In the maze of life, one thing is crystal clear: without a solid financial foundation, we’re navigating without a map. Whether you’re just starting your journey into adulthood or looking to strengthen your fiscal foothold, building a strong financial foundation is essential. But fear not! With a little discipline, guidance, and strategic planning, you can pave the way towards financial stability and peace of mind.
First things first, let’s talk about budgetingAh, the dreaded B-word. But trust me, it’s not as daunting as it sounds. I started with Mint when it first came out, but also found it restricting and inaccurate. Personally, I like to use my own Excel spreadsheet because no app is going to track my financial picture exactly how I want it to be tracked. And everyone’s financial picture is different. Why use something to track a part of your life that is so vital if it cannot give you accurate information? Take time to create your own spreadsheet to reflect your specific situation. Check out a few screenshots of my own net worth and cash flow tracker, below:
Personal Balance Sheet:
Personal Cash Flow Statement:
If you do not want to, or have the time to, create your own budget, there are some good paid-for apps out there (unfortunately, after the closing of Mint, there is no longer any truly free budgeting apps – at least not any that are as robust as Mint). YNAB (You Need a Budget) is the best paid for budgeting out there, currently. You also see banks and other financial institutions putting out their own “budget trackers”, however, I don’t recommend these. They can act as a nice, quick glance at your numbers, but they often cannot do what most full-fledged budgeting apps can do and they are less flexible and accommodating to your specific needs. YNAB is so handy when it comes to tracking expenses, categorizing them, and even sending alerts when you’re approaching budget limits. It’s like having a personal finance guru in your pocket. Whether you choose a paid, free or custom-made budget, as long as you choose something, you are doing great. I don’t recommend winging it; a detailed budget gives you a clear picture of where your money’s going and where adjustments can be made.
Next up, emergency fundsPicture this: unexpected car repairs, sudden medical expenses, or even a global pandemic (cue dramatic music). These curveballs can wreak havoc on your finances if you’re not prepared. That’s why I recommend stashing away three to six months’ worth of living expenses in an easily accessible savings account. I like to think of it as my financial safety net – there when I need it, but hopefully collecting dust most of the time.
Now, if you work for an employer, you can kind of hack this a bit, depending on your cost of living. Because you can often get unemployment insurance if you are laid off, you can potentially factor that into your emergency fund. For example, my monthly living expenses are around $5,000 per month. If I became unemployed, I can collect the maximum monthly unemployment insurance in my state of approximately $2,000. Which means 40% of my expenses are covered every month for 26 weeks. Check your state to see your specific circumstances. Nonetheless, I would still keep at least 2 months of living expenses ($10,000 in my case) on-hand in case of emergency.
Now, let’s talk debtDebt can feel like a dark cloud looming over your head, but it doesn’t have to be that way. When it comes to debt, I don’t like to ignore it and hope it magically disappears. Instead, I tackle it head-on with a strategic repayment plan. I recommend starting with high-interest debts first, like credit cards, while making minimum payments on the rest. Once the high-interest debts are gone, you can snowball those payments into tackling the next debt on your list. It’s like a financial domino effect – one debt falls, then another, until you’re debt-free.
Caveat – sometimes it pays to hold some personal debt. Especially when the interest rate on that debt is lower than what interest rates are paying out. Or when the debt is used strategically to finance investments that have the potential to yield higher returns than the cost of borrowing. It’s important to consider the purpose and terms of the debt before taking on additional financial obligations. When managed responsibly and used as a tool for wealth-building or asset acquisition, debt can be leveraged effectively to enhance financial flexibility and achieve long-term goals. However, caution should always be exercised to avoid excessive or unnecessary borrowing that can lead to financial strain or instability.
Investing – the golden ticket to wealth building I recommend starting small with low-cost index funds or exchange-traded funds (ETFs). These diversified investments offer steady growth potential without the stress of picking individual stocks. Plus, thanks to the magic of compound interest, time is your best friend when it comes to investing.
Choosing individual stocks can be daunting, for beginners and experts. It requires time-consuming research and a good understanding of the stock market. With index funds and ETFs, you delegate the stock-picking to professional fund managers who aim to match the performance of the chosen index. This approach saves you from the stress and uncertainty of picking winners and losers in the stock market. No need to worry about a company going bankrupt or falling in price significantly.
Insurance – the unsung hero of financial planningI used to view insurance as just another monthly expense, but this is not a great way to look at this. Whether it’s health insurance, auto insurance, or life insurance, having the right coverage can save you from financial ruin. I don’t like to skimp on insurance – it’s better to have it and not need it than to need it and not have it.
Retirement planning – the ultimate goalpostRetirement may seem lightyears away, but trust me, it sneaks up faster than you think. I recommend starting early and maximizing your retirement contributions, whether it’s through an employer-sponsored 401(k) or a personal IRA. Take advantage of employer matches if available – it’s free money, people! And don’t forget to revisit your retirement plan regularly to adjust for life changes and market fluctuations.
Lastly, let’s talk about financial literacyIn a world filled with complex financial products and predatory practices, knowledge is power. I like to devour books, podcasts, and online resources to expand my financial know-how. Understanding concepts like compound interest, diversification, and risk management empowers me to make informed decisions about my money. Plus, teaching others about financial literacy is a passion of mine – spreading the wealth, both figuratively and literally. For books, I recommend The Intelligent Investor (it’s really the only book you need to read) to understand the stock market. For videos, I recommend anything by Warren Buffett – he even helped create a kids version of his financial principles.
In conclusion, building a strong financial foundation is like constructing a sturdy house – it requires careful planning, solid materials, and occasional renovations. By budgeting diligently, building an emergency fund, tackling debt strategically, investing wisely, protecting with insurance, planning for retirement, and investing in financial literacy, you can lay the groundwork for a lifetime of financial stability and prosperity. Remember, Rome wasn’t built in a day, but with determination and discipline, you can pave your own path to financial freedom.