Last Spring, I posted a piece called “Becoming the Architect of Your Finances“. It outlined the 5 ingredients that make up your Personal Portfolio; an ever-changing collection of Skills, Priorities, Interests, Community and Experiences. You can call it your “secret sauce” or your “art”, I prefer calling it “S.P.I.C.E.” – the seasoning you add to whatever relationship or situation you’re in.
Your Personal Portfolio – each of these 5 ingredients – provides a framework that offers insight to the resources that you currently have at your disposal. It also highlights areas that are lacking or need reinforcing. Let’s examine each ingredient and the characteristics that will contribute to building a strong financial foundation.
Skills – One of the most important Skills in building a strong financial foundation is being really great at tracking.
In the same way that reaching your fitness or health goals requires tracking activity and nutrition, financial wellness requires tracking your numbers and results, as well. It takes work on the front end to develop a system that works for you, but will result in reduced stress and greater confidence in making good financial decisions.
Here are a few key numbers that will be important towards tracking your financial wellness:
- 10% – Automatically set aside out of each paycheck or payment you receive. In the beginning, the funds will be used to build your Emergency Bucket. Do this first and keep doing it as long as you have income coming in.
- 25% – 50% of your annual living expenses. Your Emergency Bucket needs to grow and remain within this range. It will ebb and flow, as unexpected expenses come up and funds continue to be added.
- 100% – Automatically contribute the minimum necessary to get a full match from your employer on your 401k. This will reduce your taxable income and build your retirement fund over time. If you don’t have a 401k, contribute at least 3% of each paycheck or payment received towards an IRA or ROTH IRA. Start early and keep doing it as long as you have income coming in.
- 30%/40% – Maintain monthly housing/rent expenses below 30% of gross income. This includes insurance, taxes and association fees. Keep your total housing expense plus recurring debt payments under 40% of gross income.
- 30% or less – Total balances on credit cards/ lines of credit as a ratio of the total credit available. By maintaining low balances on existing lines of credit, this will improve your overall credit rating.
- 740 – A credit score of 740 or better will get you the best interest rates and discounts, when you do need to borrow funds for a car, education or home purchase.
- 12 months – The minimum length of time since you made a payment late – over 30 days late. The longer you have no late payments, the better your overall credit score and ability to borrow funds when needed.
To begin, you’ll need to identify where you are right now in each of these areas. That will provide a road map of what adjustments you will need to make. Start with one or two goals and re evaluate at least once a month to track your progress.
Tracking your progress towards stronger financial measures is critical. Next, I’ll share some insights on Tracking behaviors and activities that lead to a stronger financial foundation.