When building a new home there is one key step that should never be skipped, that is pouring the foundation. A home’s foundation is incredibly important to the durability of the building. Not only does it bear the load of the building, it keeps out moisture and holds it steady against the movement of the earth. If a foundation is not done correctly it adversely affects the integrity and stability of the building. And without that stability, the house cannot be assured to stand for a long time.
The exact same philosophy is true for building a financial foundation of your own. If you do not take the time to get things set up properly, your finances will be subject to the damage of economic ebbs and flows and inflation. That is not to say that we are not all affected by those things, but some people feel the impact of them more than others. Why, because they do not have a solid financial foundation that can withstand the test of time. This is the importance of a strong financial base.
What is a Financial Foundation?
For our discussion, we are talking about the key elements necessary for stabilizing your financial house. The two elements that are essential are designated savings and the reduction of high-interest debt. When these two areas are stable you have much more freedom in your financial life. Let’s discuss each one in detail.
Let me say this first. A savings account will never make you wealthy. Making money and just putting it into a savings account with no purpose is like burying it in the ground. It’s not a plant it will not grow. So all those lessons you were taught about save, save, save and you will be rich were not correct. Savings has a place in your financial journey but it should always be designated. The purpose of a savings account is to store cash for 3 reasons only:
- An emergency fund (6-12 months of expenses)
- Hold money for investments, or
- collect capital for bigger purchases
Your first money goal is to determine your monthly expenses and multiply that number by 6. Once you have that number written down. That is the first amount you need to get set aside. Now twelve months is a better cushion but 6 months is a start. Next, take that amount and divide it by 26. This math will allow you to see how much money you need to set aside for the next 6 months to hit that goal in that timeframe. Now DO NOT panic. Remember our mindset work. YOU CAN DO THIS.
When you have this six months’ worth of savings set aside, imagine what you can do. Take the time to feel the freedom of knowing that if anything happened to you at that point you and your family would have a cushion that they could maintain your current lifestyle before having to find the next source of income. Now imagine how much more at ease you would be if you had twelve months stored away. Once you have hit the goal which you have chosen to achieve that account just sits there. That is for emergencies that do not allow you to cover regular expenses. If and when you dip into those funds you must always replenish it to your designated amount as quickly as possible.
Eventually, you will need to put money aside for bigger purchases and investments and your savings accounts can do that. Each time you create a new savings goal put the money in its own specific account. Remember savings should be designated. You don’t want to comingle these savings because you do not want to be tempted to pull more money from another account when you don’t need to. For right now though set the emergency fund goal and let’s work.
Decrease High-Intrest Payments
What is a high-interest debt? A definition would be debt that carries an interest higher than vehicles that would be considered good debt. When you think of high-interest debt, that typically includes credit cards, payday loans, or personal loans. It is important to pay these down and or off for several reasons. The interest will eat up at whatever gains you make in cash flow or investments. If you find an investment that brings you a return of 10% or more what good is it if you are paying 29% on debt.
The main goal here is to eliminate this type of debt. First you have to determine what must be eliminated. In a previous postt we reviewed how to determine your liabilities. This list will become your goal sheet for paying down your debt. At this stage you want to rid yourself of this debt by any means necessary. Look around your home sell what you don’t use. Down-size if necessary. Negotiate lower bills with your phone or utilities complanies. If you are serious about turning your financial life around it is very important the you remove these obstacles from your foundation.
This is going to take time and effort. As much as I want you to live a more financially solvent experience, if you haven’t built this foundation at a certain point in your life it is not going to be easy. But regardless of ease, it is absolutely possible. Stick with it and don’t give up.
I would love to know in the cooments below if you feel there are any other elements to an essential financial foundation. What have you been taught about savings? Do you feel like this method would give you more freedom? Let me know.