The amount of change we saw during and after the pandemic was overwhelming, to put it mildly. Besides changes to the workplace and education, we saw disruptions to how we remain healthy both in the gym and our pocketbook. For some, life became and remains one of survival. For others, disruption may have been mild, and with the craziness of the stock market and real estate markets, some have even improved their financial position. The analogy between physical health and fitness and financial health and fitness is not a loose one, and I use it when advising my clients and teaching my students. You cannot have one without the other.
Let’s define our terms so you can see where I’m headed with this. Per Wikipedia, health is defined as “a state of physical, mental and social well-being in which disease and infirmity are absent,” while (physical) fitness is defined as “the ability to perform aspects of sports, occupations and daily activities.” The latter also implies an efficiency and an increased ability to do work or exact a greater “return.” The idea of wellness may be thrown in the mix as well which encompasses numerous aspects of fitness including spiritual and financial, among others, and implies a holistic and balanced approach to the whole person (American Council of Fitness). These same words and concepts can be seen in a balanced approach to personal finance.
The first question I ask is, how is your financial health post-pandemic? Are you healthy? Are you perhaps even “fit?” If not, how do we get back to that modicum of health? If you’re already there, how do we get you back to a level of financial fitness? Is there an objective method to discuss financial fitness and health? Besides random internet stories with questionable sources and experts we see with physical fitness feeds, are there better guides in the financial world? We need to go back to first principles as we recover.
Again, let’s establish our vocabulary. A common term from finance and economics is that of surplus. Although surplus can have a number of meanings, one commonly used in the profession is “the difference between our revenues and expenses.” We can extend the term to mean the six months or one-year extra amount needed for living expenses – the “Emergency Fund.” Perhaps it was liquidated in these past months for just that, this black swan event from the pandemic. So, let’s start there. Let’s make sure we have that re-established in some liquid or semi-liquid form. That will help us get “healthy” again and allow us to prepare for the future.
Next, we can start discussing investing and becoming fit again or to start a fit lifestyle; let’s get back in the gym! Financial fitness should never start with a discussion about the latest hot stock. Instead, it should first come from an objectified evaluation of your “company” or entity by your financial “personal trainer” or “general practitioner” or perhaps you. Let’s treat your household as if it’s a company and analyze the financial statements just as if you’re looking at the 10-K of Microsoft. Next, let’s see where you are in your life cycle. Are you starting out, perhaps as a student? Are you in the acquiring mode as a younger adult, perhaps with a family? Are you at that point of prime earnings, say around 55? Considering retirement? Or are you thinking about bequests and gifts with your heirs or your legacy in mind? Finally, we can discuss your portfolio. When looking at your portfolio, we need to include all of your assets, including real estate, and liabilities. This is a balance sheet analysis and a strategic one. Is this process any different than what your GP or personal trainer would do, conduct a history, check your mobility, conduct an aerobic evaluation, a strength assessment, complete diagnostics and labs? The answer is no. A similar methodology is applied to both areas.
As we return to that “new normal,” remember the time you spent quarantined, perhaps spending ample time brooding over your financial status. This was not an exercise in futility. Let’s turn it into a positive experience with lessons learned. 2018 saw the latest edition of the “Physical Guidelines for Americans” released by the U.S. Department of Health and Human Services. Based on your age bracket, there are expectations of how much physical activity each of us needs on a weekly basis. Why not practice the same discipline with your financial plan? A few hours a week should only provide benefit as you become healthy and fit again. Schedule your “financial time” just as you would gym time or Zumba class or a yoga session. Take this time to look at your household’s financial statements and its portfolio. Reach out to your financial advisor, your CPA or tax advisor as you develop your financial fitness plan.
Like most fitness plans, it all comes down to good management, having the right professionals working for you and follow through. This is the perfect time to get financially fit.
James Dudgale is the Visiting Instructor of Real Estate Management at Columbia College’s Robert W. Plaster School of Business. He teaches real estate and finance courses with an emphasis on alternative investments and portfolio management.