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Achieve Financial Fitness

Do you regularly check your blood pressure, exercise, and eat healthy? If so, congratulations! You are taking steps toward better health and a longer life.

What about your financial health? Are you keeping your finances healthy now so you can see benefits in the future?

Just like physical fitness, achieving financial fitness means you have to stop bad habits, create an exercise plan and do routine checkups. Here’s a financial fitness plan to help you reach long-term success:
  • Personal finance basics
  • Creating a budget
  • Managing debt
  • Investing for beginners
  • Taxes
  • Protecting your possessions
  • Helping your children understand money
Expand All

Personal finance basics

Getting a grip on basic money management can provide many financial rewards, including financial freedom, peace of mind, and the time and resources to pursue your interests. Everyone’s financial situation is different, but here are a few basic principles that apply to everyone:

  • Budgeting
    Spending money without a budget usually leaves you confused as your paycheck seems to disappear. When you create a budget, you see a clear picture of how much money you have, what you spend it on, and how much, if any is left over.
  • Cutting Expenses
    After you have successfully created a budget, you'll have a much better understanding of where your money goes and where you can possibly trim expenses. For many people, this is as simple as cutting back on some of the little things that can add up.
  • Getting Out of Debt
    Even after creating a sound budget and cutting unnecessary expenses, you may still find yourself with lingering debt. Using credit and taking on some debt isn’t necessarily a bad thing, but when you can't keep up with the payments or borrow more than you can afford to pay back, you could be in trouble.

    One of the most important steps in getting out of debt is to pay more than the minimum amount due each month. Even a modest credit card balance can take over a decade to pay off if you simply pay the minimum amount due. In addition, paying the minimum will end up costing you thousands of dollars in interest.
  • Saving for Retirement
    With fewer companies offering full pension plans and the uncertainty of Social Security, it has become more important than ever to save and plan for your own retirement. Unfortunately many people feel that they simply don’t have enough money left over each month to save.

    Retirement savings needs to become a priority instead of an afterthought. The Internal Revenue Service has made saving for retirement even more attractive with special tax-advantaged accounts such as employer 401(k) plans, individual retirement accounts and special retirement accounts for the self-employed. These accounts allow for tax deductions, credits and even tax free earnings on some retirement savings.
  • Insurance
    You've created a budget, cut expenses, eliminated your credit card debt and, have started saving for retirement. While you've definitely come a long way, there is one more important aspect of your finances that you need to consider.

    You've worked hard to build a solid financial footing for you and your family, so it needs to be protected. Accidents and disasters can and do happen and if you aren’t adequately insured it could leave you in financial ruin. You need insurance to protect your life, your ability to earn income, and to keep a roof over your head.

Creating a budget

Have you ever started a long road trip without looking at a map? That’s what it’s like trying to reach your financial goals without creating a budget.

Budgets are an important tool in helping people pay off debt, save for retirement and make the most of their money.

Unfortunately, many people who do create budgets do so without knowing where their money is really going. Often they create wish list of how they'd like to spend their money, but it's not realistic.

Here are a few tips on creating a realistic budget:
  • Follow your money and track your spending
    Track your expenses for at least a month. Be sure to record every purchase, no matter how small. Once you know where your money is going, you can make an educated decision on how to allocate your money.
  • Don’t try to cut all the fun out of your life
    Too many novice budgeters try to become too financially conservative on paper. These excessively trim budgets almost always fail if they have no allowance for entertainment. Instead, learn to moderate your entertainment spending.
  • Make savings contributions automatically
    A good rule of thumb is to set aside at least 10 percent of your earnings toward savings, using direct deposit to pay yourself first. If you put that money aside before you even see it, you won’t miss it.
  • Try to spend no more than 35 percent of your earnings on housing and utilities
    Homeowners can often raise this percentage a bit since principal payments are a form of forced savings, and mortgage interest is tax- deductible.
  • Set aside 10 percent of your earnings for specific items
    If you’re saving for a new car or your child’s college education, set aside another 10 percent of your earnings into an interest-bearing account or a 529 college savings plan.
  • The rest, except for debt payments, is discretionary
    What ever is left over can be used on food, entertainment, clothing, vacations, etc. Keep in mind that you can’t afford everything you want, but you can direct your spending to the things you want the most.
  • Pay down your expensive debt
    Interest payments made to credit cards are expensive and they deny you the ability to apply that money toward savings or entertainment. If you have multiple credit card balances, try to pay off the card with the highest interest rate first, while continuing to make minimum payments on the other cards. Determine how much you can afford to pay each month, and make those payments consistently.
  • Set aside any financial windfalls for a rainy day
    Try to put away any bonuses, tax refunds or raises into an emergency fund.
Creating your first budget can be overwhelming, but it’s worth the effort. Developing a budget that you can maintain over the long term will help you build wealth, get out of debt, and cut expenses.

Managing debt

Even if you only have a little debt, you need to be aware of how to manage it. You still need to keep up your payments and make sure it doesn’t get out of control. On the other hand, when you have a lot of debt, you have to put more effort into paying it off.

Whether the debt is big or small, owing money can be uncomfortable and stressful, regardless of your financial status. However, debt can also be a tool commonly used to get ahead, whether it is borrowing for education, for business or for a home that will appreciate over time.

Here are some pointers to help you control and leverage your debt:
  • Know who and how much you owe
    Make a list of your debts, including the creditor, total amount of the debt, monthly payment, and due date. You can use your credit report to confirm. Refer to your debt list periodically, especially as you pay bills. Update your list every few months as the amount of your debt changes.
  • Shop around
    Plenty of sites (try creditcards.com or nerdwallet.com) refer you to creditors and keep you coming back with a variety of resources and information. They also help you narrow down choices based on a variety of criteria you can customize.
  • Negotiate with creditors
    It takes time and it can be frustrating to deal with multiple representatives, but the benefits (including better rewards, lower rates, waived fees and higher credit limits) can be worth it.
  • Take advantage of the payment cycle
    If you charge something the day before your statement closes, you get an interest-free period of 20 to 25 days to pay it off. But if you wait until the day after your statement closes, you can an extended interest-free period of up to 55 days
  • Take advantage of store card offers
    Big retailers offer discounts on purchases if you open a credit account with them and continue to use their card. This can mean serious savings, as long as you pay off the balance in full on time, every time. However, there are more flexible store cards offered by banks that provide discounts at a variety of retailers instead of just one.
  • Use your cards regularly
    Doing so (and making payments on time, of course) will boost your credit score and encourage your creditors to increase your credit limit, helping even more. It will also help you rack up rewards.
  • Reap your rewards
    Many people neglect to actually cash in their available rewards (which can include travel discounts, cash, concierge services and more). Check your card’s website for details and make sure you don’t miss out.
  • Consider a balance transfer
    If you are nearing the end of a promotional rate period and won’t be able to pay off your total balance in time, or if you are already paying high interest on an existing balance, consider transferring it to another card with a lower rate. This can buy you extra time to pay off your balance and save you in interest. Watch out for balance transfer fees, though, and do the math first.
  • Never miss a credit card payment and don’t too much of your available credit
    Missed payments are the biggest threat to your credit score, followed by a high credit-utilization ratio (under 30 percent is ideal).

Investing for beginners

Investing is one of the most important things you'll ever do with your money, but it can be an intimidating process for beginners. However, the basics of investing aren't as complicated as you might think. By following a few simple tips, you can get a leg up on your peers and create a strong foundation for the rest of your investing career.
  • Start early and start right
    The sooner you can start investing, the better. The timing of the market – when to buy and when to sell – will determine some of your success, but time will determine how much money you make in the long run.
  • Find the right broker
    One of the biggest decisions that you'll make is which brokerage company to use. Your choice has big implications for how much you'll pay in fees, what types of investments you can access, and what your returns will be. Unfortunately, few brokers make investing easy to understand. Instead, many full-service brokers want to take advantage of beginners and make the investing process more difficult and costly than is should be.

    Choose a discount broker that won't charge you high fees. Even brokers that charge low commissions have many resources to make investing easier. Look for brokers that have arrangements to offer mutual funds or exchange-traded funds at no commission. These investments can be the best way to get started investing.
  • Start with the basics
    Most beginning investors believe that you have to pick individual stocks to make money in the market, but that's not true. Millions of investors have made their fortunes using mutual funds and exchange-traded funds, and those vehicles are easy for beginning investors to grasp.

    In particular, mutual funds and ETFs give you automatic diversification even when you have very little money to invest. Every dollar you invest gets split across dozens or even hundreds of stocks, protecting your portfolio against events that hit a given individual stock.
  • Stick with safer stocks
    Even though avoiding individual stocks can be a smart move for novices, there's another way of investing for beginners. If you focus on stocks that are less volatile than the overall market, you can get specialized exposure to stocks that have promising long-term prospects, rather than simply accepting the return of a broader index.
When you're a beginner, thinking about investing can be intimidating. But by following a few simple guidelines, you can avoid the mistakes that many beginning investors make and put yourself in the best position for a lifetime of great results.

Basic tax planning

“Tax planning” sounds complicated. Depending on your financial situation, it can be. But not matter how much or how little money you make, the goal if this process is to arrange your financial affairs in a way to minimize the amount of taxes you pay. You can do this by reducing your income, increase your deductions, and taking advantage of tax credits. There are any number of ways to accomplish this, but here are four basic things that everyone can do:
  • Maximize Retirement Contributions
    If you can, consider increasing your 401(k) contributions above the percentage matched by your company, all the way up to the limit allowed by the IRS. Contributions reduce your taxable income, which of course reduces your tax.
    With an effective 25% tax rate, a $17,000 contribution would reduce your tax bill by $4250 for the year of the contribution. While the money is in the account, earnings are tax-deferred. These are significant benefits.
  • Fund other tax-sheltered accounts
    529 college savings accounts grow tax-free, and withdrawals for qualified educational expenses are also free of tax. Some states also have additional state tax benefits for contributions.
    Health Savings Accounts (HSA) are another. Contributions are made before taxes, and withdrawals for qualified medical expenses are tax- free. Dependent Care Savings Accounts (DCSA) and Flexible Spending Accounts (FSA) allow you to use pre-tax money for child care and medical expenses.
  • Review capital gains every year
    Large financial transactions such as selling property, selling investments or receiving company stock may have tax implications. It’s better to know these implications before the end of the year (when you can potentially offset them), than at tax time, when a large bill might be due.
  • Save your receipts
    If you itemize your taxes, save your receipts. Charitable contributions can add up throughout the year. If you are a business owner, freelancer or independent contractor, business expenses will reduce your net income from your business, which reduces your tax.
No matter your income level or financial expertise, tax planning is essential to preserving your wealth. These basic techniques are easy to implement, but don’t be afraid to consult an accountant or other professional if you feel you need more help.

Protecting your possessions

Insurance is designed to protect you from life’s surprises. It’s simple…you pay a relatively small amount of money each year for insurance. If a surprise pops up, part of the responsibility of paying for the surprise is picked up by the insurance company. This protects you from spending large sums of money to pay for large expenses, such as damage to your car or home.

Some insurance is designed to protect your possessions and some is designed to protect your wealth. Two types of insurance designed to protect possessions are auto insurance and property/homeowner's insurance.

Auto Insurance
An auto insurance policy is a package of six basic types of coverage:

  • Bodily injury liability covers costs when an accident is your and someone else is injured or dies.
  • Property damage liability covers costs when you damage someone else’s property. Usually, the damage is to the other driver's car, or to buildings, telephone poles or fences.
  • Medical payments pays for your medical bills or those of people riding in your car.
  • Uninsured motorists covers costs when there is an accident and one of the parties involved does not have insurance, or in hit-and-run accidents when the other involved party is unknown.
  • Collision pays for repair costs to the your vehicle when you are in an accident with another car or object.
  • Comprehensive physical damage covers incidents that may happen to the your car, including vandalism, theft, damage from objects, and flood or storm damage.
Property/Homeowner's Insurance
A homeowner's policy is an insurance package to protect property. This includes your home and everything in it, such as furniture, jewelry; computers, and other possessions. If you rent an apartment, you should have renter's insurance to cover all the property within the rented space.

Helping your child understand money

If you want to set your child on a healthy financial path, teaching them the proper tools of money management is vital. This includes explaining money in ways that your kids can understand. Here are some tips on how to give your children the practical knowledge they need to make smart decisions down the road:
  • Allowances and savings
    Giving a young child an allowance and making him save some of it will not teach him all he needs to know. The purpose of savings will come into play when your child is old enough to decide his own financial goals. In the meantime, you need to make the connection between that money and your child's reality. Credit card companies have proved that most adults cannot connect money and their reality, so it may seem twice as challenging when you are trying to teach those ideals to a child.

    A common mistake that parents make in connecting money to their child's reality is acting like a "friendly" bank. When you buy something at your child's request, whether it’s a bike or a pack of candy, it’s important for you to realize how he or she perceives it. Is money something you magically pull out of your pocket? If so, this is a bad precedent to set.
  • Turn chores into lessons
    Many children get caught up in the candy rack/kid trap at the grocery store checkout. No matter how many times you refuse to buy something from that rack, they will never stop asking. At the same time, if you buy something from the rack once, they will take it as a sign of hope for the future.

    Explain to your child that you have a limited amount of money to pay for the groceries. Write down part of your shopping list, give your child a set amount of money and let them keep the change if they can buy all those items under their budget. If they choose, they can use that money to buy candy, or they can save it for later. Simple chores like this one can reaffirm any monetary lesson you might have tried to teach them before.
  • The best rewards
    Treating your child to something special is fine, but you have to create the context in which it would be proper. The best way to do this is to treat both of you. If your child does well on a test and you want to give her a reward, don't just give her cash. Physically take her out for ice cream and have some yourself, or watch a movie together, or do something else you both enjoy. The material gifts you give aren't your child's focus - your love for them is.
  • Learning about loans
    If your child can't live without a new bike or a brand new game console, it may be time to teach him or her about credit. Even now, easy credit is available to teenagers, so the earlier you can teach this lesson, the better. Get a jump on credit card companies by acting as your child's first creditor. When he has decided on a big-ticket item, take him out to shop for the best price and then set the terms of the loan.

    This works best if you truly act like a bank and ask for a detailed repayment plan. The repayment plan should detail how much the monthly payments will be and for how many months.

    It’s also important to show the difference between good reasons and bad reasons for getting a loan. For example, a loan to buy a bicycle with the intention of doing a paper route is a good reason, whereas a loan to buy a video game console that will probably never pay for itself is a bad reason.
The younger your children learn important money lessons, the better it will be for your entire family in the long run. By teaching some financial common sense now, your children to will be able to thrive in an increasingly whimsical world of, "buy now, pay forever."

Consult an Insurance Professional

Comments contained in this website reflect our understanding of current tax law. However, the laws are subject to different interpretations and changes. Our agents do not provide tax advice. Please consult with your tax advisor about your personal situation.