How To Create A Strong Money Foundation
“Before growth and accumulation, comes foundation.”
The importance of creating a money foundation.
I still get excited to sit down with clients and coach them about their finances for two reasons. First, I am able to hear about what is important to them financially and what their goals are in life, as well as help them to build a strong money foundation. Secondly, I am able to witness first hand the transformation that happens when they feel empowered to make financial decisions that they had been reluctant to make in the past.
One important question I ask is, “What future financial goals you are working towards?”
The most common future goal I’ve heard is to be “Financially Free”. My usual response to this is, “Ok, got you. How much are you saving every month?”. Some clients come back with, “I’m not.”. To this I reply, “Hmmm… let’s back up and talk about creating a new money foundation.”
Creating a strong money foundation is crucial to implementing a sustainable financial plan. The money foundation needs to be solid before any financial products are brought in the conversation.
I like to use the metaphor of building a house in this scenario.
The first step a contractor takes in building a new home is to clear the land. Next step is to lay a strong and even foundation of wood and concrete. Only when the foundation is set and strong, will the next steps of building walls and rooms be started. The contractor will not continue to build on a shaky foundation because he/she knows that with time, a shaky foundation could eventually buckle, which would bring the whole house down. Not in a hilarious Russell Simmon’s Def Jam comedy, kind of way. In a San Francisco 1906 earthquake run out of the house, and onto the street, kind of way.
Your money house must have a strong foundation made up of understanding practical money concepts coupled with a customized financial plan that is realistic and goal defined.
I know that talking about creating a money foundation is not as sexy as talking about growing money or financial products, but it really is the first conversation that should happen when talking about personal finance.
The are four concepts that create a money foundation and support you in becoming a good manager of your personal finance:
1. Don’t spend more than you make.
The money coming in must exceed money going out, in order for money reserves to rise. Saving 20% of your monthly income is a good practice. If saving 20% is too much of a stretch, start at 10% and then work your way up. The important thing, in the beginning, is to create a savings discipline. Consistent savings must become a habit. I firmly believe that savings is a necessity, not a luxury, and is an integral part of creating a strong money foundation.
2. Manage your debt.
There is a difference between good debt and bad debt. Consumer debt is bad debt because the items bought depreciate in value at the time of purchase. Also because of the APR and how much you owe end up going over time. The general rule of thumb, when you think about using your credit card for something, ask yourself this question, “Do I need this item? Or do I want this item?”. If the answer is “want”, put your credit card away and move on. Want know more about difference between a good debt and a bad debt? Click on this link good debt vs bad debt
3. Create an Emergency Fund.
An Emergency Fund is a predetermined amount of money, stored in a place that is easily accessible in the event of a life emergency. A life emergency could be an unexpected medical bill, or being laid off from work. When I talk to my clients about the importance of an Emergency Fund, the question I ask is, “If for some reason you had no income today, how long could you survive financially?”. An Emergency Fund can be 3-6 months of monthly expenses put away in a savings account or a safe. This money needs to be easily and quickly accessible when an emergency happens.
4. Set financial goals.
Before going into this step, I want to first define a goal. A goal is a dream with a
deadline. A goal is measurable and attainable. Setting short-term, mid-term,
and long-term financial goals are a MUST to creating a strong money foundation.
In setting your financial goals you have to take your values, priorities, and habits
into account. After evaluating these things, you can start to map out a plan that
will take you from where you are to where you want to go financially.
Creating a money foundation, as steps 1-4 illustrate can be that easy. After reading the above how do you feel about moving forward and creating a money foundation for yourself?