5 Steps for Building a Strong Financial Foundation
Do you want to be the master of your money?
So many people crave financial health but feel less than satisfied with where they are. Our recent survey found that just 34% of participants feel that they’re doing well financially. That leaves a sizable amount of the population in need of guidance and support. So how can we all get to a place where we’re empowered with our money?
The key is to build a financial foundation that takes care of you now while supporting your future goals. Putting that structure in place is surprisingly straightforward. If you want to boost your financial confidence and set yourself up for success, this five-step method will help get you started.
Step 1: Get organized
Before you do anything else, get crystal clear about where you are right now with your money. Yes, you’ll need to round up some documentation, but this one-time exercise provides an invaluable baseline view into your financial health.
Start by building a personal balance sheet—which is simply a summary of your assets (what you own) and liabilities (what you owe). Your assets may include things like your bank account balances, investment holdings, a home, family car(s), and more. Your liabilities are the debts that you owe—like a mortgage, an auto loan, a personal loan, credit card debt, and so on. List out each asset and liability individually on a single sheet of paper. This is your personal balance sheet.
Once you have all your data, you’ll have a general sense of your net worth by adding up all your assets and subtracting your liabilities. Now let’s look at your monthly cash flow—which is every source of income you have and the expenses you have on a regular basis. (A budgeting template, like this one from the FTC, can make this process easy!).
Finally, check in on your credit. You’re entitled by law to a free copy of your credit report from each major credit bureau.
Step 2: Protect yourself
Now that you know where you stand, it’s essential that you put a plan in place to keep you financially safe along your journey.
- Emergency Fund: If you don’t already have one, you’ll need to focus on building an emergency fund. (Check out our step-by-step process for getting yours up and running.) An emergency fund is a must-have for keeping you financially afloat—versus dipping into debt—when facing an unexpected cost, a job loss, or other crises.
- Insurance: Check your insurance coverages. Insurance policies limit your out-of-pocket expenses when unforeseen things occur like medical costs, car accidents, disabilities, and even death. Even if you have coverage in place, you’ll want to review them as your lifestyle or family makeup may have changed since you purchased the insurance. You may be able to find a cheaper policy.
- Estate Plan: Create or update your estate plan, which is simply a set of directions you provide about how what you leave behind is handled when you die. Estate plans may include naming your heirs, dividing up your assets, creating a trust, and assigning guardians for minors.
Step 3: Prioritize debt reduction
While some debt may be beneficial for your financial situation, you should be mindful of over-extending yourself because paying interest on any money you’ve borrowed can keep you from putting money toward your other financial goals. Focusing on debt repayment is a great way to free up cash and build that financial foundation.
Consider implementing an accelerated debt repayment strategy like the debt snowball method. Also, to simplify your debt payments and maybe knock down your interest rate, look into consolidating your loans or credit card debt.
Step 4: Define your financial goals
You’ve put the pieces in place to build the future of your dreams. So what do you want? Now is the time to spell out exactly what goals you have for both the short term and the distant future. Write them down, and make your goals SMART: Specific, Measurable, Achievable, Realistic, and Time-bound.
Ready to start brainstorming? Here are a few ideas to get you started:
- Build an emergency fund.
- Pay off high-interest credit card debt.
- Save for a down payment on a home.
- Improve your credit score.
- Learn how to invest with confidence.
- Set up vacation fund and budget to avoid putting it on your credit card.
- Look into a secondary stream of income.
- Retire by age 65.
Step 5: Make it happen
Once you’ve got your balance sheet and goals in writing, marry the two by identifying the areas for improvement in your current financial situation, and how you can make changes to get to your goals.
Once you’ve got your balance sheet and goals in writing, it’s time to get moving! Remember, your goals need to be achievable and realistic, so don’t overwhelm yourself by trying to accomplish them all at once. Maybe step one in building your financial foundation is opening a bank account to start your emergency savings. It could also be opening a retirement account or calling an estate lawyer to iron out your estate plan.
- Have discipline: No matter what your goals are, sticking to the plan you just created and checking off your goals one by one will keep you progressing.
- Budget: One of the most important aspects of a financial foundation is a balanced budget. you can’t be financially healthy if you spend more than you earn! Use the balance sheet you created to build a budget that reflects the reality of your income and expenses.
- Automate: Make life easier by automating as much as possible like setting up recurring money transfers from your paycheck to special savings accounts or automating your bill payments so you never miss a due date.
Building a financial foundation takes focus and effort. But when you follow your step-by-step process, you’ll see real results with your money and gain confidence in your ability to create and stick to a financially healthy life.