What is a Financial Fitness Quotient?
When starting Blue Collar Budgets, I wanted a quick and simple way for people to know whether or not they were on a good or bad financial path. I needed to create something that was easy to use and could be understood without an advanced degree in Finance. The simplest way to know if you are on a good or bad financial path is to compare your monthly expenses to your monthly NET income. This is how I came up with the idea for the Financial Fitness Quotient.
Monthly Expenses / Monthly NET income x 100 = Financial Fitness Quotient
The Financial Fitness Quotient (FFQ) allows the ability to quickly see how much of your income you are spending, and how much work needs to occur to reach your desired level of Financial Fitness. Although the FFQ is a quick and simple calculation handled by the Grade My Budget application on my website (follow link), the required steps to accurately determine your FFQ can be complex! This is where we can explore further to ensure your FFQ depicts your real-life expenses and income.
For most people who have W-2 jobs, the income part of the equation is relatively simply. Add up all your paycheck amounts (weekly, bimonthly, etc.) and that becomes your Monthly Net Income in the equation above. For those who work “side hustles”, gig jobs, commission based “sales” roles, your income can vary greatly from one month to the next. In order to get a decent understanding of your salary, unfortunately it will take about a year to have enough data to understand the variability in your pay. This is okay because I can still help you during coaching sessions, even if there is uncertainty in your FFQ based on the variability of your income. Once we have a year’s worth of data that goes through various economic, political, and seasonal cycles, we can develop a better monthly income average for your Financial Plan!
The fun part is determining your Monthly Expenses! In my previous blog post, Monthly Income & Expenses, I go into great detail about monthly expenses. I won’t bore you with the details here. If you haven’t read it, click the link and give it a read before you continue with this blog. You will need to understand the important concepts of Financial Location and Budget Bucket before diving deeper into your Financial Fitness Quotient. The fixed monthly expenses (rent/mortgage, utilities, insurances, etc.) are usually readily known or can be easily calculated by taking the yearly amount and dividing by 12. The variable expenses are where things can get messy and cluttered. The important thing to remember is, as long as you are tracking every single dollar you spend, you are headed in the right direction!
The simplest way to track variable expenses is to use the spiral notebook method mentioned in previous blogs. Each time you spend cash, use debit card, or credit card the cost gets written down as soon as you spend it! At the end of the month, you will have a definitive list of your monthly variable spending. The next thing to do is to add it all up and combine it with your fixed monthly expenses for a single number representing your Monthly Expenses in the equation above. All that is left to do is divide the Monthly Expenses by your Monthly Net Income, which is hopefully less than 1. Then multiply that number by 100 to determine your Financial Fitness Quotient (FFQ).
This lets you know quickly do you spend more than you make (values greater than 100) or do you spend less than you make (values less than 100). Ideally, your Financial Fitness Quotient should be under 64; if your FFQ is greater than this, please schedule a FREE 15-minute consultation. The goal is to have your FFQ be as low a number as possible during the first 4 steps of my 12-step Financial Fitness Plan. Once we reach step 5, it is possible that we can loosen the budget reins because we all want to have an enjoyable fun-filled life, as long as we are doing it in a financially feasible way!
Hebrews 13:5 Keep your life free from love of money, and be content with what you have, for he has said, “I will never leave you nor forsake you.”
