Everyone has had that dream of becoming a millionaire, constantly traveling, driving fast cars and living in mansions. The first step to getting closer to making that dream a reality is by making sure you have a good financial foundation. Think about constructing a house- do you start at the top? Or do you start at the bottom? What kind of house do you have if you pay attention to the top floors without first making sure you have a solid base? In finances, just like building a house, you should have a solid foundation that can withstand disasters that could happen. Before you start building the top you should make sure that your foundation is structurally sound.
Your financial foundation is broken down into three main categories:
The first category is Budgeting
Creating a budget can be frustrating and tedious. Most people don’t want to allocate their money to specific things as that can reduce “spontaneity” or “feeling free”. Creating a budget should not make you feel that way. You should feel satisfied and happy in the end. And because everyone is different, every budget is going to be different. A budget helps you put your finances towards what matters most to you. Maybe what matters most is your children’s education, or having a big home to entertain in. Maybe it is taking two trips a year or being fit. A budget just puts into perspective where your money is going and what actually matters most to you.
The second category is Insuring your Risks
Throughout our lives we all take some risks. What is important is that we need to make sure these risks are insured so that if something unexpected happens, it will be okay. Some of these "risks" include things that almost all of us have- i.e. a car or a house. In Saskatchewan, as car owners, we don't even have a option of not getting insurance on our vehicles and most even go further to protect themselves by buying a package policy which I highly recommend.
When looking at a house, it's very rare that someone does not invest in home insurance or renters insurance. This protects us in the event of fire, flooding, burglary etc. It minimizes our risk against unforeseen circumstances. The ultimate goal is that nothing happens but it gives us peace of mind knowing that if something does happens, it will be okay.
Many people then forget about Life insurance, Critical Illness insurance and Disability insurance as these become wants and are not forced upon us. These can be more important than car or home insurance. For example what would be the most devastating financial loss for you and your family? A robbery, cancer diagnosis, a house fire, a death in the family, an illness or accident that leaves you unable to work for life, a car accident. You need to make sure that you and your family are protected no matter what. Once again a budget can help as it helps acknowledge what is most important so that you can allocate your financials appropriately.
The third category is Having an emergency fund
Having an emergency fund is an important thing to have because you need finances right away when tragedy happens. Insurance does not pay out the next day, it does pay out fairly quickly most of the time but many times it will reimburse you for what you needed. For example say you had a fire in your house and it is unlivable. You need to stay in a hotel for a week or two while it gets repaired. Sometimes the insurance company needs to look into the situation before they will pay anything to you. That means you need to pay out of your pocket for the hotel, restaurants, etc and then be reimbursed. If you do not have any emergency funds for this situation it will make life difficult and will cause a lot of stress. Another instance could be a loss of job, a death, or illness. By having a minimum of three months of funds that are available to you immediately and without penalty you are able to take care of your world and minimize your stress.
Once you have these things in place then you can start to grow your funds and start to build your assets. Without a financial foundation any assets you build could be destroyed in the event of an unfortunate event.
Life is unpredictable and we want to be prepared no matter what life throws our way. To add to what I have discussed this is a great article that runs down the 5 things that create a solid foundation in a financial plan. The only thing missing is a Power of Attorney.