Financial gurus are taking a page out of the employee wellness handbook and have begun calculating an investor’s “fiscal fitness.” The idea is to know how your lifestyle can affect your finances and investments.
TD Bank, after a 2015 survey, says 70 percent of consumers agree that financial health has a positive impact on physical health.
“Furthermore, a vast majority (81 percent) of consumers agree that when their finances are in order, other goals are easier to accomplish,” the report states.
Yet only 36 percent of survey respondents say “they are satisfied” with their current financial health.
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“It’s no surprise that getting your finances in order can relieve stress, but our research shows that it can also positively affect physical fitness,” said Ryan Bailey, head of retail deposit products at TD Bank. “With New Year’s resolutions still top of mind, it’s important for Americans to know that working on your wallet can also benefit your waistline. You don’t have to choose one or the other.”
Compare those numbers to actual physical fitness figures, also from the TD Bank Report. In it, researchers say that 80 percent of Americans set health-related goals for the New Year, including eating healthier, losing weight and getting in shape.
But what if those Americans had an actual plan to create and sustain a fiscal fitness plan? One that, like a physical fitness program that merges cardio, weights and stretching, gets investors on a plan to good, solid financial health?
“There are definitely financial fitness formula’s individuals can use to set and track progress towards goals,” says Mark Avallone, certified financial planner and president of Potomac Wealth Advisors in Rockville, Maryland.
In fact, Avallone says he has trademarked the phrase, “What is your unique formula?” to reflect such a calculation.
“At its core, the formula simply asks how much money do you have now, and how much can you save each month,” he says. “After providing an inflation adjusted growth rate to these two amounts until your expected target retirement age (at age 67, for example), you will see their expected future value. To this number, add the future value of any inheritance. Then multiply this amount by .04 (or whatever sustainable withdrawal rate you trust). This amount, plus any Social Security or pension will be the amount of money you have to live on later in life.”
The formula is relatively simple and it is different for everyone, Avallone says.
“The bottom line is, if you don’t like the result you need to save more money,” he adds. “Just like going to the gym, if you don’t like what you see you simply have to work harder.”
Of course, not every financial fitness formula is the same, although they all attempt to reach the same desired result — good money management health. For instance, Brian C. Ulch, a past senior bank portfolio manager and currently the owner of Aventail Wealth Management, a registered investment advisor firm, has his own three key steps in achieving a great financial fitness score:
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Positive monthly cash flow. “The good news is, if you are not fit as you would like in this area, this first aspect can be improved from both sides,” Ulch says. “You can increase your cash inflow from deferring Social Security or buying a fixed annuity with a strong income roll up rate.” At the same time, you can decrease your cash outflows by downsizing your home or selling that fancy boat that isn’t used very often, he adds. “Folks that spend less than their incomes are way ahead on the fitness scale,” Ulch says.
A growth solution. To be truly fiscally fit, you have to hedge against inflation, Ulch says. “To do that, a portion of one’s financial fitness program must be allocated toward growth.” That doesn’t mean deploying a hyper-growth, ultra-risky investment. “Solid blue-chip stocks that might even have a decent dividend will keep up with inflation over time and improve one’s financial health,” he says.
Add a stress test. “You’ll need a stress test to gauge your financial fitness, and in my experience, most people fall flat on this one,” Ulch says. “To stay fiscally fit, you must give great care, time, attention and resources to hedge against future long term care expenses.” Ulch advises using a stand-alone long-term insurance policy or a long-term care form of annuity to build the “hundreds of thousands of dollars” needed to keep financial stress at bay. “As technologies and advancements in medical science improve, our lives are extended and one day, we will need care whether in our home or at an assisted living facility,” he says.
Any fiscal fitness formula would have to include key personal financial criteria, especially involving debt — the obesity equivalent in a fiscal fitness plan.
“One topic of any fiscal fitness test has to be debt ratio, the ratio of total monthly debt payments over monthly gross income,” says Tal Frank, president of Physical Loans in Atlanta. “A person needs to know what a debt ratio is, what an acceptable range is for a personal debt ratio and most importantly, how to calculate their own personal debt ratio.”
As a lender, Frank says his firm is “very familiar” with the three C’s of underwriting, a basic lending tenet and how a lender assesses the fiscal fitness of a potential borrower.
“The three C’s are credit, capacity and collateral. The method used by lenders to measure capacity, how much financial strength does this person have to take on the requested debt, is the debt ratio,” he says. “An individual or couple with a high debt ratio, regardless of level of income, will never be able to save enough and get ahead.”
The debt ratio, which is an unfamiliar term to most, is the mathematical equation of the more commonly heard and understood expression, “It’s not what you make, it’s what you keep.”
[Read: Why You Should Downsize Before Interest Rates Go Up.]
Consequently, when you’re making your New Year’s resolution, include a fiscal fitness test. It can tell you where you stand, finance and investment-wise, and prescribe a money management regimen to get you where you need to be.
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What’s Your Fiscal Fitness Number? originally appeared on usnews.com
