– The Five Fundamentals of Financial Fitness
The five fundamentals of financial fitness:
1. Save at least 10% of your annual income Begin saving to build a liquid cash reserve. Once you have achieved sufficient liquidity, direct savings toward balancing and building your portfolio. Savings also include retirement plan contributions.
2. Have sufficient liquidity Most wage earners should have 10% of their annual income in a primary cash reserve (A1) and another 20% in a secondary reserve. Self-employed and retired individuals should build their cash reserves to an even greater level.
3. Fully fund your pensions Take advantage of tax deferred savings plans, especially if your employer matches contributions.
4. Have the right size house For most middle income Americans, your home is the most significant investment you will ever make. Buy a home 2 or 2 1/2 times your annual income, with a mortgage of 50% or more of its value. If the value of the home reaches 100% to 125% of your income, sell it and trade up again.
5. Pay off all credit cards and consumer debt Learn the difference between bad debt, good debt, and acceptable debt. Avoid the bad, use the acceptable debt wisely, and take advantage of the leverage of good debt.
“If we don’t change the direction we are going, we’re likely to end up where we’re headed.” –Ancient Chinese Proverb