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Your financial fitness impacts every area of your life. It’s not just about money. Financial concerns can influence your stress levels (and as a result, your physical and mental health) as well as affect your relationships. Your lifestyle depends largely on your financial health, now and in the future.
If you want to feel secure later and achieve financial freedom, now is the time to lay a solid foundation. Create habits of financial fitness now, and you’ll be much better off down the road.
Learn the Difference Between Needs and Wants
Understanding the difference between needs and wants is the basis of successful finances. You need to know what you can’t live without – and be willing to cut out everything else.
- Needs supply you with the necessities of life. Food, clothing, and shelter are needs. You also need a way to get to work or otherwise earn money so you can provide for your survival.
- Wants comprise everything else. If you can live without it, it’s a want.
While this initially seems simple, it’s easy to get off track. What our parents or grandparents considered luxuries feel like necessities to us. How many of us feel like we can’t live without our smartphones? It seems a matter of course that we should all have Internet access and other modern conveniences, but in a pinch you might discover that you don’t need these things after all. I need the Internet to accomplish my work, and put food on my table, but I don’t need Netflix and Hulu. If I had to cut something from my budget, the unnecessary items, like streaming services, eating out, and going to the movies, would be the first things to go.
Another pitfall is justifying wants by connecting them to needs. You need shelter, but you don’t need to buy a huge house that you have to stretch to afford. Food is a necessity, but paying to eat out three times a week is an expensive way to meet that need. Re-evaluate your spending to identify true needs, and understand which expenses can be cut. You don’t have to stop buying things you want, but you should know the difference so you can make hard choices when necessary.
Understand Your Values and Set Spending Priorities
Too often, we spend money without thinking about the “why” behind it. You might not even care about what you’re spending money on, leading to waste. Take the time to think about what you value. What’s most important to you? What are your long-term goals?
If you have a goal to build a million-dollar nest egg, and you like to travel, it doesn’t make sense to buy an expensive car if you haven’t taken care of those goals first. Once you understand what truly matters in your life, whether it’s paying off debt, saving up for a down payment on a house, or providing music lessons for your kids, you can make financial decisions that help you reach your goals. Decide which items are most important and use these spending priorities to guide your budgeting choices.
My priorities, after taking care of my basic needs (food, shelter, clothing), revolve around saving for retirement and my son’s college, building an emergency fund, giving to charity, and travel. When I have to make a decision about what to cut, I can look at my priorities and get rid of what doesn’t help me reach my goals.
Create a Spending Plan that Matches Your Values
Track your spending for two or three months. Once you see where your money is going, you can decide whether or not to continue that spending. Create a spending plan that allows you to live within your means while working toward your goals. This means that you use your values and priorities to decide which items should be funded first – after your needs are taken care of.
Once your basic food, clothing, and shelter needs are covered (including bills for utilities and insurance), fund your following goals in order of importance. Pay down debt, save for retirement, set money aside for a vacation, donate to charity, and cover your kids’ extracurricular activities. When you know your priorities, and you make sure what you value is taken care of first, it’s easier to cut unimportant items from your budget. It’s easier to say “no” to the movie when you know that you are putting money toward your next vacation.
Before you spend money on something you don’t need, ask yourself whether or not it matches your values or helps you reach your goals. If it doesn’t, put your money elsewhere. View your money as a resource that you can direct for a better financial future.
Pay Off High-Interest Debt and Live Within Your Means
Once you understand your values, and you’ve prioritized your goals, you can begin working on paring down your expenses, and get rid of high-interest debt. High-interest debt can be devastating to your long-term financial fitness. When you pay interest, it goes directly into someone else’s pocket. That’s money that you pay for nothing more than the privilege of borrowing. When your money goes to interest, it’s not building your financial future.
While there are some types of low-interest debt that can offer a tax benefit and a way for you to improve your financial situation, like your mortgage or school loans, consumer debt is a different issue.
Credit cards can be great tools to help you earn rewards over time, but it’s important to be responsible so you aren’t paying interest. One viable solution is to use a balance transfer card to reduce the interest you pay and get rid of debt faster. Make it a point to pay off debt as quickly as possible so you can start using more of your money to build your future wealth.
Build Wealth with Saving and Investing
Finally, one of the keys to long-term financial fitness is investing. Tax-advantage retirement accounts like your 401(k) or an IRA can help you build wealth over time when you contribute regularly. In addition, you should create an emergency fund so that you can handle unexpected expenses without the need to turn to high-interest debt.
Consistency over time is key when working toward long-term financial freedom. Start small, contributing a small portion of your paycheck to a retirement account. Automatically transfer money from your checking account to your savings account each week, even if all you start with is $25. Over time, as you pay down debt and look for ways to earn more money, you can contribute more to your investing and saving efforts. Starting the habit, and letting interest work in your favor (rather than paying it), can make a big difference down the road.
Because building long-term wealth is important to me, I rate saving for retirement near the top of my priority list. However, if you don’t know what you value, and you aren’t spending according to your priorities, it’s difficult to create financial freedom. The fact that I know why I spend money, and all of it goes toward things and experiences I value, means that I’m more satisfied with my situation, and that I don’t have to stress out as much about money. Taking care of my future, while living within my means now, contributes to my financial fitness.
Miranda Marquit is a financial journalist and author of Confessions of a Professional Blogger. Her work can be found on many financial sites, including US News & World Report, Yahoo! Finance and Huffington Post. Miranda’s blog, Planting Money Seeds, aims to inform consumers on growing wealth to achieve life goals.