Can You Touch Your Financial Toes?
During my years as a gymnastics coach, I learned two principles about physical flexibility: some people are much more naturally flexible than others. But anyone can increase their flexibility through regular stretching. The same truths about physical flexibility apply to fiscal flexibility, but with even more capacity to increase your financial stretchiness. Because your money habits are easier to change then your DNA!
Financial flexibility is an accounting term that describes “a company’s ability to react to unexpected expenses and investment opportunities.” We find this concept useful for personal finance as well. What options would open up if you could live on half your current income? How easily could you weather a job loss or unexpected illness?
Whether you are counting down to financial independence or just starting to get out of debt, focusing on financial flexibility allows you to enjoy the journey and live for your values, not just your job. So let’s break down the definition and consider how flexible your finances are by considering how poised you are to respond to unexpected expenses and opportunities.
Responding to Unexpected Expenses
Do you have an emergency fund? Perhaps the worst financial advice I’ve heard is that you should have a credit card for emergencies. No, you should have an emergency fund for emergencies! Everyone should have an emergency fund of at least $1,000, but preferably enough to cover six months’ expenses.
We all know that “life happens.” You may get in a car accident. You or your child could get sick and rack up medical bills. Sometimes people get laid off. Bad things happen to good people, but smart people are prepared for inevitable bumps in the road of life.
Do you have any debt? In our view, personal debt makes you inherently less flexible. It limits your options because it increases your expenses and the amount of income you must make to survive. It means your money is spoken for before you even earn it, because it actually belongs to someone else. The proverb “The borrower is slave to the lender” expresses the emotional impact of debt well.
Carrying consumer debt is a highly inflexible position. You are effectively paying extra for your expenses since you are charged interest. It’s also a difficult trap to escape since accumulating interest makes repayment progressively harder over time.
There are times when debt is an appropriate financial decision. Neil took $25,000 in student loans to complete a five-year engineering program. Considering his earnings since graduation, he’s enjoyed a good return on this investment. But we also decided to reduce the amount of interest owed by paying them off early.
Carrying student debt makes it harder to take risks required to grow your career. Having no student loans made it easier for Neil to leave a good job at a Fortune 500 company and change industries into a more rewarding job. It also helps allow me to stay home with our young children. And we’ve been freed to focus on other goals, like saving for our children’s education.
Mortgage debt may also be reasonable, but keeping it in proportion with your income is key. Common advice is to limit mortgage payments (PITI) to no more than 25% of your monthly income. Pre-paying the mortgage makes sense to us as we wish to gain the flexibility that comes with lowered expenses, while others prefer to direct those funds to increasing investments.
Responding to Opportunities
The second side of touching your financial toes is responding to opportunities. Have you ever said “no” to a great opportunity because of money? Do you limit your travel, volunteering, giving, or fun because of money?
Unless you’ve already achieved financial independence, you probably answered yes. While we can’t do whatever we want without any concern for money, the lens of flexibility allows us to make values-based spending a reality. On the one hand, we are not constricted by the burdens of excessive debt and over-spending. At the same time, we refuse to pursue financial independence at the expense of our big-picture purposes.
Try to get a vision for how your options would increase along with greater financial flexibility. Maybe you want to focus on family, pursue a different career, or become self-employed. Pursuing financial flexibility should make you more available to spend time in ways that are rewarding and meaningful.
For us, financial flexibility allows us to travel on several family vacations and church retreats each year. It allows us to forgo side hustling in favor of spending time with family, friends, and our volunteering commitments. Flexibility encourages us to be generous, even if it means saving less, because we know we have ample resources to share.
As flexibility increases, saying “no” to opportunities should come from your values rather than your bank balance. We say “no” to over-spending on what we don’t value, like frequent dining out, overpriced children’s activities, or driving new cars. But we also feel free to say yes to pricey opportunities like short-term mission trips, having children, or sponsoring children in poverty. These endeavors are well-worth their cost, but if we were bogged down with debt or lacked sufficient savings, we would miss out or end up in debt.
How close are you to touching your financial toes? If you have emergency savings and little to no debt, you pass the stretch test! If not, remember that flexibility is a trait anyone can work to increase. Dream about the opportunities flexibility would open for you, and then make a plan for progress. Focusing on flexibility celebrates that every step is an inch closer to touching your toes.
Have you ever said “yes” to an expensive opportunity? What was invaluable about it? What is your next step toward touching your financial toes?