Blueprint To A Stronger Financial Foundation
12/17/2020
Perhaps you're starting from scratch, or maybe you just need a little work on your existing foundation to be able to build a better financial future. Think of your finances as a building project that needs a strong foundation. Like most things, doing the work early in a project will influence how that project progresses. Once you have established that solid financial foundation, the work to maintain it and then adjust as your life circumstances change will be easier.
Here's your blueprint for financial success:
1. Plan the work and work the plan – You will need to spend some time to establish your financial foundation, particularly if you are starting from scratch. Don't be put off by the need to set aside a few hours to get started, in fact, embrace it. By being proactive with your finances and establishing a plan to move forward, you will earn the peace of mind that comes when you have a strategy to overcome obstacles. Make good use of a rainy weekend or perhaps a day over the holiday season while you're recovering from family celebrations. Often what seems like an overwhelming situation is not as bad as you may have imagined once you have a clear understanding of the issues.
2. Create the Framework – Sometimes you don't know, what you don't know! This can be a precarious place to be with your finances. Start by gaining a solid understanding of your monthly cash flow by setting up a budget. Include all of your accounts, bills, income, and your debts. Write it down, all of it. Put all of this information into a budget. If you're not sure how to set up a budget, then get some help. You can learn how to set up a basic budget here or use an app like Mint. A budget will form the framework of how you use your money to create a solid financial future.
Having a budget will allow you to discover where you are ‘really' spending your money and help identify items you don't need or are costing you more than you believed. It can also help you identify how much money you could have left for saving or debt reduction if you made a few simple adjustments. Perhaps eating out once a week instead of twice will allow you to save a significant amount each month.
Read more: How To Organize Your Finances And Why It Matters
3. Clear the landscape of debt – Once you have your budget established, you should be able to identify your debts and their minimum monthly repayments. Using your budget, decide how much extra money you can comfortably put towards your debt. Focus on reducing one debt at a time, either the smallest debt or the debt with the highest interest rate. Once that debt is paid off, roll all of the money from that debt payment into the payment for the next debt. Importantly, keep paying the minimum amount due on your other debts while you focus on paying down this one debt.
If you're completely overwhelmed with your debt and struggling to make even the minimum payments each month, you would probably benefit from a credit counseling session with a certified non-profit credit counselor. They can help identify your financial difficulties, provide financial education, and tell you if a debt management plan is right for you.
4. Build Automatically – Establishing a solid financial foundation should include the creation of an emergency fund and savings account. A painless way to build your savings is to ‘pay yourself first.' Have a portion of your paycheck automatically transferred into a separate account each month. Treat this payment as if it is a bill that you must pay. Over time, this regular deposit will accumulate and provide a nest egg or emergency fund. Having a separate savings account provides stability to your financial foundation and can lessen the impact of a financial emergency such as a large and unexpected car repair.
Most banks provide the ability for you to pay your bills automatically as well. This is a great idea to help prevent late fees, if you miss a payment during a busy time. Paying your bills on time also helps to build your credit. Having good credit is another stabilizing factor in your financial foundation and can lead to better interest rates when you're looking to take out a loan for a mortgage or lease a car.
Read more: Spring Cleaning Your Budget In A Post-Pandemic World
5. Build for the future – Invest in your company's 401K or start a Roth IRA. Both of these funds will create a better financial future, and the earlier you start the longer these funds will have to grow due to the magic that is compound interest.
6. Renovate as necessary – Continue to learn about personal finance. Read books, listen to podcasts and read articles. The more you know, the better you will be able to adjust your finances as your life changes. Spend an hour or two every few months to go over your budget and reevaluate your savings and debts.
Once the basic work of establishing a strong foundation has been done, you will be able to build a robust financial future on this solid base. Consistent effort in evaluating your financial structure will pay off in the long term with better cash flow now and a more substantial retirement later.
