Want to live a life that feels satisfying and lets you be your best self? While it might come as a surprise, a sound financial foundation is an important part of the journey.
That doesn’t mean that you have to have a lot of money or that happiness and fulfillment are associated with a dollar figure. But a stable foundation is key not just for financial success but for living with an easy mind.
Good financial health hardly occurs without deliberate planning. Your approach to savings and debt forms the cornerstone of your financial life. It also affects your relationships and your career moves. Likewise, making moves toward better financial stability can improve your mental health.
With the right financial plan, the strain of saving for retirement, saving for college, making payments for a mortgage, and taking on other high-cost endeavors is more manageable. By getting informed and having the right mindset and attitude, you can secure your financial future.
This guide will examine measures to take to build a solid financial foundation. We’ll also detail the initial steps to take when building a foundation. Read on to learn simple habits that can boost your monetary well-being.
What is a financial foundation?
Your financial foundation forms the core of the life you plan to live. This foundation is the mix of habits and practices that make up your financial life.
Like the foundation of a home—a financial foundation requires strong building materials. Healthy saving, budgeting, and spending habits support the life you want today and in the future.
Without the right base, you can struggle to meet financial and even personal obligations.
In the U.S., poor financial foundations have caused many to struggle with living expenses. Around 44% of Americans can’t afford an emergency that requires $400.
Poor planning may affect the income of entire family units. Almost 38% of households in the U.S. have credit card debt.
A poor financial situation can cause a person to live paycheck to paycheck, in spite of earning a decent income. Similarly, living in chronic debt can negatively impact your mental health and create chronic stress that damages your physical health. It can be hard on the people around you as well.
What are the 5 components of a financial foundation?
A steady income, a home of your own, or a rented space you enjoy are wonderful accomplishments. But a job and a home may not be enough to provide and protect your financial security.
The following are important pieces that should form the foundation of your finances. They include:
- Budgeting
- Emergency funds
- Savings
- Investments
- A 401(k) plan
1. Budgeting
When getting on track to financial security, one of the first things you should do is craft a budget. This means drawing up a list of your expected income and expenses for the week, month, or other suitable time frames.
Your foundation relies on how well you’re able to navigate financial situations. By keeping track of your spending and sticking to a budget, you can maintain control over your financial life. Think of a budget as a spending guide. It keeps you within the limits of what is safe for your earning power and potential needs.
2. Emergency funds
For many households, one health emergency could cause a spiral toward bankruptcy. Recent surveys show that only about 50% of Americans have emergency savings.
Life is full of unexpected events. The loss of a job, declining health, or major home or auto repairs can quickly put a strain on your finances. Worrying about these types of events, unpredictable and inevitable, puts a strain on every aspect of your health and well-being.
To guard against this and gain peace of mind, financial counselors often recommend setting money aside as a buffer for the unexpected. Ideally, you save enough money to tide you over for 3-6 months in case of an emergency, but even a month's expenses is a meaningful goal.
You can build your emergency fund through monthly contributions. A simple monthly contribution of $100 can be all you need to begin.
3. Savings
You can also secure your foundation by putting money aside for short-term goals. Your checking/savings accounts can receive any excesses from your income. The interest rates on these accounts aid planning for a vacation, expensive home device, minor car repairs, etc.
By having a separate account, you’ll learn the benefits of keeping money aside for future use.
4. Investments
Investments are one of the most passive ways to make your money grow in value over time.
There are different investment options available. But to protect your interests, proper research should be done before deciding on a choice.
This is because investments can often come with risks. Returns on investment may also be hard to predict.
Common investment choices include stocks. These allow you to own a portion of a corporation. You can also invest in bonds from the government or a company. Another option—mutual funds, permits you to invest in a pool of security options.
The investment you choose will depend on your age, financial situation, and personal preferences. But there are a variety of options to choose from.
As we mentioned, the markets fluctuate. So, to make the best choice for you, be sure to speak with a financial advisor or an expert in the area.
5. A 401(k) plan or other retirement account
Your financial foundation should offer support for your emergency, immediate, and future needs. Taking advantage of a 401(k) plan offered as a benefit from your employer can see you through life after retirement.
Where your employer provides this option, you can choose to go traditional or Roth. During salary negotiations, you can also discuss 401k employer matching contributions with your employer.
On types, a traditional 401(k) allows you to reduce how much of your income is taxed. This option makes contributions from your pre-taxed income.
The Roth 401(k) plan makes contributions after your paycheck has been taxed. This option allows tax-free reductions when you retire. Your retirement plan stands to gain from taking advantage of either savings account.
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How to build a strong financial foundation
The good thing about building a financial foundation is that you do not have to be at the height of your career to get started. You could be fresh from school, or with decades of work and life experience. At any stage you have an opportunity to take action and plan for the life you would like to live.
You also don't have to do it alone. There are many types of financial coaching and counseling available. While we often see advertisements aimed at the higher end of wealth management, financial advisors aren't the only source of help.
To get a home to stand firm, concrete footing, a foundational wall, and a floor slab are required for building. Similarly, structures must be in place to lay the groundwork for your financial life.
Any good foundation takes time to build. A financial base is no different. The following are ways to build a strong structure:
- Get your affairs in order
- Make long-term goals
- Prioritize ways to protect yourself
- Pay off debts owed
- Develop a tax strategy
Get your affairs in order
Before starting a foundation, it’s important to take note of the materials available to build. This means your financial well-being requires a look at any assets. Consider your cars, home, jewelry, etc—examples of the property you own.
For a full picture, you’ll also need to account for your liabilities. Student loans, credit card debt, and other monies owed will fall into this category.
By writing out your assets and liabilities, you’re in a good position to calculate your net worth. This is worked out by adding up your assets and subtracting your liabilities.
Your net worth gives a clear understanding of your financial status. This allows further building plans to take place.
Make long-term goals
The foundation of a home is built with a structure in mind. In the same way, your financial foundation should be geared towards defined goals.
This means making plans for your savings. For instance, money set aside outside an emergency can be towards a goal. Your aim could be for a down payment or other similar purposes. Goals can prevent your savings from being carried out without guidance.
Your financial foundation can also enjoy a clear roadmap to increase your earnings. Making provisions towards additional income streams can support your financial life.
Ultimately, you should also make plans for a future where you no longer work. Early on, you can identify the age you wish to retire, and how much you expect to have in the bank or as passive income.
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Prioritize ways to protect yourself
Your financial foundation should achieve at least two things: financial security and stability. This means putting measures in place to protect your monetary life.
Emergency funds offer clear benefits for unforeseen circumstances. Job insecurity can be a tremendous source of stress that can even affect your performance. Knowing that you have other prepared for contingencies can ease that stress.
Sometimes, emergency funds can fall short in providing the needed support. Insurance coverage can be important in case of a health emergency, job loss, or a death in the family and supplement whatever you have in place. Your coverage should accommodate your earnings, lifestyle, and family needs.
A good financial foundation also makes it easier to care for loved ones. Estate planning helps keep a family’s future safe. It also clarifies how else assets should be divided, or what trusts may be created. By leaving no doubt as to who is entitled to what, proper estate management also helps preserve relationships and avoid unnecessary stress.
Pay off debts owed
Living without debt is a top financial goal for many. This lifestyle directs your cash flow straight to your desired needs.
Accumulated credit card debt, a mortgage, etc, can limit your income. To avoid legal issues, a lender must receive his percentage of your earnings.
You can, however, build your finances by organizing your debts. This should be followed by a plan to pay off higher or lower interest debts first. With the former, you can bite the bullet to clear off the heaviest hitting loans early. Smaller debts can then be struck off afterward.
In reverse, lower interest loans can be paid off first. This allows cash flow to accumulate for treating larger debts.
Paying debts off can improve the income available to meet financial goals. This approach is also invaluable for building your credit score.
Develop a tax strategy
A financial foundation relies on smart habits. In particular, you can take advantage of opportunities that reduce your tax liability. Fringe benefits you get from the workplace like monthly car insurance, or education expenses do not get taxed. The same goes for other employer benefits.
Where possible, you might decide to start a business as part of your tax strategy. This allows deductions for operating costs like business equipment and marketing efforts.
Consult with a tax professional before making significant changes for tax reasons. Consulting a tax expert is an investment in your future. These specialists can advise on tax-saving strategies.
Tips for building a stable financial foundation
Any solid foundation should withstand the pressure placed on it. With the right mindset and financial practices, you can build a stable foundation. Certain tips can help you through this process. They include:
- Be disciplined about your financial goals
- Learn to distinguish between wants and needs
- Make a habit of checking your credit score
- Take the necessary steps to pay off your debts
- Track your savings and expenses through a detailed budget
Very importantly, remember you are the rock your financial foundation is built on. While framing your financial life, be sure to care for your well-being. This means keeping your physical and mental health in check. Simple self-care practices like exercise, yoga, and breathing exercises can keep you in good health.
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