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5 Financial Tasks to Boost Your Financial Health

By Jimmy Turner, MD
The Physician Philosopher

The pastor that married my wife and I would always say, “You can never hear ‘true things’ enough.”  What he meant was that it is always good to go back to basics.  A reminder about good financial habits follows serves the same purpose.  In this guest post, written by Carter Kilmann, we will discuss 5 ways to boost your financial health in 2020.  

If you haven’t accomplished all of the following things outlined in this post, I highly encourage you to do so.  Well, except for number 1.  You guys know I hate traditional budgets.  All kidding aside, this is a high-yield guest post.  Mr. Kilmann and I have no financial relationship.  

5 Ways to Boost Your Financial Health

Do you have a New Year’s resolution this year?

“Exercising more” and “going to the gym five times a week” are common resolutions, because people want to be in shape and take care of themselves. Yet, it’s much less common to hear “organize my finances” or “get better at managing my money.” 

Trimming some excess poundage and going down a few waist-sizes is a great feeling. But wouldn’t it feel rejuvenating to be in control of your money and financially independent? 

It’s just as important to be in good financial health as physical health. So why not get in financial shape this year?

Let’s go over five actions you can take to boost your financial health in 2020. 

1. Build a budget

Go ahead, get the groans out of the way. 

Budgeting might not be the sexiest topic out there, but it’s a critical component of personal finance. If you want to obtain financial independence and stability, you’ll need to understand how you spend money. Why? Because there’s a difference between being rich and being financially independent. 

If a business mogul makes millions and spends millions, their bottom line isn’t all that pretty, is it? 

Living outside of your financial means strips you of your financial freedom. That’s where budgets come in: they provide a personal blueprint, mapping your good, bad, and ugly spending habits. 

If you can’t learn to live within your means, it won’t matter how much money you make. You’ll always be dependent on that next paycheck. 

Part of the reason budgeting gets a bad rap is the idea that it’s time consuming and complicated. The good news: it doesn’t have to be. 

Frankly, it shouldn’t be.

There are plenty of high-quality budgeting apps out there that will streamline the process for you. Mint is a free budgeting app that syncs to all of your accounts (checking, savings, credit card, etc.) and consolidates your expenses into a single, clean dataset. It’s designed to be user-friendly and simple. Keep in mind, at the onset, it’ll take a little bit of time to connect accounts and relabel any misclassified expenses. 

If you’re old school and prefer the DIY-method, here’s a guideline to a 15-minute self-made budget. 

2. Establish an emergency fund

We all have rainy days sometimes.

Life is unpredictable, you never know what it’ll throw at you. The best you can do is be financially prepared for life’s most unexpected financial burdenslike huge medical bills, car accidents, or worselosing your job. 

That’s why you need to establish an emergency fund. 

Your emergency fund should hold roughly six months of expenses and should be housed in a high-yield savings account (so it’s earning interest and readily accessible). In a real-life example, if you were to lose your job, you’d have six months of runway set aside, providing you with ample time to find another source of income.

Living without an emergency fund is risky. Should any of these events unfold, you risk jeopardizing your liquidity and putting yourself in a deep financial hole. 

An emergency fund acts as a buffer and safety net. Not only does it hedge against life’s downsides, it also provides invaluable peace-of-mind. You can rest easy knowing the money is there if you need it. 

That being said, there’s a reason it’s called an emergency fund. It should only be accessed in emergency situations. It shouldn’t fund your Amazon shopping or backpacking trip. 

3. Monetize your spending

Life isn’t just unpredictableit’s expensive. 

Why not make the most of your day-to-day purchases?

With cashback credit cards, you can earn money from your usual life expenses, such as groceries, subscriptions, and travel. For example, let’s say you spend $400 a month on groceries. If you used a cashback credit card, you could earn anywhere from $4 to $20 every month just from groceriesdepending on the card. 

The sound of credit card debt can make people uneasy. Using a credit card to fund your expenses and managing the associated debt requires organization and personal restraint. 

When used responsibly, credit cards can act like “free” debt, meaning zero interest or fees. Here are a few responsible credit card practices to ensure your debt remains free:

  • Always pay the last statement balance. You should never pay just the minimum.
  • Always pay on time. Late or missed payments will hurt your credit score.
  • Choose a credit card without an annual fee.
  • Never use cashback rewards to justify a purchase. Earning money by spending is a result, not a reason. It would be counterproductive to spend more.
  • Know your card’s limits. Credit cards come with a spending limit, which you should be aware of when you’re spending.
  • Know your personal limits. In other words, you should assess your budget to understand how much you can afford to spend each month.

Debt is a powerful tool that you can leverage to your advantage. But with great power comes great responsibility. 

4. Quit dumping hard-earned money in a zero-interest checking account 

Consider the following financial infrastructure: one checking account with biweekly paycheck deposits. One savings account with sporadic transfers from the checking account. 

Does this situation sound familiar? 

This is the bare minimum approach to financial management. And it’ll cost you in the long run. 

How much? 

Well the average checking account has an interest rate of 0.06%, and the average savings account isn’t much better at 0.09%. In other words, it would take millions of dollars in one of these accounts to generate hundreds of dollars in interest each year. Meanwhile, the average historical annual return of the S&P 500 is right around 10%.

That doesn’t mean checking accounts don’t serve a purpose or aren’t necessary. It’s good practice to have roughly two months of expenses in a checking account to cover your day-to-day expenses, credit card payments, etc. They’re just not effective at generating interest income. 

Let’s assume you’re 30-years old. Let’s also assume you start setting $10,000 aside each year.
Option A: You deposit $10,000 into a checking account each year until you retire at 65.
Option B: You deposit $10,000 into a brokerage account each year until you retire, buying a market index fund that mirrors the S&P 500.

Based on these percentages, how much could you have at retirement?

Option A:  $360,400
Option B:  $3,290,395

So, if you want to get in financial shape this year, stop dumping all of your hard-earned money into a zero-interest checking account.

Once you have two months of expenses in a checking account and six months of expenses in an emergency fund, it’s time to allocate excess earnings into a brokerage account. 

5. Set up a brokerage account for excess earnings

Two possible options: you can either (a) move your money to high-interest accounts, set up automatic deposits into a brokerage account, and schedule recurring purchases of a market index fund (or other funds based on your research or an advisor’s recommendations) or (b) use a platform that consolidates and automates this process for you. 

One such platform is Unifimoney, which is scheduled to launch early this year. 

They’ll be offering a high-interest, hybrid checking/savings account that automatically transfers excess funds into a robo-investing account. 

With this structure in place, your short-term needs will be covered, letting you focus on your mid/long-term goalslike buying a house, going to graduate school, funding your children’s education and retiring.

TPP: What do you guys think?  Have you taken care of these tasks?  Leave a comment below

Author: Carter Kilmann

2 Comments

  1. Kelly

    Edit needed to number 4 regarding total $ gained over 35?years in the two separate scenarios of A and B. Switch totals labelled A and B.

    Reply
    • Carter Kilmann

      Good catch! Accidental flip. Should be fixed later today.

      Reply

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