Are You Fit And Strong Financially?

Posted: May 01, 2008 12:00 AM

That is the question that is right on the front page of my monthly Men's Health magazine, only I added the financially. It seems like a very good question and one I would like to look into on your behalf. For my behalf I am looking into fit and strong, although at my age I believe fit works a lot better than strong. It is imperative I am fit because of both my plans and my responsibility. Unfit wouldn't work very well. Strong is another question. Other than golf and jogging I really don't participate in other athletic activities any more so I am not sure what I would do with strong. That is because I equate strong to mean large muscles, lifting heavy weights and being able to punish my opponent physically. I am not sure if that is what they mean because I just got the magazine and probably won't get through it until the next one is due.

So I need to ask you are you fit and strong financially? Before you have to guess at the meaning I will explain. Fit means to me that every thing is flowing the way it should. You are earning money, paying your bills and able to maintain your current life style. That doesn't mean strong, however, because keeping up isn't enough in this society. We have so many pressures coming from so many different directions that one must be able to fight off the problems, metaphorically speaking, at almost any time.

Strong means in my world, having liquid reserves, period. Having assets doesn't cut it today because of the problem in converting them to cash. We have a credit crisis currently that defies imagination and has rendered many insolvent who wouldn't have been that way a year ago and may not be next year. But they are now. Reserves are assets that can be converted to cash, if not there already, in about seven days. Pure and simple without these you are not financially strong.

How much is needed is different for all of us. Although I am not a believer in "rules of thumb" they can be used as a starting point. To be secure, and most likely strong, you should have one years income in reserves. The problem with setting that as a rule is that if you make less than $20,000 then one years income probably won't due and if you are a Fortune Five Hundred C.E.O., $200 million is a bit of an overkill. But nevertheless I think you can get my point. What if that amount isn't feasible in your situation? Then strive for six months expenses as your safety net. If you end up with one months expenses it is at least a start. You can get 10 inch biceps over night.

For most of us our house has been and quite possibly can continue to be our bank. I have suggested in the past that one should pull out reserves from their house because when they need them they probably can't get them. I have also said many times that HELOCS, Home Equity Lines of Credit, are not reserves. Many people unfortunately didn't get the message and have found their Helocs frozen by their lender because of a declining real estate market linked directly to the credit crisis. It really didn't matter whether your house's value was declining the lender wasn't taking any chances.

There aren't any simple answers to being fit and strong financially but unless you are, I wouldn't become complacent. Not only are we in the middle of a real estate and credit crisis but we are seeing real signs of inflation creeping into the economy. Usually the way to stop inflation is to slow the economy down to the point of recession and the pressure is relieved. We are most likely in a recession currently and inflation isn't slowing because of energy, dollar and employment problems. Slowing the economy doesn't look like it will be the answer this time.

Rather than worry about things we have so little control over let's look at some ways to add the strength we need. If you own a house and have sufficient equity pull some of it out and stick it into the bank for reserves. The rewards will far exceed the risks at this point.

If you own a house without sufficient equity you might consider refinancing to a shorter amortization loan to begin to build equity. (You of course would only think about this if the new interest rate is significantly lower than your current one. If it isn't start paying more toward the principal with your current monthly payment.

Are you a renter? Now is the perfect time to look to buy something you can live in and try to do this with a sorter amortizing loan, as a 15 or 20 year fixed. This will put you on your way to build some equity, protect yourself from inflation and set up some reserves in the future.

Fit and strong are terrific goals as long as you define them for yourself. What works for me probably wouldn't work for you and why should it. We aren't the same age, don't live in the same community, don't have the same ideas, desires or philosophy so we shouldn't have the same goals. We both however, need to be fit and strong financially and at least fit

physically or we might have a real battle on our hands. I certainly hope not! Life works better when the pressures are reduced and now is the time to get started.

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