ABCs of a Solid Financial Foundation
A strong foundation is possibly one of the most crucial aspects of your financial journey and it can help with feeling secure and therefore may be helpful for the mental health relationship to finances we discussed last time. And this is true whether you're just starting your journey or if you are looking to strengthen your financial knowledge. The ABCs of personal finance can help no matter where you are in your financial journey.
First let’s talk about why building a strong financial foundation is so important. A solid financial foundation serves as the backbone of your financial health. It provides stability, security, and peace of mind. And having a solid foundation allows you to weather unexpected storms, like job loss or unexpected big repairs, and perhaps even seize opportunities for growth.
"A" – Assess Your Financial Situation. What does it mean, and how can you do it effectively?
Assessing your financial situation involves taking a close look at your income, expenses and also your assets and liabilities. You want to start by creating a budget and tracking your monthly income and expenses. You want to understand where your money is going and identify areas where you can cut back on unnecessary spending. This gives you a clear picture of your financial standing which will allow you to make informed decisions moving forward.
If you have already established a budget and are maybe a bit further along in your journey, it’s always a good idea to re-assess where you are. This could be things like checking your investments to make sure they are still yielding what you desire or adjusting savings goals where needed.
Simple things like a job change or buying a new vehicle or moving can all change your financial budget and plan. So, it’s important to revisit your goals and your plans periodically.
"B" – Build an Emergency Fund. Why is an emergency fund so important?
Building an emergency fund is critical in order to handle unexpected expenses without derailing all your financial plans. A great goal is to save three to six months' worth of living expenses in your emergency fund. This serves as basically a safety net during challenging times, such as medical emergencies, job loss, or major car repairs or home repairs.
It’s important to revisit this fund as well. If you use some of the funds, make sure you build them back up. A job change or moving to a new home can change the amount you would like to have in the account. The goal amount may change from time to time, so be sure and make adjustments as needed.
"C" – which is Control Debt. How can we do that? How can we reduce our debts?
It’s so important to keep your debt under control. Start by prioritizing high-interest debts, such as credit card debt, and work towards paying those off first. Start with the highest interest rate card first and put all you can toward it. You could even just do the minimum payment on other cards and use the extra you would have paid on several to focus on just one. Then once you have it paid off, do the same with the next one and so on.
Debt consolidation is another option. And while that can be a great idea, be careful on how. There are places out there that offer consolidation options that can actually hurt your standing with creditors. If you want a loan of this type, consider speaking with your credit union or bank first. They can help you understand debt consolidation and help you explore your options.
You may also be able to negotiate lower interest rates to ease the burden as well.
Avoid taking on additional debt unless it’s absolutely necessary.
And lastly, its best to Focus on living within your means.
"D" - Develop a Long-Term Savings Strategy.
This goes beyond emergency savings and has a very specific purpose. This is more about other, more long-term financial goals which could be things like buying a home, an education fund, saving for retirement. The idea here is to establish specific and achievable goals. Then, explore different investment options, such as retirement accounts and brokerage accounts, to grow your money over time. Consistency and patience are key when it comes to successful long-term savings. We are all used to instant results these days and this is very much NOT that. This is about investing and growth over time.
"E" - Educate Yourself.
Financial literacy is the foundation of sound decision-making. Educate yourself about personal finance topics, read books, listen to podcasts, and take advantage of online resources. Attend financial workshops or consult with a financial advisor if needed. The more you know, the better equipped you are to make informed choices that align with your goals.
And the truth is, you may need to learn about some basics, we all need it. Then it’s time to move to more in depth topics that go beyond a basic savings or checking account can trip you up.
You don’t know what you don’t know right? So, ask questions. Even if you don’t know what to ask. Visit with your credit union and tell them what you would like to do and ask for their guidance to get you started.
Investments are kind of a whole new level to financials that can be hard to understand. A financial advisor can be a great place to start to help with that.
You can also visit your HR department to get information about savings or retirement accounts available through your employer. If you need more help understanding those accounts, your credit union or financial advisor are again, great places to ask.
There is always someone that can help. Keep asking until you find who you need!!
"F" – Focus on Retirement Planning. Why is it essential to start planning for retirement early? And what steps you take to secure your future?
Starting early with retirement planning allows the power of compounding to work in your favor. If you have it available to you, contribute to retirement accounts, such as a 401(k) or IRA, and take advantage of any employer matching contributions. Employers will often match or give a percentage of what you give. So, you could easily double your contribution this way!
Start by setting specific retirement goals and then regularly review and adjust your investments to align with your changing needs and risk tolerance. When you’re younger you may be willing to allow riskier investments as you won’t need the money as soon. So, if you lose a bit, you have time to make it back. If you are older and getting closer to retirement age, you may want to be a little safer with your money and hopefully not lose any.
"G" - Give Back to Your Community. How can charitable giving can be a part of a strong financial foundation?
Giving back to your community is not only fulfilling, but it can also be a part of your financial plan. It’s important to incorporate charitable giving into your budget. Find causes that resonate with you or that are important to you. Your donation can be money or it could be time or skills. Any of these will make a positive impact and helping others helps create a sense of purpose in your financial journey. Every bit of help an organization gets helps them move forward. Success for one, can help in the success of another. Building each other up and giving of ourselves is an important part of community and success.
Bonus tip! The letter I! Invest in yourself.
This can be a variety of ways.
Self-care – getting away and doing You things. Try not to wait until you need it if you can, that way you aren’t just reacting. You could also have a regular date night with yourself, take yourself to lunch or to the coffee shop.
Health care – make sure you are healthy, go to the doctor when you need to. Eating right, getting exercise all make you healthier.
Investing could be in your education – bettering your situation by getting training or learning something new can help you get a raise or a new position which can help you feel more financially secure.
You can also learn something new just to make you happy. Like finally taking that cake decorating class or that photography class.
Be open to new ideas and trying new things.
We never stop growing and learning.
So what were our ABCs? Assess, Build, Control, Develop, Educate, Focus, and Give, and of course, Invest in yourself – these are the pillars of your financial success. I truly believe if you take these steps to heart, and you'll be well on your way to achieving your financial goals.