For you to build a house, you need to have a good foundation. The foundation should be strong enough to bear the load if, for example, you want a 3-storey house or 4-storey house. Before construction, you should already have a clear idea of how the foundation should be built. You can’t build a 4-storey house with foundations designed for a bungalow. A slight tremor would set that house collapsing.
The concept of the financial foundation is similar to building any house. There should be ample foundation depending on how high you want to go. Listed down are the most important things anyone should have to start strong in the journey of financial independence.
First and foremost, the foundation should be set to protect yourself against expenses that surely arises during a serious health problem or sickness. Most often than not, we are caught unprepared when it comes. This is not about slight fevers or colds during the cold season. We all know that affliction can be unpredictable and our bodies become more susceptible to them as we get older. Statistics show that 90% of personal bankruptcies are caused by unforeseen illnesses. Will the money in your bank account be enough to cover the demands of a critical disease?
This is how to get ready: Healthcare Coverage
In addition to what we all know about having to stack a good amount of money in our savings accounts, HMOs and life insurances are conveniently available to serve as a “buffer.” Put it this way -- the “buffer” is a large amount of money that we don’t have, didn’t earn as income, or never ours, unless we meet certain requirements, which is, getting seriously ill. Again, everybody gets ill but is it the only thing we are saving for?
Short Term Healthcare
This is what’s commonly known as the traditional HMO. Depending on the package, it may cover minimal expenses such as regular check ups and diagnosis. These two, though not as expensive as surgical procedures or therapy (which we may get into anyway), may hurt our finances a bit. Investing in short term healthcare is exceedingly helpful, because in most cases, doctors always recommend a follow up check up even for a sore throat.
Long Term Healthcare
This is the HMO with a Health Savings Account. You pay premiums which usually matures after a number of years. Unlike Short term healthcare, the premium that you don’t use in your Long term healthcare accumulates with interest. Start with this now and you will never have to worry about healthcare expenditures when you reach the age 60 and beyond.
This should go second to having healthcare coverage. Insurance will cover your expenses should anything happen to you or your property. People nowadays get insurance for their most important possessions -- their cars, homes, even smartphones. Travel insurance is also a popular pick because it simply doesn’t cost much. It is fairly satisfying to know that we are slowly becoming aware of the risks we are protecting ourselves from when getting these insurances. But the most important of all these is the one that’s usually evaded.
This gives the ultimate peace of mind and is extremely beneficial to your loved ones. It may not benefit you for the most part but it allows your loved ones to move on without being financially crippled. Since life is extremely unpredictable, it wouldn’t hurt to throw in a small part of your monthly income into this. Life insurances also offer coverage for critical illnesses with the benefit of claiming a sum of money in case, well, we don’t survive. The premium you pay will also accumulate interest over the years. In other terms, you don’t really “pay” for this, you are putting in money just like what you do with your savings account.
When I say “becoming debt-free,” I mean that incurring debts are inevitable, but manageable. Borrowing money is so easy nowadays that no one is totally free from debt. It’s good to keep the goal to free yourself from debt, though.
At some point you loan money to get something you can’t afford at the time like a brand new car or a house. Except for loans intended for business purposes, these type of debts do not have a return potential. You become a slave to the interest, has extra fees and charges, and most loan applications require a collateral.
Here are some tips to get closer to the goal:
Instead of using your credit cards and risk overextending your finances, using cash is the most sure-fire way of becoming debt-free simply because you’re not incurring debts when you use cash. You only buy what you currently can afford when you use cash. This way, you know your spending limitations because there is actually a limit!
About Credit Cards
Credit cards contain spending power that you don’t really have. To easily manage this, limit the number of your credit cards. No, I’m not talking about the credit limit. I’m talking about limiting the total number of your credit cards to just ONE for daily spending and an extra card for emergencies -- wanting to have a new 55-inch TV that you spotted while walking in the mall is not an emergency, especially when it’s not in the budget. In addition, pay your credit cards in full every month to eliminate incurring interest. This supports the gist “do not buy something with your card when you don’t have the cash for it.”
Keep Track of your Debts
Having your debts on a list makes it easier for you to organize your payments, much better if you put them on a payment calendar. While it’s best to prioritize putting more on the ones with the lowest balance with high interest rates, also consider when interest rates will mature. Simply put, pay attention to the ones that are presently costing you more money. Pre-pay your mortgages if you can and please do not add more on the list if you’re already having problems paying off your existing debts.
Saving Money for Emergencies
No, I’m not talking about your savings account (which you still have to build up). This is about your emergency fund which is a completely different savings altogether. This can also be put in a bank account but is never ever used until real emergency scenarios happen like:
How much do you save for your emergency fund? Is there a limit?
The basis for how much you save is 6 months worth of your income. If you can move the line further, make it a year’s worth. The bigger, the better. Why is it too much, you ask? In case you suddenly become unemployed for some reason, your family’s expenses will still be covered for the number of months you aimed for. It’s like keeping your job after all -- for 6 months, which is enough time to look for another income stream.
This should be satisfied last because investments present bigger risks. The funding, ideally, put here is your extra money and is not allotted for anything else. Investment instruments include: Stocks, Bonds, and Money Markets. More information about each will be coming up in future articles. Better yet, you can reach Denis Rodriguez, Financial Wealth Planner for more information and direction delivered to you up close and personal.