Every other Sunday, The Simple Dollar reviews a personal finance book.
I’m a big believer in the idea that personal finance and personal health have a lot in common. They both involve simple principles that are often harder to follow than they seem. They both require some changes in your regular behavior to maximize success. They both really only require a bit of time each day to improve your situation, but they also require some mindfulness.
The Net Worth Workout (by Susan Feitelberg) takes that analogy and runs with it. Feitelberg extracts the basic principles from getting yourself into shape and applies them to personal finance. Along the way, though, it’s not hard to notice how these basic principles apply to any positive change you might want to make in your life.
Does the analogy hold up and provide useful personal finance insights? Or is The Net Worth Workout just another personal finance book? Let’s dig in.
The Net Worth Workout Explained
Feitelberg lays out the basics of the analogy right off the bat.
She compares earning to metabolism. The faster your metabolism runs, the more effectively you use the food that’s put inside of you. Similarly, personal finance success is heavily tied to how effectively you utilize your income.
Spending analogizes with calorie intake. Just as junk food is loaded with cheap calories and moves you away from your optimum weight, frivolous spending does the same thing – taking you away from financial success.
Saving analogizes with strength training. Weights help you build physical muscle so that you can easily handle more diverse tasks, while smart saving strategies add to your financial muscle, enabling you to be more flexible with your lifestyle choices.
Investing analogizes with cardio fitness. Just like a great cardio workout helps your heart and lungs (and brain) work better, good investing increases the capacity of other components of your life.
Many people view personal finance as complete drudgery, a task to be avoided in favor of … pretty much anything else in life. If you keep that negative attitude, personal finance success will be very difficult.
Instead, you should view it as a personal challenge, one that makes you feel great after you do it … just like a workout. Feitelberg recommends actually having a weekly personal finance session that’s an hour long (and, eventually, it could/should be stretched to two hours). What do you do with that time? Keep your bills paid. Learn about investments. Develop a debt repayment plan. Contact your lenders and look into debt reduction opportunities. Look for new ways to earn money.
This is really an excellent idea. I’ve actually been doing this for a while, as I usually spend my children’s Sunday naptime doing just that (which lasts for approximately an hour and a half). It makes all the difference.
Your Shape, Goals, and Plans
Before you can get going with your financial fitness routine, you need a checkup. Where are you at? What are your goals? How do you intend to reach those goals? Feitelberg argues that these pieces provide the bedrock for any personal finance success you might enjoy.
The first step is to get a firm grip on where you’re at financially, and the best way to do that is to do a detailed calculation of your net worth each month. She advocates making a monthly “Net Worth Statement” – the idea of a monthly personal finance statement is a brilliant one that I strongly agree with.
After that, you need to focus on setting some goals for yourself, short term and long term. Where do you want to go in a month? In a year? In a decade? At retirement age? Now, what do you actually need to do to get there? Break it down to little manageable steps that you can actually accomplish in reasonable time and track during your weekly personal finance “workouts.”
Earning: Which Gear Are You In?
People earn three kinds of income: active income (what we earn from our work), passive income (what we earn from work done in the past, like book income or a rental home), and portfolio income (what we earn from our investments). The harder you work on your active income, the more you can put into passive income and portfolio income (which you don’t have to actively work for).
So, the first step that most of us need to take is maximizing our active income. The author’s advice was written in a time of economic optimism and mostly involves shopping around for jobs and asking for raises, which can be difficult right now. My recommendation for earning more money right now is to start a side business.
Spending: What Kind of Fuel Are You Burning?
Much like how some calories are healthy and others are empty (and unhealthy), some types of spending are vital and others are wasteful. Obviously, there are some expenditures that are required – we need to spend money for food, water, clothing, and a roof over our heads, of course. These areas are much like green vegetables – essential to your diet. Beyond that, things start to get a bit grayer until you reach the wastefulness of rampant discretionary spending.
The key to success here is much like how one succeeds like a diet. You won’t succeed by switching to eating nothing but vegetables – if you do, you’ll rebound pretty quickly and be back to where you started. Instead, just find a few areas you can easily trim without reducing your quality of life, get used to those changes (say, after a month or two), then find a few more pieces to trim. Much like a healthy diet.
Saving: How Much Do You Save in a Year?
So, you’re earning more and you’ve got your spending under control, but then you’re left with another problem: you’ve got that leftover money sitting in your checking account. It’s incredibly tempting to just spend it – it’s just sitting there, after all.
Here comes the need to do your strength training. Take that money and start saving it for the future. An emergency fund in a savings account is a great start – follow that with retirement savings and college savings, too.
The key here is to make it into a bill – something you pay as a matter of course. You can make it even easier by simply automating the transfers – have a certain amount scraped out of each paycheck into another account, or have an automatic transfer occur each week. Then you don’t even have to think about it.
Investing: What Shape Are Your Investments In?
What’s next, once you’ve started good savings plans, have your financial life in order, and know where you want to go? You have to start putting your money in places that maximizes your earnings while only facing an amount of risk you can tolerate.
This chapter provides a nice basic guide to investments, but once you reach this part of the equation, I think it’s a great idea to turn to a strong resource on investing. My preferred book on investing is The Bogleheads’ Guide to Investing, which is the most thorough guide to sensible modern investing that I’ve yet read.
Getting It All Together
What comes next? Getting started, of course. Personal finance (much like getting yourself into shape) is all about establishing a healthy routine and sticking with it. There’s no better time to do that than now.
Feitelberg suggests starting by basing your routine around your monthly Net Worth Statement, a sentiment I agree with. Just spend an hour a week getting in touch with your money, then once a month assemble a net worth statement. You’ll find that it pushes you to achieve more.
Is The Net Worth Workout Worth Reading?
Feitelberg really nails one particular aspect of personal finance: the aspect that success in personal finance really is tied to a healthy routine, just like physical fitness is. Setting up a weekly routine of personal finance tasks and devoting an hour or two to learning more about the money options available to you is a brilliant way to start getting in touch with your money and pushing yourself to improve your financial state.
Of course, built onto the structure of that one good idea is a lot of personal finance advice that you’ve heard elsewhere. While it all fits together into something of a system that’s really sensible, The Net Worth Workout might not be the best book to read if you’re in control of your finances.
However, if you’re struggling with getting a grip on your money and find a routine-oriented lifestyle to be comforting, The Net Worth Workout really is an excellent book, well worth reading.