Thursday, September 24, 2015

The Five Fundamentals of Fiscal Fitness

With the new school year in full swing and kids getting back to basics, this is a great time to revisit the basic building blocks of financial planning – what we call ‘The Five Fundamentals of Fiscal Fitness.’  We believe that financial success is 80-90% determined by how well a person follows these fundamentals:

1.    Save enough money from your paycheck into permanent savings.
2.    Have enough liquidity to manage the bumps in the road.
3.    Buy enough insurance to protect against catastrophe.
4.    Own the proper size house.
5.    Avoid consumer debt.

Let’s take a look at each of these in a little more detail:

Save enough money from your paycheck into permanent savings.
This means putting money away not for a future purchase, like saving for a car or a vacation, but into building permanent wealth off of which you can eventually live.  For most folks, that means using your company 401(k) or 403(b) retirement plan.
How much is ‘enough’? Of course the specific answer for anyone is unique to each situation, but a really good place to start is to take your starting age minus 15 and save that percentage of your income.  So if you start saving at age 25 and save 10% of income you’ll be in good shape.  If you wait until you are 35 to start, saving about 20% of your income is a good general target.  If you don’t start saving for retirement until age 45, you’re going to need to save about 30% of your income to reach your goals.

Have enough liquidity to manage the bumps in the road.
Again each person’s situation is unique, but a good place to start for employees is 10% of income in a checking account and 20% in emergency reserves like a savings account or CD’s.  Double those amounts you are self-employed.

Buy enough insurance to protect against catastrophe.
Insurance isn’t intended to cover minor bumps in the road or common maintenance, the reason you have liquid reserves to handle those things.  Insurance is needed to cover major, catastrophic events – like losing your ability to earn an income because of death or disability, being sued for a fatal accident or having surgery or other major medical care.
You probably need more life and disability insurance than you think.  Your ability to earn an income is typically your greatest asset.  Consider:  if your house burned down and wasn’t insured, it’d be terrible but as long as you could keep working eventually you’d be able to buy another one.  However if you lose your ability to work, there’s no way you could overcome that except for having enough insurance.

Own the proper size house.

For most folks this means owning a house worth between 1 ½ and 2 ½ your annual income.  Not only does real estate provide a lot of enjoyment in addition to its diversifying effect on your net worth, with a proper mortgage and liquidity combination it gives protection against inflation that can’t be found in many other places.

Avoid consumer debt.   
Consumer (bad) debt is any debt used to buy things that lose value over time, and is most commonly found in credit cards and auto loans. Good debt is used to buy things that increase in value like a house or an education, and is not what we are referring to here.
Spending above your means and always having an auto payment are two of the most crippling mistakes you can make.  The old saying ‘If you can’t buy it in cash don’t buy it’ should be the rule, not the exception.  Adhering to this Fundamental is one of the biggest things you can do to help yourself achieve financial success.
These five things aren’t very complicated, but like many recipes for success in life it’s the things that are simple-but-difficult that are the keys to success.  If you’d like more information about building a strong financial future, or a checkup on how you are doing so far, please get in touch and we’ll be happy to talk with you.


  1. This is a very informative article full of information I wish I had been given as I approached adulthood. Perhaps if that had been the case i would not have accumulated so much consumer debt at such an early age. Now I am swimming in a sea of debt I am afraid I will never get out of. My hopes are to consolidate my debt, but finding bad credit loans is much easier said than done. My advice to anyone in their late teens/early twenties who read this would be to heed the advice given. If not; you'll likely regret it later in life.

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