Over the weekend, I had the privilege of sharing the stage with experts in personal finance and wealth management. For one whole day, almost a thousand people gathered to listen and learn more about the practice, art and craft of financial planning. The event was called Financial Fitness Forum, which has already been running for several successful years.
As I sat on the sidelines, I toyed with ideas on what Financial Fitness is really all about. Is it about money?
Wealth? Having more than enough? Of course, different people would have different versions of being financially fit as their values vary. But nonetheless, there are a few concepts that all might agree upon, such as having adequate cash flow, a healthy insurance coverage, and some money to experience the niceties of life.
Still exploring the idea with my colleague, Fitz Villafuerte, I suddenly remembered my gym coach, who always tried to instill in me the concept of being physically fit. According to him, being “fit” means not only having a nice body—a lot of people have nice physiques but are not healthy, or strong for that matter, or cannot endure lengths of physical effort. Being fit for him is holistic: it must cover all physical aspects such as strength, stamina, endurance and flexibility.
If these are the four aspects of being physically fit, perhaps they could also be applied in measuring financial fitness.
Strength. Think of weightlifters. In the gym, being strong means being able to lift or carry heavy weights such as dumbbells, barbells – even one’s own body. To develop strength, one must progressively increase the weights they are able to carry over time. In personal finance, being financially strong means being able to carry your (and your family’s, if applicable) financial responsibilities: providing for their needs, education, retirement, and your own dreams as well. Not to mention, there are other contingencies that may come up unexpectedly, such as sickness in the family, unplanned vacations and expenses or even damage to property. But over the years, the weight of all these is likely to increase due to inflation. Expenses will rise due to inflation, and also because items are expected to stack up on top of the others.
To be financially strong means to be able to carry these without breaking under their weight. For instance, your Balance Sheet should be strong; i.e., your assets should significantly be more than your liabilities. The mix of the assets, too, should be properly diversified as to maximize on opportunities from different investments. In terms of Cash Flow: a strong cash flow would mean positive net cash flow per month or per year: more income than expenses. The net cash flow can be small in amount, but if cash is being redirected toward investments, then that should be fine as well—provided that there is enough cash already built up for an emergency fund.
Endurance. Think of marathoners who can run for a long time. Endurance simply means the body is able to perform and function over extended periods of time without tiring. One may be strong to be able to lift heavy weights but it does not mean that the person can run long distances.
Financial endurance, then, is withstanding financial stress for an extended period of time. A strong balance sheet and cash flow may just mean being strong for a year, or even a month. But financial endurance means you have enough assets to cover your—and your family’s—needs for months and years to come. One significant component of this is having an emergency fund, and significantly more assets than liabilities such that when liquidated they can provide the cash needed for expenses in the years ahead. It also means having diversified investments so that whichever way the market goes, you are able to liquidate an asset to fund your needs—at a profit. Financial endurance also means having significant net cash flows consistently. And lastly, it means having adequate insurance to cover for your family’s needs for a significant amount of time.
Stamina. Stamina is closely related to endurance. While endurance means staying power, stamina means staying power using maximum capacity. You may run long enough, but it doesn’t mean that you are employing 100 percent of your capacity. To be able to perform for a long time at 100 percent is stamina.
Financial stamina means that you are maximizing the potential of your money, whether it is invested or just in plain savings accounts, all the while managing its risks. For instance, a sizeable emergency fund can be spread among an ATM account with insurance, a money market fund, or time deposits so as to maximize potential returns while being conscious about liquidity. For long-term cash needs, it means investing in real estate or the stock market in order to maximize on potential returns.
Flexibility. I knew of a case once, where an 85-year old person had 80 percent of her assets in real estate while the remaining 10 percent was in jewelry and 10 percent in cash. Given her circumstances, she was not financially flexible. It would be best for her to stay financially liquid at this point, to fund anticipated hospital expenses and for ease of asset transfer at any moment.
In fitness, flexibility is the ability of joints and muscles to move freely. In finance, flexibility means you can move your assets around to fund present, future and even unforeseen needs. Another example: I know of someone who sold his land for half the price because he already needed the money to fund his heart surgery. Being financially flexible means having enough liquid assets such as cash to move around and, if you have other assets, their mix should be able to fund even accidental needs. This means you are properly diversified, so whatever situation you are in, you are able to respond to your financial needs in a timely and relevant manner.
Rienzie Biolena is a registered financial planner of RFP Philippines. Attend the 61st RFP Program this March 2017. To register, email firstname.lastname@example.org or text <name><e-mail><RFP>at 0917-9689774.