haven’t already started tracking your spending (see step 2), write down your total monthly net income and total monthly expenses.
    • For monthly net income, look at your pay stubs and record the take-home pay amount (after taxes and other deductions) or use an estimate if self-employed.
      • Include income from any side hustles.
    • For monthly expenses, look at the itemized listing on all your credit-card statements and add in any other monthly bills paid by check or online. Also, include an estimate for cash spent each month on smaller items.
      • You can look at 3 months of statements and bills, and divide the total by 3 to get a more accurate total.
      • Also include a pro-rated monthly amount for any bills paid once a year, such as some insurance premiums.
    • Spend less than you earn.
      • Subtract total monthly expenses from total monthly net income.
      • If this number is negative, you need to either spend less or earn more (or both).
• Know your credit score and check your credit report once a year.
  • • You can access your credit report for free once a year from each of the three credit-reporting companies (Equifax, Experian, and TransUnion) through www.annualcreditreport.com. (See Federal Trade Commission Consumer Information: Free Credit Reports.)
  • • Many credit-card companies will provide your credit score for free.
  • • You can also get your credit score here: CreditKarma, CreditSesame, and CreditWise (CreditWise is from Capital One, but you don’t have to be a Capital One customer to use the free service).
  • It’s a good idea to check your credit report once a year to make sure everything in it is up-to-date and accurate.