Building Your Financial Foundation
Finances - one of a couple of taboo topics for generations on end to discuss openly. I admit that I didn’t even want to talk about this topic due to the personal nature of it based on everyone’s situation with the ongoing pandemic. However, that’s exactly one of two reasons I finally decided to write about building your financial foundation. More to come on the second reason later.
Building your financial foundation can be as easy and as difficult as people make it out to seem. Coming from a background in finance and economics, I can attest to that fact but truly believe it ultimately comes down the basics, most of which you’re already aware of in some form or fashion.
Let’s take a closer look at the four core tenants to better understanding and planning for your financial future:
Budgeting
At the center of building your financial foundation, budgeting your month to month expenses is crucial. Both you and I know this, but we mindlessly spend on little things here and there every single month. I’ve been there where I had a “mental budget” and then was left scratching my head thinking where all the money went. I had my “mental budget” planned out and stuck to it pretty well upon first thought, so where’d I go wrong? Sound familiar?
That’s when I looked at my monthly expenses and found minuscule purchases add up quickly. From then onward, I decided to maniacally track my monthly expenses to ensure that I’m staying on track with my financial goals. There are a host of apps out there, such as Mint, You Need a Budget (YNAB), and Goodbudget, that can help you out tremendously in setting up your budget and tracking it. They say we don’t plan to fail but we fail to plan, and that couldn’t be any more true when it comes to budgeting.
Debt
The greatest inhibitor to our financial foundation, debt cripples so many of us at one time or another. Think about how much debt affects and limits your livelihood - it’s probably near or at the top of the list. No matter your situation, your number one priority, in conjunction with budgeting, should be paying off your highest-interest debt obligations as quickly as possible. Debt is often a necessary risk to take on throughout life - getting a higher education, purchasing property, starting a business - but you have to pay it back as fast as possible to reduce your interest expense as much as possible.
Long story short - pay back your debt as fast as possible by making some tough choices when developing your budget and/or pay for everything in cash. The latter may not always be feasible due to time constraints, but it’s often overlooked in my opinion when planning out major purchases.
Saving
You have a monthly budget created and all, if not most, of your debt paid off, so you have extra money leftover at the end of each month - great! Repeat after me - you will not mindlessly spend this extra money left over at the end of each month. Everyone should ensure that they have an emergency fund built up that can cover around 6-8 months of expenses, though I recommend closer to 10-12 months due to the pandemic, in the event you lose your source of income unfortunately. Once you’ve built your emergency fund, now comes the fun part where you can start saving for long-term purchases, such as for a car, furniture, property, business, etc., that fits in with your lifestyle and goals.
I didn’t mention it earlier, but your savings should be accounted for in your budget and constantly updated any time you see your income increase. In order to help you avoid the urge of lifestyle creep, automate your savings so that you aren’t tempted to reduce your savings rate. Additionally, it’s wise to set up a savings account with a separate institution from that of your checking account, such as Ally Bank or Marcus by Goldman Sachs, so that there’s a larger barrier to you dipping into your savings funds.
Investing
Last, but not least, investing in the form of the stock market or real estate is a terrific way to ensure your money grows to fund large expenses down the line as well as for your retirement. Similar to saving, investing should be a priority of yours after you complete your monthly budget and have largely paid off your debt. Investing is where most get tripped up given how it’s marketed as a quick-fire way to a quick buck if you understand all these technical terms and financial instruments.
Investing can be as easy or as complex as you want to make it based on your level of curiosity for it. I can tell you that the stock market as a whole has had a positive return over a 10+ year period throughout most of history, so take that as you will. On the flip side, you can invest in individual companies or properties but do your due diligence before making these investments. Additionally, there are a variety of different investing philosophies, so I suggest learning from the host of strategies and decide upon a strategy that meets your specific investor profile. I’ll say from personal experience that investing is often equally about the numbers as much as it is about the psychological aspect of things.
Plan for your future and perform your due diligence, and I can confidently say that you’ll be one step closer to building your financial foundation. But let’s go back to the reasons I finally decided to write this post. Firstly, I’ve gone through the whirlwind of managing all four of the core tenants of finance and struggled with one or another throughout my life, so I know that it can be difficult. Having been able to learn and develop a better understanding, it is only fitting that I try to share my own thoughts to help others build their own financial foundations to set them up for success in the future.
The second reason I wanted to write this post is that I wanted to help all of you reshape your mind and psychological approach to money and finance. More often than not, we only perceive finances as some sort of enemy and inhibitor in our lives. I won’t disagree with that fact, but I similarly won’t agree with it either. If there’s one key takeaway I want you to get from this post, it is to:
Treat money and finances like a friend.
You don’t just leave friendships aside - you nurture and develop them through both good and bad experiences. Money and finances can, and should, be approached from that lens. Instead of thinking that you can’t afford something due to a constraint in financial resources, try and reshape your thought process to how can you obtain more resources instead to make it a more whimsical experience. We preach a healthier mindset in terms of living your life, and that shouldn’t stop when it comes to the financial matters of life. With that, I hope you have been able to gain some, even if just a tad bit, clarity to building your financial foundation!
Disclaimer: The information claimed on this post and the resources made available through this post are not intended as, and shall not be understood or construed as, financial advice. I am not an attorney, accountant, or financial advisor, nor am I holding myself out to be, and the information contained on this post is not a substitute for financial advice from a professional who is aware of the facts and circumstances of your situation. I am not liable for any actions taken upon reading this post. Consult a financial professional and perform your own due diligence prior to taking any actions.
“Planning is bringing the future into the present so that you can do something about it now.” – Alan Lakein
