7 Steps for Training to Financial Fitness

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April is Financial Literacy Month in the USA, and a good time to remember the importance of financial awareness and the work it takes to skillfully manage your money. Learning the principles and best practices of money management and achieving your financial security takes effort and time, but most of all, it takes training.

Every year in April and May, the Future of Finance Initiative, sponsored by CFA Institute and its member societies, conducts the Putting Investors First Campaign to inspire local communities to foster a market environment where both investment professionals and investors can thrive. In addition to reminding investment professionals about the importance of putting the interest of their clients above their own, the campaign also demonstrates how investors can help ensure that their interests come first by proactively managing their finances. This year, we are encouraging savers and investors to train their way to increased money management skills by concentrating on the 7 Steps to Financial Fitness.

Exercising Money Management

No one masters any of these steps in a simple class or seminar. Developing the knowledge to achieve financial security and learning to avoid the common mistakes that can thwart financial plans takes education and experience. Think of financial capability as a discipline. Just like mathematics, a foreign language, art, dance or athletics, it requires study, training and application before you become proficient.

Envision learning the fundamentals of money management as you would those of a sport or other specialization. Certain financial goals, like saving and investing for retirement, can take 30 years or more to achieve. It is more a marathon than a sprint. So like preparing for a marathon, you must train methodically over long periods of time by building on your strengths and mitigating your weaknesses.

Taking the right steps

Marathoners focus on endurance, nutrition, psychology and a host of other factors. We recommend that your money management training revolve around these 7 Steps:

1. Set financial goals: It is impossible to reach your goals if you don’t have any or a plan to reach them. Saving and investment management is about using your financial resources to meet your short and long-term objectives. You must determine the purpose for your money: to buy a home, as an emergency fund to protect you from the unexpected, to secure your retirement, to donate to others or perhaps all the above. Whatever you decide, your goals should amount to something greater than just supporting increased consumption. Once you have a plan, accumulate as much as you can, put it to work to create wealth, and then use it to finance you dreams.

2. Understand where your money is going: Many people have a hard time saving because they don’t have a good sense of what they spend their money on. While it’s important to have and adhere to a budget, it’s just as important for you to track your expenditures. Most people will naturally cut back when they realize they have been overindulging on some discretionary items, say entertainment. Tracking expenditures also helps you to reduce fees and other leakages, to renegotiate contracts and subscriptions that may cost you more than the value they provide. Once you become confident with your budget and spending habits, you can be proactive about saving before spending each month.

3. Manage your debt: Saving and spending are mutually exclusive, which is why debt should not be used to consume more. Debt is a tool that should finance the purchase of big ticket items or financial assets. If possible, you should always avoid high-interest consumer debt, which usually costs more than what a well-constructed investment portfolio can be expected to return. Create a debt management strategy to reduce and eliminate high-interest debt and to accelerate paying off such debts as your student loans and your mortgage.

4. Put your finances on autopilot: The best way to build your savings and investment accounts is to fund them automatically through direct deposit each period. Use autopay to manage and pay recurring bills like mortgages, student loan payments, and other household essentials. Keep discretionary funds separate so you have continual knowledge of the money you can spend without affecting savings. Build an understanding of financial applications and other innovations to help you manage your money and track expenditures.

5. Maintain a steady lifestyle: Keeping your household budget and major expenditures relatively constant over time helps optimize your savings and achieve a secure financial future. People who increase their consumption as their incomes rise increase the cost of their lifestyle over time. They lose the ability to target their bonuses, tax returns, raises and other unexpected sources of income towards optimizing their savings and reaching financial objectives.

6. Invest wisely: Another way to improve your chances of reaching your financial objectives is to invest your savings so they can grow over time. Use a broadly diversified portfolio of global stocks and bonds to achieve a proper return that reflects your attitude towards, and ability to take on, financial risk. Not only do you need to invest to help increase your wealth, but also to counteract the effects of inflation, which reduces the purchasing power of your money over time.

7. Obtain knowledge and advice: Most people pick up their financial skills through the school of hard knocks, which is a tough and expensive teacher. Like marathoners searching for a coach who will maximize their performance and address their weaknesses, savers and investors should look for people who can bring out their best and instill in them the principles and best practices of money and investment management. If you’re not good at budgeting or debt management, find courses or online resources to help you with those subjects. If you lack confidence in your financial skills, look for an accredited financial professional who can support you as you build a financial plan and manage your investments.

What you need to know to manage your finances and achieve your financial objectives is not overly complex or difficult to learn. As with any discipline, however, the training required to become financially fit takes time, energy and self-control. Follow these fundamental 7 steps to train and hone your skills and you will be on your way to amassing the money to meet your current needs and building long-term wealth.

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