How to FI

The Financial Independence Ladder

There are multiple stages along the journey to financial independence (“FI”).  These have been detailed by several financial bloggers over the years and I want to provide my take on it here.  As you progress through the stages, your life and your feelings can change quite dramatically.  If you are currently at the early stages, don’t be discouraged by the road ahead.  As you move forward in the journey, your cash flow position will improve, your networth will increase, and the FI habits that you’ve built along the way will solidify – all making your goal feel and become more attainable.  Not everyone will reach financial independence in their 30’s and 40’s, that’s okay!  The key is that you want to take back control of your financial life and reduce the negative feelings and stress associated with being financially dependent on debt, other people, or your job.  Even moving a few rungs up the FI ladder can make a significant difference to the quality of your life and decrease your stress / anxiety / tension due to your financial situation.  Once you get on the right side of “zero networth” (positive networth) the momentum really starts to work in your favour!

The FI Ladder:

1) Financial Dependence

  • Financial situation
    • 0 or negative net worth
    • Not living within your means (likely spending more than you are earning and accumulating debt)
    • Potential cash flow / liquidity problems
    • Not intentional or thoughtful with financial decisions
    • No management system in place (tracking your finances, etc.)
    • No savings plan / goals
    • NEED HELP!
  • How you may feel
    • Out of control, trapped, insecurity
    • Overwhelmed, confused, frustrated
    • Worry, fear, guilt, shame
    • Unorganized

2) Solvency

  • Financial situation
    • Still 0 or negative net worth, BUT
    • Your debt level isn’t increasing monthly anymore – you have increased your income and/or decreased your expenses to the point where you are able to pay all of your bills for the month without having to rely on additional debt
    • Have started to get organized – tracking your finances
  • How you may feel
    • Relieved
    • Made it through the month
    • Although still worried about looming debt payments

3) Emergency fund 

  • Financial situation
    • 0 or negative net worth
    • You may still have debt, but your debt balance isn’t growing or even starting to decline!
    • As you pay down some of your debt and your interest payments decrease, you find that you may even have some amount left over from the month – freeing up a bit of cash that can serve as an “emergency fund” (money to cover expenses for 3-6 months).  This way, if you have an unexpected / emergency expense come up, you won’t have to rely on debt or a payday loan to cover.
    • Intentional with financial decisions
    • Developing a debt paydown or savings plan and long term goals
  • How you may feel
    • Good about having money left over from the month
    • More in control, secure – “things are starting to fall into place”
    • Confident – “I have a clear plan to pay down my debt, and it’s achievable”

4) Debt Free!

  • Financial situation
    •  0 or POSITIVE net worth
    •  Your debt is gone! Time to start thinking about having money work for you (Investing)
  • How you may feel
    • Sense of Accomplishment
    • Empowered
    • “I made it, I’ve turned around!”

5) FU Money

  • Financial situation
    • Networth of 1-5 years of living expenses
    • Start to see the benefits of saving to get to a positive net worth
    • Investment income starts to grow as your portfolio grows
  • How you may feel
    • In control
    • Free – “I am no longer beholden to others”
    • Flexible, confident
      • Not afraid to ask for what you want (e.g. time off, work from home, increased pay, getting rid of tasks you dislike)
      • You have flexibility to change your situation if need be (e.g. if you are doing work you don’t enjoy, have a team or boss you don’t like, or you are not being fairly compensated)

6) Coast FI

  • Financial situation
    • Networth of 10-15 years of living expenses
    • You have enough saved for retirement that if you were to stop saving today (only earn enough to cover your expenses), you would be financially independent by standard retirement age
    • Significant optionality emerges
      • Option to decrease to part time to provide more balance or take a lower paying job that you may enjoy more to cover your expenses
      • Option to take a mini-retirement (take a couple of years off?)
  • How you may feel
    • No worries!

7) Lean FI

  • Financial situation
    • Networth of 15-20 years of living expenses
    • Your investment income is able to cover your essential expenses (e.g. housing, transportation, food) but not discretionary expenses
  • How you may feel
    • My money is starting to work for me – “I don’t have to work my job for each dollar I get now”

8) Financial Independence!

  • Financial situation
    • Networth of 25-30 years of living expenses
    • Your investment income is able to cover all of your expenses (essential and discretionary) so you no longer need to rely on paid employment
    • Shift in focus to life’s true purpose since you no longer need to trade your time for money
  • How you may feel
    • Like a million bucks! (probably because you have a million bucks!)
    • “I’ve come a long way, and I made it”

9) Fat FI

  • Financial situation
    • Networth of 30+ years of living expenses
    • Your investment income covers your lifestyle expenses, and more!  The excess can be used to further increase your standard of living or give back (charity, etc.)
  • How you may feel
    • Like two million bucks (real feeling of abundance)

The #1 Factor of Financial Independence Success

Let’s start by talking about pensions!  It may sound boring but this is an important place to start the conversation about savings since the type of pension you have have (if you have a pension at all) has a huge impact on your future savings plan.

Years ago, people relied on Defined Benefit Pension plans and government benefits to fund their retirement.  With Defined Benefit plans,

  • Contributions are generally made by both the employer and the employee during the employee’s career
  • The employer pools the funds of all employees and manages them together as one
  • The employer is responsible for providing employees with a monthly payment upon retirement (generally until death) that is calculated based on various factors (e.g. years of service, salary, etc.).
  • Given the employer’s obligation to pay the employee monthly payments set by a calculation, the employer bears the risk associated with investing the funds (the performance of the investments do not impact the outcome for the employee).  

Nowadays, many employers have shifted to Defined Contribution Pension plans since they are less expensive to administer, create certainty on how much the employer is required to pay in (usually a percentage of employee salaries), and allow investment risk to be shifted to employees.  With Defined Contribution Pension Plans,

  • Contributions are generally made by both the employer and the employee during the employee’s career
  • The employee is assigned an individual account and is responsible for selecting his/her preferred investments within the account
  • Given uncertainty of future investment performance, the actual amount that the employee can withdraw in the future is not known (the employee bears the risk associated with investing the funds).

For those without any employer pension plan (e.g. entrepreneurs, self-employed, or employees of companies that do not offer pension plans), they have to responsibly save money outside a pension plan to ensure they have enough money for retirement.

As the responsibility of investing shifted from employers to employees over the years, many were not ready and equipped with the knowledge to manage their pension. In 2011, the ASPPA Journal published a paper named “Retirement Success: A Surprising Look into the Factors that Drive Positive Outcomes” by David M. Blanchett and Jason E. Grantz.  In that study, the authors ranked four drivers of retirement success, in order of importance:

  1. Savings Rate
  2. Asset Allocation (the mix of the assets that you invest in – e.g. stocks, bonds, GICs, etc.)
  3. Asset Quality (selecting and monitoring individual investments) 
  4. Actuarial Assessment (making strategic changes to the allocation as situations warrant)

Ironically though, people spend most of their time on the less important activities (e.g. picking individual investments) and very little time figuring out how they can SAVE MORE (the most important activity). In fact, it should be obvious that savings is the #1 factor of retirement success since you need savings to start the wealth accumulation journey.  Investment selection is a moot point if you don’t have enough money going into the account in the first place!

Let me show you how much of a difference savings rate can have on the time you need to work to reach financial independence.  See the chart below (assumptions stated at the bottom of this post).

  • On the horizontal axis – different levels of savings rate (expressed as percentage of after tax income) 
  • On the vertical axis (or blue numbers at the top of each bar) – working years to Financial Independence (“FI”)

First let’s speak through the extremes:

  • If your savings rate is zero or negative, you will never accumulate money and will technically have to keep working forever or fully rely on government benefits in your older years (in Canada, Canada Pension Plan, Old Age Security, Guaranteed Income Supplement)
  • If you only save 1% of your salary, of course it is going to take you forever to reach financial independence – it would take a whopping 37 working years to save just 1 year of expenses, and 99 working years to save 25 years of expenses
  • If you save 100% of your salary, you are already financially independent.

What about the average?

  • The average savings in Canada in 2019 was between 3 and 4% – at that rate it would take you between 71 and 77 years to reach financial independence!  This means that the average Canadian is drastically under saving and will likely have to significantly rely on government benefits during retirement.

But what if you can save more?

Where this really becomes interesting is when you progress towards a higher savings rate.  You will see that small changes in your savings rate can create a massive impact on your time to financial independence.  

  • Let’s say you make a few minor tweaks to your monthly budget (whether that be earning a bit more, or spending a bit less through conscious value-based spending), and are able to go from the average savings rate of 3-4% up to 10%.  At the 10% level, the math says that you reach financial independence in 52 years. THIS MEANS THAT YOU CAN WORK 19-25 YEARS LESS JUST BY SAVING 6-7% MORE!
  • I personally think we all should go further – who really wants to trade their time for money for 50+ years!
    • Many people in the financial independence community target saving 40-70% of their net incomes (that puts their working years down to 9-22 years).  That is certainly not for everyone, and like most other topics in personal finance this is a very personal decision where you have to find what is right for you. Those who enjoy their jobs and value spending a higher percentage of their income may be more than happy to have a longer working career. Others who find their jobs less fulfilling or stressful may want to try to save more so that they can expedite their journey to financial independence – eventually shifting their time and energy to other things that they value.

Anyone can do this – sure it is easier to have a higher savings rate with a higher income (assuming you are able to avoid the lifestyle creep / rising expenses associated with a higher income), but there are many examples of people in the financial independence community who are able to reach high levels of savings on a low income.

I have a strong opinion that the basic concept of “saving” is too often overlooked.  Most people spend too much time with their financial advisor thinking about what stocks to buy and not enough time thinking about how they can increase their savings rate in the first place.

So what should you do? Track your finances, spend less and/or earn more to increase your savings rate to decrease the number of years to financial independence!  If you would like help, visit my financial coaching page.

And for those who’re interested in the assumptions and math behind the bar chart above:

  • Networth starting from zero today looking forward
  • Constant expenses 
  • Investment return of 5%
  • Withdrawal rate of 4% during financial independence
  • Financial independence definition – the point where your investment portfolio is 25x your annual expenses  
  • Income: these numbers work for every level of income since we are talking about relative savings rate (annual savings divided by after-tax income)
  • These numbers ignore government benefits.

Stop Wasting Your Life – Change Your Mindset!

This post was inspired by a quote that my sister shared with me:

It is not that we have a short time to live, but that we waste a lot of it. Life is long enough, and a sufficiently generous amount has been given to us for the highest achievements if it were all well invested. But when it is wasted in heedless luxury and spent on no good activity, we are forced at last by death’s final constraint to realize that it has passed away before we knew it was passing. So it is: we are not given a short life but we make it short, and we are not ill-supplied but wasteful of it… Life is long if you know how to use it.            – Seneca

One of the core principles of Financial Independence is understanding the time for money trade-off. Most people understand that when we work, we trade our time for money.  What people sometimes fail to do, is to take the trade-off one step further to realize that when we buy things, we are indirectly trading time for things (since we trade our time for money and in turn use that money to buy things).   

Since we are indirectly trading time for things, we need to make sure the things that we buy are aligned with our values and actually make us happy (otherwise it is a waste of life). Many of us tend to buy aimlessly as soon as we enter the workforce – due to a “newfound financial freedom” from all that money flowing into our bank accounts every month, or worse yet, from credit cards. We can’t necessarily be blamed given that we are just doing what everyone else is doing. Buying a house / taking on a mortgage, buying a car / taking on a car loan – these have all become conventional in our consumer-driven society. We are encouraged by friends, family, and advertisers touting how much we “deserve it” after all the hard work. What we don’t realize is that when we bite of more than we can chew (buying beyond our means and taking on large amounts of debt), we are effectively trapping ourselves in our jobs because it has now become more necessary than ever to work to make the payments that we signed up for. While the instant gratification of buying something now is oh so tempting, the “future me” is the one who actually has to grind out the hours to pay for these things – plus interest!  

If we choose to save money, rather than trading it all for things, we are trading time for savings. The beauty of that savings is that it will allow us to work less in the future (gives us back the time spent initially – PLUS interest!). The principle of financial independence takes this to the next level where we ultimately save enough money so that we don’t have to grind at work if we choose so! The ultimate thing we buy through savings is our freedom.

This principle is so important that I even included it in my JBFI logo – you can see the person balancing the money and time trade-off as they climb their way to financial independence.  

What’s our real hourly wage?

One thing we can do to develop more consciousness about trading time for things is to calculate our “Real Hourly Wage”. This is another concept that was introduced in the brilliant book, “Your Money or Your Life”. Basically, we calculate what our hourly wage is so that we can calculate how many hours we have to work to buy something.

Let’s walk through an example together. Say you make $50,000 per year and you work 40 hours per week.  Easy:

  • $50,000 ÷ 52 weeks per year = ~$962 / week
  • $962 ÷ 40 hours per week = $24 / hour

This is how most people think about their hourly wage – on a gross dollars per hour basis only counting the hours that they are actually working. Let’s dig a bit deeper and make a couple of adjustments:

  • Numerator adjustments: deductions
    • You’ll notice that when you get your paycheque at the end of the pay period, you don’t get to keep every dollar you earned (in the example above, you don’t get $962 each week). Why? Deductions! In Canada, our employers are legally required by the government to withhold amounts for federal income tax, provincial income tax, Canada Pension Plan, and Employment Insurance premiums.
    • Using our example above, if you make $50,000 per year in Alberta, Canada, the following deductions apply:
      • ($4,917) Federal tax
      • ($2,740) Provincial tax
      • ($3,231) CPP / EI premiums 
    • So that $50,000 actually looks more like $39,112 in your pocket at the end of the year. It is important to think about “after tax” income since all of our purchases are made with post-tax dollars.  
  • Denominator adjustments: the extra time
    • One thing that many of us don’t think about is the additional time we need to spend in order to work (incremental to the hours we are officially “on the clock” and getting paid).  Examples include:
      • Getting ready before going to work
      • Commuting to and from work
      • Unwinding after getting home from work
    • Continuing our example above, let’s say that somebody spends 45 minutes to get ready for work, 30 minutes to commute to work, 30 minutes to commute home from work, and 45 minutes to change / unwind after work.  That is an additional 2.5 hours per day or 12.5 hours per week.  

Let’s re-run the math using our adjusted numbers:

  • $39,112 ÷ 52 weeks per year = ~$752 / week
  • $752 ÷ 52.5 hours per week = $14 / hour (that is a WHOPPING $10 / hour less than what we originally thought!)

I would encourage you all to run some calculations of your own to calculate what your real hourly wage is.  You can do the calculation manually or you can go to the “Your Money or Your Life” website and use their “Life Energy Calculator“.  

To estimate the amount of your deductions, you can just search “tax calculator Alberta Canada” or something similar depending on where you live. I use this one for Canada.

Once you calculate your real hourly wage, the idea is to think about your purchases in terms of the time spent working to earn the money to buy them, rather than just the dollars you part with to make the purchases.  Going further with the example above:

  • $6 fancy coffee = ~26 minutes of life energy
  • $150 dinner out for two = 10.7 hours of life energy 
  • $50,000 luxury car = 1.3 YEARS of life energy

Now I’m not saying that we all need to cut out the fancy coffee, the dinner out, and the nice car.  I just want us to understand the “time” for “things” trade-off that we make whenever we spend our money. A real foodie may be more than happy to trade 10.7 hours of their life for a nice meal, however, others may prefer to settle for cooking at home or a cheaper takeout alternative and save an entire day’s work. A car enthusiast may be happy to trade over a year of their life for a car since it genuinely gives them lasting happiness, however, others may prefer a lower cost used car and an earlier retirement date. These trade-offs are extremely personal. The purpose is not to judge or shame anyone for making purchases – as long as they are made consciously with the time for money trade-off in mind.  A good quote that is relevant here: 

Spend extravagantly on the things you love, and cut costs mercilessly on the things you don’t. – Ramit Sethi

This is the whole concept of “value-based spending” – consciously spending money on things that we love, and not unconsciously spending on things that don’t make you happy. We may even want to consider increasing spending on things that we truly value! The ultimate goal here is to maximize value and your life satisfaction for the time / resources you trade. 

 

Household Inc. – Tracking Your Household Finances Like a Business

I am a huge believer that if you want to make any kind of change in your life, you will probably have to implement some type of tracking system to make sure you are progressing towards your goals (and if you are not, course correct!).  I track everything from calories in / out, money in / out (see the analogy comparing the two here), distance cycled, time spent playing piano, and more! 

Money wise, I have personally tracked every single penny (or shall I say cent since some people may not know what a penny is these days) in and out of my life since January 1, 2011.

It is completely normal, expected, and even legally required for businesses to track their finances but why don’t individuals treat their household more like a business?  When businesses track their finances, they produce a set of financial statements that help give various stakeholders (owners, investors, bankers, tax authorities, etc.) a view of the health and profitability of the business.  The two most well known financial statements for a business are the Income Statement and the Balance Sheet.

  • Income statement (or profit/loss statement) – this is expressed for a period (e.g. month, quarter, or year)
    • Sales revenues
    • (-) Expenses
    • = Profit (Loss)
  • Balance Sheet – this is expressed at a point in time (e.g. as of December 31, 2019)
    • Assets
    • (-) Liabilities
    • = Equity 

I have a strong view that we should treat our households like businesses, regularly generating statements to analyze the financial health of our household and how the household’s “profitability” changes over time. 

Benefits of tracking your individual finances like a business:

  • Control: Knowing where you stand on a regular basis (I do monthly) is critical to maintaining control of your finances and reducing financial stress in your life.  If you take the “head in the sand” approach of not knowing where you stand financially, you’re not going to feel secure and money is more likely to cause stress in your life.  Ignorance is not bliss here!  
  • Progress & Motivation: When you track your finances, you are more likely to progress towards your goals.  When you make progress and are able to see it on paper every month, it is extremely motivating!  Celebrate your wins and investigate things that may be hindering your progress.
  • Accountability: Once a month check-ins with a trusted family member, friend or financial coach create accountability – making sure that your spending remains aligned with your values, and it also gives you an opportunity to weigh certain financial decisions (e.g. should I buy that fancy watch that’s been on my mind for months?) with someone else.
  • Optimization: Tracking your expenses provides a view into where you are spending your hard earned money.  This view gives you an incredible power to optimize your finances – for example, it easily shows your largest spend categories thereby giving you a good sense of which levers to pull to create the biggest impact on your savings.  It also gives you the ability to make smaller changes that can compound to a big difference.  Most people who start tracking their expenses notice that they start saving money simply by being more conscious about their spending.
  • Transparency: People who don’t track their finances may not notice certain things – one of my friends didn’t realize that he had been paying for two Netflix subscriptions by accident for some months!  Another example is credit card debt – when you see a minimum payment of only $50, it may not seem like a big deal.  That said, when you sum up the hundreds of dollars of interest that you’ve been paying for months, it really highlights how much of a drag that debt may be creating on your financials. 
  • Dare to be different: If you do what everyone else does, you get what everyone else gets.  Most people don’t track their finances and this has led to record low savings rates and record high household debt. 
  • Catch the bad guys: Some people don’t even look at their bank account or credit card statements.  Ever!  If you regularly review your bank account and credit card statements, you will catch fraudulent transactions quicker than you would otherwise.  Most people I know have had their debit and/or credit card compromised at least once. 

Example of household financial statements: 

  • Personal Income Statement (Income / Expenses / Savings)
    • Gross Earnings (salary, investment income, side business income, etc.)
    • (-) Taxes, CPP contributions, EI contributions, etc.
    • = Net Earnings (after tax)
    • (-) Expenses (essential expenses, discretionary expenses)
    • = Savings
  • Personal Balance Sheet (Networth)
    • Assets (bank accounts, investments, real estate, cash, etc.)
    • (-) Liabilities (credit card debt, mortgage debt, lines of credit, personal loans, etc.)
    • = Net worth 

In addition to financial statement type reports that may be unexciting to some, I use highly visual charts to give a graphical representation of my finances on a monthly basis.  I’ve been doing this for years and recently brought my wife on board.  Just as a business has regular “shareholder meetings”, we have “household finance meetings” on a monthly basis (we just had our 22nd monthly meeting in August 2020).  Each month we prepare our statements and charts (both individual and combined) and then meet to discuss the month.  We have found this hugely beneficial as it keeps us on track – ensuring that we are always living within our means, spending our money consciously on the things that we value most, and saving a good chunk towards our Financial Independence goals.  The monthly meetings are also a good forum to discuss investment performance, asset allocation, major upcoming expenses, taxes, insurance, and more!  This level of financial transparency and accountability encourages us to stay aligned on our earning/ spending/ savings plans, in addition to ensuring that there are no unintended surprises (I’ve read that money is the leading cause of relationship stress).  

Here is a simple example of a Networth chart: 

It can be extremely motivating to watch this number grow over time.

In Vicky Robin’s book, “Your Money or Your Life” , Vicky suggests implementing a “wall chart” system whereby you track your monthly work income, monthly expenses, and monthly investment income.  For months where income exceeds expenses, you save money.  As your savings start to accumulate and as those savings are invested, you start to generate investment income.  Eventually you get to the point where your investment income starts to cover a portion (and eventually, all) of your monthly expenses.  The point at which your monthly investment income exceeds your monthly expenses is referred to as the “crossover point” and represents the point of financial independence (where you no longer need to trade your time for money since your income from your investment portfolio is covering your expenses).  Here is a picture of Vicky’s recommended “wall chart”:

After experimenting with several different options over the last decade, I have created my version of the “wall chart”.  Here is JBFI Inc.’s version of the “wall chart”: 

Each bar represents one’s overall financial position for a period (I usually do both monthly and yearly), and the green line shows how the financial position changes over time (upward sloping line means an accumulation of positive savings every year).  

  • Whole bar for each year = total income/money into your life for the given year.
  • Blue segment = mandatory deductions (e.g. federal and provincial taxes, CPP contributions, EI payments).
  • Everything below the blue segment is your “net income after taxes”.  This is money that is available to be either spent or saved:
  • Black segment = essential expenses (e.g. rent, utilities, groceries, clothing, etc).  These should generally be stable from month to month.
  • Red segment = discretionary expenses (i.e. for the purchase of items that are “wants”, not “needs”).  These expenses tend to be more volatile from month to month. 
  • Green segment = savings (i.e. money left over after deductions, essential expenses, and discretionary expenses).
  • Green line = investment income.  For example, if your networth was $100,000 and you earned a 4% return on that amount in a year, your investment income would be $4,000.  This is a very powerful line as it shows how much of your expenses can be covered by your investment income.  The goal is to eventually get to the point where your investment income covers your essential expenses (i.e. lean FI) and eventually all of your expenses (full Financial Independence).  This is similar to the “crossover point” concept that Vicky Robin introduced in “Your Money or Your Life” .

I choose to do all of my tracking in spreadsheet format for a couple of reasons:

  • Flexibility – you can build things exactly how you want it rather than being confined by how a software developer thinks (truth is, I’m a big spreadsheet nerd)
  • Tracking shouldn’t be made too easy – some of you may disagree, but I do think there is value in having to manually enter your transactions as it helps to reinforce conscious spending (now on what degree of labour is effective, let’s debate this on another day)

To get started with tracking, take a look at the JBFI Inc. coaching program!  I provide each of my clients with a Google Sheets tracking spreadsheet and a web form that makes data entry fun and easy (especially for those who’re new).  I’m happy to help you set it up and be your accountability partner along the way. 

If you prefer not to go the manual route, I’ve heard of others having success with programs that will do the heavy lifting for you.  For example:

Maybe you aren’t a fan of computers at all. Not to worry. All of this can also be done the old-fashioned way and achieve the same results. 

 

 

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Health / Personal Finance Analogy

I’ve heard a few people make an analogy between health and personal finance over the years. I think it makes perfect sense and is a good way to explain basic personal finance concepts in a relatable way.

I used to be overweight.  I tried a few different things, however, the only way I ultimately succeeded in losing weight was to start tracking my calories in and out meticulously.  If you don’t believe me, ask my wife.  I think she is probably sick of me weighing my food at every meal and asking her for a detailed list of every single ingredient that make up her recipes when she cooks.  I have a strong belief that the same principles hold true for personal finance, that meticulous tracking of money sets the foundation for long term financial success.

To set the stage, let’s say that:

Calories = Dollars

Exercise = Earning

Eating = Spending

In health, if you exercise you can either eat more or lose weight (by running a calorie deficit).  In personal finance, if you earn more you can either spend more or save money (by earning more than you spend).

In health, Resting Metabolism is defined as the total amount of calories that you burn when your body is at complete rest.  This means that even if you stayed in bed all day, you would still burn a base amount of calories.  Now let’s say that:

Resting metabolism = Employment income (salary)

Now I’m certainly not saying that work is restful or that working is boring and makes you want to sleep (some may argue otherwise), but stay with me here.  Just as your resting metabolism burns a base amount of calories each and every day regardless of your activity level, employment income (assuming you are a salaried employee) allows you to accumulate a base amount of dollars each day/week/month/year.

Exercise beyond resting metabolism = Extra income (side hustle income, investment income)

Some people find it hard to lose weight by controlling diet alone or consuming less calories than their resting metabolism each day.  This is where exercise comes in.  Exercise allows somebody to burn additional calories. In personal finance, some people find it hard to save money with their employment income alone.  This is where extra income comes in.  Extra income from side hustles or investments allow people to earn more.  The beauty with extra income is that the upside potential is unlimited whereas there is a physical limit to how much you can exercise.

Now we certainly all know that in health, not all calories are treated equally.  It is more complex than that, breaking down in to fat, carbohydrates, protein, etc.  In personal finance, not all spending is treated equally.

Healthy calories consumed = Conscious, value-based spending

Unhealthy calories consumed = Unconscious spending

In health, there are tradeoffs.  For example, the short term gratification you get from eating that whole box of timbits (I hope I’m not the only one who has done this) vs. thinking longer term about how that type of behaviour will ultimately impact your long term health goals.  Same goes for spending, the short term gratification you get from that Louis V bag may seem great at first, but over the long term, it may put stress on your financial situation and ultimately impact your long term financial goals and happiness.

In health, there are limits to the amount that you can reduce your calorie consumption and if you take calorie consumption too low, it can lead to eating disorders and starvation.  Same goes for personal finance, if you cut your spending too low, you will get to a point where you feel deprived.  That is not the objective here!  In health, you want to consume the right amount of healthy foods, with the occasional treat so not to feel deprived.  In personal finance, you want to target a level of spending that aligns with your values so that you do not feel deprived.  Don’t forget, you can always exercise if you need more calories just like you can always earn additional income if you need more money to spend / save.

Habits are important here as well.  The choice to choose salad over a burger and fries one day may not make a big difference, however, the compounding impact of this choice made daily can make a massive difference in one’s health and progress towards health goals.  In personal finance, the choice to buy that $15 burger and fries is harmless every now and then, but if practiced daily, can really add up and negatively impact your long term financial situation.

When calories consumed > calories burned = weight gain
When spending > earnings = savings decreases or debt increases

When calories consumed < calories burned = weight loss
When spending < earnings = savings increase or debt decreases

Lastly, in health, people often utilize personal trainers to set long term fitness goals, and design a meal plan and exercise plan to achieve those goals. Importantly, a personal trainer also acts as an accountability partner. Same goes for personal finance – a financial coach helps set long term financial goals and works with you to design a budget to make sure that your spending is within your means and aligned with your values. A financial coach also keeps you accountable, with regular check-ins to see how you are doing along the way.  To learn more about financial coaching, check out this page.