T-shirts and Calculators: Building The Right Financial Foundation
by Joshua Lance, CPA, CGMA
For most people, understanding what they should do with their finances is overwhelming. There is a plethora of competing advice that can be confusing and complex. Instead of trying to figure out what to do, most people neglect their finances and hope things will get better. However, I believe there are five simple steps people can take to build the right financial foundation that will put them on the path to financial success.
- Get a handle on your finances.
Knowledge is power and before anyone can build the right financial foundation, they need to understand exactly where their finances stand. Too often, people will jump right into budgeting or making drastic financial cuts without any knowledge on their past spending activity or what assets and liabilities they have. The first step to building the right financial foundation is getting a handle on the current state of your finances. Take a look back at your last three to six months of financial activity. Classify the income you received and the expenses you incurred into different categories and understand how those categories trended over that time period. Create a list of all of the assets you own and the debt you are liable. By doing the legwork to learn about your past financial activity will allow you to make knowledgeable decisions on how to spend your money going forward and what lifestyle choices you need to change to get your finances under control.
- Kill the debt monster
Whether it is a mortgage on your home, consumer debts like credit cards or auto loans, or some other sort of long term debt like student loans, most Americans carry some sort of debt. And most Americans do not see those debts as the financial emergency that they are. In order to build your financial foundation, you need to get rid of your debt as soon as possible, particularly with consumer or student loan debts. These debts not only take away dollars that could be saved to achieve future goals, there is the added interest costs that are providing a negative financial return on those dollars. Take a look at your debts and understand the length of time of repayment and the interest rate being owed on those debts and start chipping away at them. Whether you use the snowball method and go after the smaller debts first or the stacking method and go after those with the highest interest rate, it should be your priority to get out of debt as soon as possible. Doing so will allow you to take those dollars previously spent repaying debt and apply those funds to save for the future.
- Set Your Goals
One of the key areas people forget when they are working on their finances is to set goals on where you want to be financially in the future and how you want to utilize the money you have saved. For some people, they may want to retire or retire early. Some may want to save for a vacation home or for a child’s college education. Others may want to travel the world. Whatever your goal is, it is important to set those goals as part of building your financial foundation. Your ability to save and invest will be fueled by being able to
- Invest for your future
This is the key part of building a financial foundation is creating the habit to save and invest. It does not matter how much you start saving or how much money you invest as long as you start doing it and continually increase your savings and investments, you will be charting the path to get to the goals you have set for yourself. The key on where or how to save and invest is to keep it simple. Keep savings in low risk accounts and invest in index funds and continue to regularly invest in those funds over time. Having your money work for you is critical in reaching your goals and building your financial foundation.
- Try and Try Again
Figuring out your finances is much like riding a bike or starting a new health regime. There will be times you fail along the process. Those who have physically healthy lifestyle may eat too much cake sometimes or miss a few days or weeks of exercising. However, they remain healthy because they pick up where they left off and continue on the healthy habits that they have. The same holds true to financial health. If you are building the right financial foundation, you can weather the speed bumps that come along the way and get right back into your good financial habits that you have built your foundation on.
Building a financial foundation definitely takes some work, but everyone is fully capable of making the changes in their lives and understanding what they want to accomplish from a financial perspective. Doing these five actions will build the right financial foundation in place to help make the right financial decisions in your life going forward.