When building a home, it’s easy to get absorbed thinking about how you will decorate it and to start envisioning the memories that will be made in that house – holidays, birthday parties, newborn babies, and retirements.
But if that home isn’t built with a strong foundation to support it, then all those dreams may crumble before you have a chance to realize them. A strong foundation on your home helps to support it, bear its weight, and protect it from the unexpected.
In the same way that you need your home to be built with a strong foundation to ensure that it can withstand the unforeseen, creating a strong financial foundation can serve the same purpose by helping to support you, give you peace of mind, and protect you and your family from the unplanned curveballs life tends to throw at us.
So, what are the components of a strong financial foundation?
Emergency Fund: The first step in creating a strong financial foundation is to make sure you have an emergency fund in place. An emergency fund is a cash reserve set aside to help cover unexpected expenses. One way to think of it is as a “rainy day fund.” Generally speaking, your emergency fund should be between 3-6 months of expenses. This cash cushion can help you weather the storm if you experience an unexpected job loss, a healthcare crisis, or an unforeseen home or car repair. It can act as a life preserver and keep you afloat when times get tough.
Retirement Savings: We often think of retirement as a day far off in the future and saving for it as something we will get to later when things in life are less complicated. But life tends to sneak up on
us and there is no better time than right now to start saving for retirement. Saving for retirement today will help you build a nest egg that will allow the older you to be self-sufficient as you age without being a burden to your loved ones.
There are countless ways to save for retirement, but some of the most common ways are through an employer-sponsored retirement account such as a 401(k) or 403(b). Employers will often match what you put in as an employee by up to a certain percentage of your income. Other common ways to save for retirement include Traditional IRAs or Roth IRAs, which can be opened at most brokerage firms and provide you with a nearly endless number of investment options.
Once you’ve decided to start saving for retirement, one common question is “How much should I save?” While there is no one-size-fits-all rule on how much to save, saving 10% of your income is a good rule of thumb to get started.
The most important thing is that you start.
Estate Planning: Estate planning may be the most underestimated and forgotten component of a strong financial foundation. An estate plan is intended to guide how your assets will be preserved, managed, and distributed in the event of your death. It can be uncomfortable to think about your own death, but putting together even a simple estate plan can allow you to ensure your assets are distributed according to your wishes and offer protection to your beneficiaries. This can be especially important if you have young children who will be cared for by a guardian after your passing. Using the proper estate planning tools, such as trusts, can also add privacy to the management of your affairs after your death by avoiding probate court, which is a public record.
While estate planning is often an overlooked component of financial planning, it shouldn’t be as it can be a vital bedrock for stabilizing your financial life.
Insurance: Last but certainly not least, we have the final pillar of a strong financial foundation: insurance. Like estate planning, the role insurance plays in creating a financial foundation can often be overlooked, but that doesn’t make it any less important. In its simplest form, insurance is a contract between you and an insurance company to help protect you and your loved ones from financial loss due to an unforeseen loss such as a natural disaster, debilitating medical condition, or other catastrophic event.
Most people are familiar with insurance in some capacity as health, homeowners, and auto insurance policies are relatively common. But there are other types of insurance that should be assessed to ensure you are safeguarding your financial wellbeing from the unexpected. The Social Security Administration estimates that 1 in 4 twenty-year-olds will become disabled at some point before they retire. While social security benefits can help offset the loss of income that may occur from a disability, having a disability insurance policy in place can bring peace of mind and help safeguard your family in the event of the unexpected. Similarly, ensuring you have enough life insurance in place in the case of an untimely death, and an umbrella policy to help protect from catastrophic loss, are all vital to protecting your financial foundation and keeping it stable.
Establishing these pillars in your financial life will help put you in position to weather the storms life throws at us and to focus on those dreams and goals that drive us through each day.