Defining Financial Health and Fitness

Consistently tracking Net Worth is a foundational element of Functional Finances.

Hold on…

Many would say that those that have a high net worth are rich. But what does it mean to be rich these days? Some think having a net worth of $1 million is rich but is that even true anymore. According to statistics Canada, households in the top 20% have an average net worth of about $3.3 million. A net worth of approximately $10 million places individuals among Canada’s top 1% of wealth holders. All of those seem pretty big to me

To complicate things even more is net worth alone a good indicator of financial health. Let’s compare two people with equivalent net worth. Who is financially fitter Lisa or Bob?

	Lisa	Bob
Total Assets	$1,000,000	$10,000,000
Total Liabilities	$0	$9,000,000
Net Worth	$1,000,000	$1,000,000

Without going into a ton of detail yet, the ratios (one number divided by another) between your assets, liabilities and net worth can be a another key indicator of financial health. They can tell us how much of the assets we actually own and provide insights in our ability to service debt especially if something unexpected happens. In the above scenario Lisa is significantly healthier than Bob despite having equal net worth.

Consistently tracking financial ratios is a foundational element of Functional Finances.

Hold on tighter…

Let’s again consider Bob and Lisa again. If we dig a bit deeper beyond pure net worth numbers and looks at their monthly financial activity. To do this, we would analyse how much are they making (otherwise known as income) and how much are they spending each month . The difference between the two is the amount that either is able to save, positive or negative. Considering this who is financially healthier when we add details around monthly spending.

	Lisa	Bob
Monthly Income	$5000	$5000
Monthly Spending	$6000	$4500
Saving	-$1000	$500

Lisa is consistently overspending by $1000 per month which equates to $12,0000 a year. Bob is saving $500/month. Based on this, over the course of 10 years (all things being equal) Lisa’s net worth will decrease by $120,000 and Bob’s will increase by $60,000. So, after 10 years Lisa’s net worth will be $880,000 and Bob’s will be $1,060,000, a difference of $180,000. Based on this new information we would definitely say that Bob is financially healthier than Lisa.

Consistently tracking spending and maintaining a budget is a foundational element of Functional Finances.

But wait a second…

What if I told you that Lisa was 85 years old and Bob was 37. How does this knowledge change things. In a pretty big way actually. Lisa, despite over spending each month, will never live long enough to spend everything she has saved and will leave a pretty nice inheritance to her children assuming she has some. Bob on the other hand has will only really save $60,000 dollars in 10 years. Is that enough? How will Bob know if he is saving enough to be able to support himself in retirement and ideally have something left over to leave for his children. This takes some serious financial planning. Knowing how your financial fitness stands according to the stage of life is essential.

Building and tracking to a detailed financial plan is a foundational element of Functional Finances.

A financial plan involves fully understanding what income you will need in retirement and what the sources of it will be. Government programs like CPP and OAS are available and represent a good source of income but it’s unlikely they will be enough to maintain your lifestyle in retirement. That means we need to implement strategies to maximize the potential benefits of the savings generated through a proper budget. This involves investing in different assets that would give you a yearly return on investment. Those returns on top of the saving over the course of time will provide the majority of the income you will need to live while not working. That plan in my opinion should build in the ability to leave something behind for your children

And what about after

Having an appropriate estate plan is a foundational element of Functional Finances.

Many will say “You can’t take it with you” when considering how they will live in retirement but personally I think that is wrong. I am a firm believer that a big part of financial health is establishing something for future generations. We should be looking to establish generational wealth by not only teaching our children Functional Finances but also helping them get a leg up. Especially given how costs such as housing and education have risen in the last few decades. Having a proper estate plan ensures that your net worth is passed to your children effectively without complicating it or paying unnecessary taxes.

And now for some controversy…

The last foundational element is going to throw many off for sure. What if I told you that at 37 Bob weighs 275 lbs and was just this week diagnosed with Type 2 diabetes. Lisa on the other hand at 85 goes to aquafit 3 days a week, travels once a year and still plays 9 holes of golf once a week. Does that change how you think about financial fitness? Many don’t want to hear it but the stark reality is that most of the causes of chronic disease and premature death are preventable through proper diet and a regular fitness regiment. I ask what is the point of all the above if you are not actually able to enjoy the benefits. That’s right, actually taking care of your physical health and fitness is foundational to functional finances. I can tell you 100% that my financial plan definitely does not have me spending my retirement in a hospital bed.

Having a health and fitness plan is a foundational element of Functional Finances.

Pick your destination

Finally, all of this is really meaningless if you don’t actually know where you are trying to get to. What are you actually trying to achieve. When I started my desire was never to be really wealthy. It all about getting out of debt and saving money for retirement. Since getting married and having children it’s much more about providing security for my family both now and in the future. There is also a certain lifestyle I want to live while alive. One thing you definitely won’t find on this blog is me telling you to be hyper frugal and only eat rice and beans for 10 years in order to save as much as possible. I also don’t believe in over spending on luxury cars or glamorous vacations if you can’t actually afford them. There has to be balance because the reality is you don’t know when your time is up and you still need to enjoy life.

Having clear goals is a foundational element of Functional Finances.

Pulling it all together

I’ve tried my best to outline at a high level my thinking on the key fundamentals of Functional Finances. By putting these foundational elements together we form the framework for what defines financial health and fitness. I will go deeper on every one of these topics and provide the tools needed to help people build financial fitness. Furthermore, there are other other important areas not mentioned that also play a significant role in financial health such as Credit Management, Passive Income, Asset Diversification and more. We will definitely dig deeper on these and I reserve the right to add them as foundational in the future. I suspect at some point I will have a pretty diagram that better articulates my definition of Financial Health and Functional Finances.

For some this will all seem overwhelming and others will think there is nothing really earth shattering written. My goal for this blog will be to simplify for the first group and maybe just maybe teach the second group something new. Taking control of your financial health can seem complicated but it doesn’t need to be.

I will leave you with one key piece of advice that applies equally to financial fitness as it does to physical fitness.

It’s best to start early but if you can’t start early then start now.

Financially starting early is so beneficial and I am finally getting to the point in life where I am starting to reap the benefits. It’s a simple concept called compound interest and it’s a magical wealth building strategy anyone can use easily and it only involves saving and investing consistently over a long time horizon. That being said it’s never too late so get going.