Why does my car have a four-letter word instead of four interlocked rings on its nose? What can I do to lower the first two digits of my postcode to 20, 30 or 40? Social comparison is how we evaluate ourselves against others. It’s a natural part of the human condition, especially when it comes to understanding how we’re doing financially.

In a short stint at a financial advice firm, I heard a lot of the above when we dug a little deeper into motivations behind financial goals. There is a reason why ‘Which percentile does my salary fall into?’ articles run yearly in major publications.

There is nothing wrong with healthy competition—it can be aspirational. Reaching a financial goal is a marathon. However, we’re not all standing at the same starting line, or running the same distance. It is inevitable that we will make comparisons, but we should try to understand financial fitness relative to our situation, our responsibilities, and our financial goals. Ignoring this can often be to our detriment—taking on extra risk or investing in securities that don’t align with our goals. It can mean giving up if you seem hopelessly behind.

These aspirations are not just misaligned with financial fitness but can also be to its detriment through overextension. Investors should look at their financial fitness only in the context of their own circumstances.

This is where professional financial advice can be helpful. The purpose of a financial adviser is not to get you the best return possible on your investments. Their purpose is to holistically review your financial situation and improve it with the resources you have and with your goals in mind.

Financial fitness checklist

Here is a checklist of the main areas that financial advisers review. Self-advised investors can use it to assess their financial fitness.

1. Establish the foundation 

  • Get debt under control
  • Create a budget and generate a surplus
  • Check your insurance
  • Build an emergency fund 

2. Build wealth

  • Document your goals and create a plan
  • Consider estate planning
  • Review your superannuation
  • Limit the impact of behavioural biases 


Details on each step of the checklist can be found below. 

Establish the foundation

The first step is to lay the financial ground work so you've got a solid foundation to build off.

Get debt under control

Debt is sometimes inevitable. In December, it was announced by the Australian Bureau of Statistics that average household debt grew by 7.3% to $261,492 in 2021–22. 39% of Australians carry debt outside of their mortgage, according to Canstar—42% of respondents had credit card debt, 28% had BNPL debt, and 24% had personal loans. All households have experienced increased costs, as persistently high inflation bites.

Although debt is sometimes inevitable, the never-ending pursuit to keep up with the Joneses explains the popularity of Buy Now Pay Later companies, why Instagram is integrated with a shopping feature to own what you see in a few clicks, and why close to 1 in 10 people have admitted to buying expensive luxury items because of peer pressure. Even as inflation bites, discretionary spending still increased 13.3% in the first quarter of 2023.

Those that have debt such as personal loans or credit cards should focus on debt reduction before all other financial goals. The interest rates attached to these accounts are often eye wateringly high. This is easier said than done. Although debt is a vicious cycle as interest compounds and costs go up, you should know that this is not a lifetime sentence. Speak to a professional at the National Debt Hotline for guidance. They are a not-for-profit, free service that can assist you with structuring your debt.

There are also ‘good’ and ‘bad’ types of debt. ‘Good’ types can be associated with education costs, such as a HELP debt. They can also be associated to assets like your home or investment property. Generally, investors with these ‘good’ types of debt do not need to have a sole focus on debt reduction.

Have you got a mortgage and you’re not sure whether to pay that down before investing? This article explores the considerations for investors.

Create a budget and generate a surplus 

A sustainable surplus is the basis of a good investment strategy, as it allows for consistent additional investments. Again, this is difficult for those in certain circumstances, such as contractors and those that are self-employed.

The best way to ensure that you have a sustainable surplus is a budget to understand your cashflow. Understanding your spending habits will allow you to be aware of where your funds are going and can often make you cognisant of unnecessary or unplanned spending.

Unplanned spending can be valid, but largely is linked to those impulse purchases that we make on non-essential items. Understanding your behaviour is the first step to maintaining a sustainable surplus and building wealth.

Morningstar’s Personal Cashflow Statement provides a basic outline of this process.

Check your insurance

There is an insurance product for almost everything these days. We’re going to focus on personal insurances in this section, as that is what is focused on in the financial advice process.

There are three main types of personal insurance—Income Protection, Life Insurance and Total and Permanent Disability (TPD). These insurances may or may not be relevant to your circumstances. In general, the considerations are the following:

Whether you have dependents—if you don’t—who would be the beneficiaries of a life insurance policy? Determine whether it is necessary.

The level of cover—MoneySmart has an insurance estimator, but you can also seek professional advice regarding what level of cover is sufficient.

Whether to hold it in or out of super—depending on the policy and your circumstances, the net cost of the insurance policy might be better if held in super.

Build an emergency fund

I’ve written and spoken about emergency funds a lot (for example, here and here). They’re important to ensure that you are not put under financial stress, and to ensure that you are not forced to sell assets when you are building wealth.

The general rule is 3 to 6 months of expenses, but this may change depending on your circumstances. You might want a larger buffer if you have dependents, if you do not have income protection insurances, or if you are self-employed or a contractor.

Emergency funds are tempting. They are meant to be there as readily accessible amounts of cash to help with unexpected expenses. This also means that there is a pile of money there that’s readily accessible for unexpected expenses that aren’t necessary. I’ve found holding my emergency fund in a separate bank altogether helps—out of sight, out of mind.

For people that find this tempting still, write out the conditions that justify release of funds.

Build wealth

Now you've laid the foundation, it's time to work towards your financial goals.

Document your goals and create a plan

When financial advisers look at building wealth, this is where your financial goals come into consideration. Whether you want to own a house, whether you want to travel, how many children you have—your personal circumstances, capacity and goals are the main drivers here.

Christine Benz, Director of Personal Finance at Morningstar has written about how her idea of wealth has evolved over time. It speaks to how the perception of wealth started with earning the respect of her peers through material belongings and how she defines wealth now.

The main point for building wealth is to understand that there are no quick fixes. This is where financial advisers can add value. Showing people the journey, and how they get from where they are to their goal is a motivator. Self-advised investors can replicate this through an Investment Policy Statement (see below), and going through the Portfolio Construction process. The key here for investors is defining goals, instead of starting with investments. These goals should be your north star for all of your financial decisions.

Morningstar has a few resources that can help with this process, including an outline of how to construct a goals-based portfolio, and putting together an Investment Policy Statement (IPS)—a tool used by professional investors to outline their investment strategy.

Consider estate planning

Some people want their savings to run down to $0 perfectly timed with the day that they leave this earth. Others want to leave behind an inheritance—whether that is to loved ones, or philanthropic.

Estate planning is an oft-forgotten part of financial fitness. It is not something that you set and forget—and must be reviewed at every life stage and every change in circumstance—new life (kids, grandchildren etc.), death, marriage, divorce, re-marriage, long lost siblings. Whatever your circumstances, ensure that your intentions are known—and legally binding.

Review your superannuation

Superannuation is the first place where a financial adviser adds immediate value. Usually, investors who have never reviewed their super are in funds with mismatched super, relatively high fees, and the wrong mix of assets. It pays dividends (literally) to get this right early. Financial advisers can save you thousands of dollars over the years, simply from reviewing your super.

Superannuation is likely the second largest asset that you will own, and sometimes the largest asset if you do not own property.

A comfortable retirement, for the duration of your retirement, is becoming more difficult. The expected returns for the medium to long-term are projected to be a lot less than most investors expect, and have received, in the recent past. Adding to this, retirement savings must last for longer time periods as our life expectancy rises.

As part of Morningstar Investor, you get access to a portfolio projection tool that allows you to project an investment balance, adjusted for inflation, at a future date. Although this does not take tax into account, it gives you a good understanding of what your final superannuation balance.

MoneySmart also have a great calculator that allows you to see the same projection but shows you how many years of your retirement will be self-funded, and which will be supplemented, or wholly, by the age pension. Playing with the variables allows you to see how you can change your outcomes. The longer your time horizon, the larger the difference smaller contributions can make. The website also has a superannuation optimiser calculator that allows you to see how you can optimise your superannuation contributions given your taxable income.

If you’ve never reviewed your super, you can start with my guide to reviewing super here.

Limit the impact of behavioural biases 

Behavioural coaching is where a lot of financial advisers can be invaluable to investors.

As humans, we are often irrational with the decisions that we make when it comes to investing and money. This is exacerbated in times of stress, when markets are volatile or undergoing a shift. This is especially true when we are trying to compete with returns others have achieved, or when we feel like we aren’t maximising our returns.

Having a financial adviser create a comprehensive plan and strategy helps us navigate through these periods. Daniel Kahneman, author of Thinking Fast and Slow, outlines the biases that humans have. The central message is if we want to make better decisions in our personal lives and as a society, we ought to be aware of these biases and seek workarounds. The same holds true for individuals when it comes to money and investing.

This is why Investment Policy Statements are important for self-directed investors. In lieu of a financial plan, an IPS will keep you focused on achieving your goals and help prevent irrational decisions.

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