Finance 101: How Your Bills Impact Your Financial Fitness

One day you wake up and decide – it’s time to get fit. You hop online and buy new workout clothes and shoes. You join the gym that you’ve driven past every day for years. You dedicate yourself to your workout regimen, getting in the gym 4 times a week. After several months of being committed to your program you decide it’s time to see what kind of gains you’ve made. You hop on a scale to check your weight, and take measurements of your arms, chest and waist. You pull up the note where you recorded your metrics on your first day, and write down your new measurables. Your eyes glance from side by side as you compare your numbers and you’re hit with the stark realization that – your body really hasn’t changed much at all since the beginning. You wonder to yourself, “what is holding me back?” This lack of progress is confusing, crushing and dispiriting.

The fact of the matter is there’s two parts to getting in shape and you only addressed one. If you want to be in the best shape of your life your diet has to change along with your workout habits. While you began a new workout regimen, you stuck to your old dietary habits. A steady diet of fried foods, burgers and carbs neutralized any progress you made in the gym.

Liabilities (aka bills) are the “diet” of your financial fitness. Just as there are two parts to physical fitness, there are two things you must watch if you want to be financially fit – what you earn and what you owe. It does not matter how much you bring in if you subsequently send it right back out.  Any raise you receive is instantly neutralized when your bills increase right in line with it. If you want to be financially fit, your liabilities have to move in the opposite direction as your earnings. 

What good is earning more if you don’t keep more? Why use a raise as an excuse to increase your burden?

Imagine a runner at the starting line of a marathon. She’s outfitted in lightweight running shorts, a sweat wicking tank top and 8 oz. running shoes. However when the signal is given to start the race, she turns around, picks up a 40 pound weight vest, puts it on and then begins to run.

That is what we do when we burden ourselves with unnecessary bills early in our careers.

I learned this lesson the hard way a couple years ago. Throughout my early 20’s there was one car that had caught my eye, I wanted this car more than any other – the Volkswagen CC. I loved how they looked. I loved the fact that not a lot of people had them and most importantly I loved how I thought I would look in it. There was just one problem – I couldn’t afford the car note….yet. A few months passed and I earned a promotion. With that promotion came a raise…and a new car. Before the end of the first pay period at my new salary I had negotiated a “deal” for the car of my dreams. I’d trade in the car I bought just eight months earlier, take on a higher monthly payment and a longer loan. And I agreed to do all of this while grinning from ear to ear. I increased my liabilities right along with my raise wiping out any benefit I might have received. Complete wash.

Don’t be like me. Don’t pick up extra weight at the beginning of your race to financial freedom.

Income – Liabilities = Accumulation

That equation is straightforward and complicated at the same time. It’s simple in the fact that what you earn minus what you spend equals what you accumulate (also known as your net worth). At the same time this concept can take a while to grasp. It did for me at least. See I thought if my salary was $60,000 then that meant I was doing pretty good. I could afford to have nice things, live in a nice place and have a good life. If I only had a few dollars left in the bank at the end of every month it was no big deal. I’m doing okay!

But if from January to December I make $60,000 and as the ball drops in Times Square on New Year’s Eve I check my account to see $150 staring back at me how good did I really do? Accumulating wealth is all about retention, and we cannot retain money if we give it all away.

Although you might not be able to tell from reading this post, I don’t hate nice things. I don’t want your takeaway to be – material things are bad. I am by no means a minimalist. I don’t think you should work yourself to death, never buy lunch, never go out to dinner, never take nice trips and live in a cardboard box. There’s nothing wrong with having nice things, as a matter of fact if you work hard and take care of your responsibilities you deserve to have nice things. But just as dining daily at your favorite fast food restaurant wrecks your body, consuming goods and constantly increasing your liabilities can ruin your financial health. Stay mindful and employ systems to set yourself up to buy the things you want. Be smart and one day you’ll look up and see those gains you desired.