There’s good debt and bad debt.  Good debt can allow you to acquire an asset with financial advantages more quickly than you could have enough cash saved up to pay for it.  Lots of the common forms of good debt give you a tax break.  Mortgages and many student loans are good examples.  Even a car loan can be good debt.  There aren’t tax advantages for car loans, but if having good transportation allows you to have better jobs and more flexible career options, a car loan that doesn’t overburden you financially could be a good move.


Bad debt often comes about when the debt lasts longer than what was purchased.  Your instance if you eat out a lot, charge the meals on your credit card, and don’t pay your balance off every month, that’s bad debt.  And bad debt is usually easy to spot by the interest rate you pay, too.  Mortgages, student loans, and even car notes usually have pretty manageable interest rates.  Lots of credit cards have interest rates so high that just opening the bill will give you a nosebleed. 


Ending our Fiscal Fitness review with debt takes as back to where we started.  If you’re saving a portion of everything that you make, you won’t get into debt.  If you’re in bad consumer debt now, take the dual approach of beginning to save while you’re paying down your debt.  When the debt is paid off, you’ll have started the habit of saving and can supercharge your ability to sock away more for your financial goals.


Buying a House

Owning a home is part of the American Dream.  There are some great financial reasons for owning a home.  For many people, having their own house gives them a greater sense of security and control over their lives than renting a home.  Over long periods of time, homes have increased in value.  This adds to the owner’s financial wealth while providing a place to live.


Ideally you own a home that’s worth somewhere between one and a half to two and a half times your pre-tax annual income.  There are certainly some real estate markets where that’s not practical.  You’d either end up in a house that’s ridiculously extravagant or you’d buy a tree house in someone’s back yard.  Also, it’s ideal to start with at least a down payment of at least 20% of the purchase price of the house. 


Many people consider paying off their mortgage as a top and urgent priority.  But if you’ve got the right type of mortgage (usually fixed interest and amortizing over a long period like 30 years), it allows you to continue building other aspects of your financial life and keeps you from having too much money tied up in one illiquid asset – your home.  Even if retirement, having a mortgage can be a good financial move.  Some people can’t sleep at night if the roof over their head isn’t paid for, so everyone needs to do what they’re comfortable with.  Having an improperly structured mortgage that puts someone in a house that’s not a fit for their finances can be a catastrophe, as the recent mortgage industry crisis is showing us.  But having a properly structured mortgage on a home can be prudent. 

Funding Pensions

As you’re saving, you’ll also want to put money into retirement accounts.  Even if you don’t have all your liquid reserves filled up, it’s good to start socking money into retirement accounts as soon as you get your first “real” job.  The earlier you start saving for retirement, the more the money can grow over your lifetime. 


If your employer has a retirement plan, that’s a good place to start with your retirement savings.  Putting at least some of the money into a tax deferred plan is a great way to save on current income taxes as well as put money toward your future.  If your employer doesn’t have a retirement plan, you can put money into an individual retirement account, usually called an IRA.  Whether you put money into a Roth IRA or a Roth 401k is going to involve some more in depth analysis of your situation. 


No matter how long you plan on working, you should give serious thought to the advantages of putting money into retirement accounts.



Once you get into the habit of spending less than you make, you’ll need to decide what to do with some of the money you’re not spending.  It’s common for money that you can access pretty quickly to be referred to as liquid.  So when people refer to financial liquidity or liquid reserves, they’re talking about accessible money. 


It’s important for everyone to have a cash cushion for emergencies.  So some of the money that you’re saving should go into this emergency fund. 


Eventually, you’ll want to have at least 10% of your annual income where you can get to it quickly without any tax ramifications or other penalties.  This money can cover most of your standard unexpected financial needs like a car repair or a health insurance deductible. 


Then you’ll want another 20% of your income where you could get to it, but it might cost you some taxes or penalties.  This second savings stash is for less likely emergencies like losing a job or being out of work for an extended illness.  


If you’re self employed, you’ll want these liquid reserves to be bigger than if you have a regular job with a steady paycheck.


If you don’t yet own a home, you should be putting money away for a 20% down payment on a house.  More on that in a later posting.


Saving 10%

First, get your cash flow under control.  Whatever your income is –  before taxes and other deductions –  save 10% of that amount from every paycheck.  There are lots of different places to put the money that you save.  In fact, the other Fundamentals of Fiscal Fitness fold right into this one.  Whatever it is that you’re able to earn, learn to live on less than you make.  And saving 10% is a good way to make sure you’re doing that.  If you’re just starting your financial life, this saving habit will allow you to reach important financial goals and be financially sound.  If you’re later in your financial life, this saving habit will lessen the likelihood that you’ll run out of money.  So work out a spending plan that allows you to pay taxes and all your other expenses with no more than 90% of what you make. 


Fiscal Fitness

There are some basics concepts that just about everyone should live with in terms of the finances.  These ideas as I’ll put them forth here are part of the philosophy of the Alliance of Cambridge Advisors.  (If you’re looking for an ethical capable financial advisor in your area, is a great place to look.) 

The Five Fundamentals of Fiscal Fitness are:

         Saving 10%

         Sufficient Liquidity

         Fund Pensions

         Having a Right Size House

         Controlling Consumer Debt

Over the next few postings, I’ll give you my version of these concepts and how the average person can apply them in their life. 

It’s A Wonderful Life

Imagine that you were suddenly gone from this earth tomorrow and a stranger was tasked with reviewing and closing out your finances.  What would that person learn about you?  Would they know that you have a big house?  An expensive car?  Drink lots of fancy coffees?  Spent more than you made?  Or would they see that you care about others who don’t have as much as you?  That you had plenty, but not too much?  That you earned a good living and gave generously to those you loved? 


Too often we can all let money become our goal instead of letting money fund our goals.  A New Year is a time when many people can reassess what they do and why they do it.  So now is a great time to decide to let what and whom we love be the driving force behind our financial decisions.  It’ll make your New Year more productive than you can imagine. 

Looking at Next Year

Now that you’ve looked at where you’ve been financially in the past year and you’ve seen how you did on some financial basics, it’s time to look toward a financially responsible future. 


On the areas where you spent more than you believe you should have, make a spending plan for those items for the coming year.  Sometimes, it doesn’t need to be in a dollar budget.  For instance, instead of saying that you’re going to spend $100 a month dining out, maybe you say you’re going to eat out twice a month. 


On the items where you’re cutting back, decide what you’ll replace them with.  One fellow financial planner, Bert Whitehead, told of some of his clients who decided to take some cooking classes to replace their many dinners out.  They’d invite friends over for nice dinners and experienced the unexpected bonus that many of their friends invited them to dinner out as a thank you.


Make a monthly spending plan that takes into account saving for items that don’t happen every month – maybe a quarterly life insurance payment, holiday gifts, vacation. 


Put in place some rewards for yourself when you stay on track.  They might be financial rewards – like a weekend trip – or less tangible rewards – like taking a bubble bath. 


During the next year, we’ll look on monitoring your financial progress as well as going in depth on the financial basics.