Let’s unpack our fiscal health. Fiscal health represents the overall state of your financial affairs
and your ability to manage your finances effectively. Fiscal health is assessed based on various
indicators, such as income, expenses, assets, liabilities, debt levels, budgeting practices, and
overall financial sustainability.
For individuals, fiscal health can be measured by factors such as income stability, debt-to-
income ratio, credit score, and personal net worth. A financially healthy individual would have a
sustainable income, manageable debt, a well-balanced budget, sufficient liquidity (emergency
fund), and a diversified net worth to support long-term financial goals such as retirement.
Today's financial landscape is more complex than ever. There are numerous investment
options, retirement plans, insurance policies, and debt instruments available. Without proper
planning, individuals may struggle to navigate these complexities and make informed decisions
about their money. With the current 41-year high inflation, the cost of living has been steadily
increasing, making it more essential for individuals to manage their finances effectively.
Personal financial planning helps individuals budget their income, track expenses, and allocate
funds for various goals, such as education, homeownership, starting a business, or retirement.
Compared to previous generations, individuals today have more responsibility for their financial
future. Traditional pension plans are rare, and people rely more on individual retirement
accounts such as pre-tax 401k’s or post tax IRA’s. Additionally, there is a greater need for
individuals to plan for their healthcare costs and manage their own investments.
Consumer debt eclipsed a historical high of $16.9 Trillion in 2023! We’re seeing significant
levels of increasing revolving and installment debt, including student loans, credit card debt,
auto, and mortgages. Financial planning can help develop strategies to manage and reduce
debt effectively, prioritize high-interest debts, and proactively budget to avoid unnecessary
debt accumulation.
As a 53-year-old healthy male, I have a life expectancy of 83.2 years. At the current full
retirement age of 67, that’s at least 16.2 years to fund to support my post retirement lifestyle
outside of social security! Healthcare spend alone increased by 6.3% in 2022 and forecasted to
be 5.4% in 2023.
Social security wasn’t ever intended to support individuals to live past 80. When the original
Social Security program was established in 1935, the life expectancy assumptions were
significantly different from what they are today. The program was designed with the
assumption that fewer individuals would live to reach the eligible age for receiving retirement
benefits. In 1935, the average life expectancy at birth in the United States was around 61 for
men and 65 for women. The retirement age for Social Security benefits was set at 65, which
was considered the typical age of retirement. The program was designed to provide financial
support for a relatively short period after retirement. The original Social Security program did
not anticipate the significant increases in life expectancy that have occurred over the decades
due to advances in healthcare, improvements in living conditions, and lifestyle changes.
Today, with longer life expectancies, individuals are typically expected to rely on Social Security
benefits for a more extended period. The sustainability and adequacy of the current program
are under great scrutiny for clear reasons, leading to ongoing debate over the necessary
adjustments to ensure its long-term viability.
To simplify the process of financial planning process, here is a basic framework to evaluate
where you are and what the wisest next steps you can take to enhance your financial position:
Your credit, FICO, score is a numerical representation of an individual's creditworthiness and
financial reliability. It is used by lenders to assess the risk of lending money to a person.
Maintaining a good credit score is a balance paying bills on time, minimizing debt utilization,
and keeping credit card balances under 20%.
A personal budget serves as a roadmap for managing income and expenses. It helps prioritize
spending, reduce debt, and save for future goals. Start by tracking all sources of income and
categorizing expenses, distinguishing between fixed and variable costs. Identify areas where
expenses can be reduced or eliminated and allocate a portion of income towards savings and
investments. Regularly reviewing and adjusting the budget ensures financial goals are on track
and empowers individuals to make informed spending decisions.
Net worth is a measure of an individual's financial health and represents the difference
between assets (such as cash, investments, and property) and liabilities (such as loans and
debts). Calculating net worth periodically provides a snapshot of your financial progress.
Compound interest and debt have the potential to significantly impact your net worth. When
investing, compound interest allows for exponential growth over time. By starting early and
consistently contributing to retirement accounts and other investment vehicles, individuals can
harness this power to build wealth. However, compounding can also work against individuals
when it comes to debt. High-interest debt, like credit cards, accumulate rapidly, making it
crucial to pay off debts promptly to minimize interest expenses and accelerate financial
progress.
Investing wisely is essential for long-term financial success. Diversification is key to managing
risk and optimizing returns. Pre-tax investments, such as contributions to employer-sponsored
retirement plans like 401(k)s, offer tax advantages and potential employer matching. Post-tax
investments, like Individual Retirement Accounts (IRAs) and brokerage accounts, provide
flexibility and a range of investment options. A balanced portfolio incorporates various asset
classes, such as stocks, bonds, hedge funds, and real estate, to spread risk and maximize
returns. Regularly reviewing and rebalancing the portfolio ensures alignment with financial
goals and market conditions.
Personal financial planning is critical as we each navigate the complexities of the financial
landscape, adapt to changing economic conditions, take control of our financial future, manage
debt effectively, plan for retirement, achieve financial security, and enhance our financial
literacy. By engaging in personal financial planning, individuals can improve their financial well-
being and make informed decisions about their money.
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