Constructing Your Financial Life

Building a firm financial foundation is critical for creating a healthy and stable financial life. When building a structure, the foundation takes the most time. If there are any mistakes made on the dimensions and balance of the foundation, then the entire design will be affected. Therefore, when a person is building a healthy financial life, it is reasonable to expect that it will take time and a focused effort to establish a proper financial foundation.

Location and Condition

The first step in establishing this foundation is to identify where the foundation will be laid and assess the state of the ground that it will lay upon. This allows a person to see where they are with their finances. A core reason some people fail in achieving their financial dreams is that they are afraid to look at the condition of their finances. The process can evoke a variety of emotions. Nevertheless, this step is vital for financial health and success. Therefore, taking the time to gather financial information and organizing it is the starting point for a successful financial journey.

Create a Budget 

A budget is a document showing the amount of money received through income and the amount of money spent through expenses. The remainder, otherwise known as discretionary income is the difference between the two. The commonly used budget is a monthly budget.  

It is important to note that the budget should start with active expenses. Aim for accuracy in the figures used. If the amounts for any category varies such as food and gas, review bank and credit card statements for a month or two to get an average estimate. If cash is the primary method of payment, hold on to receipts for a month or two to get an average estimate. 

Once the budget is complete, a person can determine how they may modify it to achieve their financial goals. Creating a new budget that includes proposed changes will make it easier to see the new cash flow. 

Create a Debt Sheet

The next step is to create a debt sheet. This document will list all debts owed. This sheet should include debts that are actively being paid, in forbearance, and any that are in collections. There should be a column for minimum payments due, the total amount due, and interest percentage rates, as applicable. This sheet is helpful when creating a plan to eliminate debt. Everything is clear and organized in one place. A person can identify the debt(s) they would like to address and add the line into their proposed budget.  

Laying Bricks

The next phase in creating the foundation is laying the bricks. There are two types of bricks to use: Savings and Insurance.  

Savings

Short Term Emergency Fund: The purpose of this fund is to cover a short term emergency. Consider the deductible amounts for insurance policies and any expenses that you anticipate will arise soon such as car repairs or registration expenses. Some employers provide benefits that will allow you to establish special savings funds such as a health savings account, transportation savings account, or dependent care flexible spending account. The funds should remain in a savings account that is easily accessible in the event of an emergency.

Long Term Emergency Fund: The purpose of this fund is to prepare for larger income interruptions such as a furlough, lay off, health event, or disability. These funds should cover 3-6 months’ worth of essential expenses. Determine this amount by examining your budget for those expenses that are required to maintain your daily living. While these funds can remain in a savings account, placing them in an interest-bearing account that features very low risk to the amount. The money will grow at a slow rate while it sits in the account. 

Retirement Fund: This fund is for retirement expenses. Some employers may offer options for retirement accounts such as a 401k. There are several options available such as an Individual Retirement Account (IRA). Many banks and brokers offer these accounts. A significant benefit of a retirement fund versus a regular savings fund is the tax advantage. There may be tax benefits either when contributing money or upon withdrawal. Retirement accounts often have stipulations regarding maximum contributions per year and when withdrawals are allowed. There are penalties if a person wants to withdraw funds before the age deemed for the plan which is typically 59 1/2. 

Insurance

Life Insurance: there are several types of life insurance products available to help a person plan for the event of their passing. Life insurance is important to ensure that burial/cremation expenses and remaining debts are covered. Term life insurance only provides death benefits for a specified timeframe such as 10, 20, or even 30 years. This type of insurance is usually the least expensive of all life insurance options because it does not feature a savings account. This type of insurance is temporary protection. Once the term is over, death benefits end. Depending on your budget and goals, a person can start with a permanent product such as Whole Life Insurance. There are a few types of permanent life insurance available. Permanent forms of life insurance offer a savings option and death benefits until the end of life as long as the premiums are paid.

Health Insurance: this type of insurance helps to offset the cost of medical care and is available on a public and private basis. When considering the type of insurance, a person should consider their level of health, the amount and category of medical care needed regularly. Within this realm, There are benefits for dental and vision as well.

Disability Insurance: this type of insurance provides a percentage (usually 60%-70%) of income if the person were to become disabled. There are generally waiting periods before the coverage will apply and specific definitions for disability. This type of insurance is available on a short term basis and long term basis. 

As a person continues to build their financial home, two recommended items are the Last Will & Testament and Advanced Health Care Directive. 

The Last Will & Testament is a document that states where a person wants their money and belongings to go after their passing. For people with children, this document will outline who will take care of the children. The document will identify the person(s), known as an Executor, that will carry out the written requests.

The Advanced Health Care Directive, known as a Living Will is a document that states a person’s preferences when they are unable to make decisions for their care and outlines their desires for medical intervention such as being placed on life support. The document will identify the person(s) they choose to make life decisions on their behalf.

A Final Note 

While there are social programs such as social security, disability, Medicaid, Medicare, and unemployment, it is best to prepare and account for any financial disruptions when possible as social programs can change and will likely only cover a fraction of the expenses. Furthermore, not all individuals meet the requirements to qualify for social programs. Always research your options, and consult with legal and financial professionals that can discuss the solutions that work best for you.

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