Everyone should have a solid financial foundation for their own well-being and that of their family. And yet the only thought that most people give to their financial security is “How can I make more money?” While making more money will help someone increase one part of their balance sheet, it may not actually contribute to a higher quality of life. And because of a lack of planning it might cause them, or their family, significant pain and hardship down the road. That’s why it’s so important to have a solid financial plan in place.
The first meeting with any financial advisor is inevitably going to result in a short questionnaire or discussion that asks for the clients’ income, savings, investments, debts, liabilities, along with some discussion about short-term and long-term financial goals. These are all necessary and helpful in creating a roadmap or framework for financial success. And while it is very personal and individual, most financial plans have a common foundation. Let’s take a look at what most financial advisors would consider to be the 4 basic elements of a solid financial foundation.
The Four Basic Elements of a Solid Financial Foundation
First, and foremost, every solid financial foundation needs to offer PROTECTION. Protection indicates that a family or spouse is protected from the loss of income that would result from a premature death in the family. For a family that is very wealthy and has a substantial income from investments, the investments may provide the protection needed. For a family with a number of rental properties and a steady stream of income from those units, the income from the rental units might provide the protection for the family.
However, in most cases the form of protection given to a family is provided by a life insurance policy. Life insurance provides the protection needed to safeguard a family that is just starting out and has very little personal assets and a boatload of liabilities. This protection continues all the way through the years approaching retirement when their savings and other investments can provide protection on their own. (And for all the business owners out there, consider a buy-sell agreement funded by life insurance as a great vehicle for protecting your business and providing a succession plan. See also, Key Man Life Insurance and Life Insurance to cover an SBA loan).
Life insurance is the cheapest and fastest way to secure a solid financial foundation for a family, and that is why it is often the first step taken by many financial advisors as they begin working on behalf of their clients. But you don’t need a financial advisor to start the process of obtaining life insurance. Find a company you trust that represents multiple companies and give them a call. Consider TermLife2Go for your life insurance needs as our agents will walk you through your options, and you can choose what fits your needs the best. We work with the top no exam companies and the top exam life insurance companies in the marketplace.
- DEBT MANAGEMENT
The second part of building a solid financial foundation is DEBT MANAGEMENT. This is often an area where most people acknowledge that they need some help. As of 2011, the average American household had just over $7,000 in credit card debt. And credit card debt typically carries a percentage rate well above 15% annually. These statistics showcase the need to manage the debt that a household maintains. There are a variety of schools of thought on the matter, as well as some “gurus” out there that have some helpful tips for handling household debt, but let me just give you a couple that can help you get off the starting line.
First of all, you need to work hard to reduce your debt as fast as possible. Those high interest rates are not working in your favor, so you need to be making payments that are above and beyond the minimum to really make a dent in the debt.
Second, you need to quit adding to the debt you’ve already accumulated, and the best way to do this is to cut those cards***. Learn to live without immediate gratification and you’ll pay far less for the items that you typically would buy with a credit card. ***Note: since we live in a society that rewards your creditworthiness, it is good to have credit cards. However, just don’t rack up DEBT with them. Instead, find a good rewards program (such as frequent flyer miles) and then pay off your credit card balance every month.
And if Student Loans are weighing you down, look into some of the wonderful student debt consolidation programs out there right now. I know graduates that have saved thousands by just making a phone call. DEBT MANAGEMENT is the second key to a solid financial foundation, and having it under control will give you a tremendous amount of personal financial freedom.
- EMERGENCY FUND
The third key to building a solid financial foundation is an EMERGENCY FUND. Now that you have the protection for your family, and you have debt under control, you’ll be able to build up a solid emergency fund for those situations that take you by surprise. There are a variety of different definitions for this fund, but generally speaking it means that you need about three to six months of living expenses in your savings. This fund needs to be liquid, so it can be used at a moment’s notice.Do a little research and you can find banks that offer savings rates of .75% currently. That is better than most banks offer on CD’s and unlike CD’s, funds from a savings account can be used without penalties.
For many people, having six months of living expenses seems almost impossible. But once you start saving, you’ll be surprised at how much you can accomplish when you really put your mind to it. Set a goal of one month of living expenses and then do your best to hit that goal as soon as possible. Once you’ve reached your one month goal, it will be obvious that you have what it takes to add to it bit by bit. Getting out of debt and having your debt under control is a huge burden off your back, and when you’ve further added three to six months of living expenses into your savings account, you’ll experience a sense of freedom that many never manage to acquire.
The fourth and final key to a solid financial foundation is INVESTMENTS. Now obviously there are good and bad investments out there, and we don’t have time to discuss them all in this short article. Just keep in mind that a solid financial foundation needs to have safe and secure investments that are making money without exposing the client to unwanted and unnecessary risks. The right kind of investment will vary depending on the age and goals of the individual, but in most situations, the investment should provide a decent return on the investment without risking significant loss. Don’t expect to double or triple your savings in just a year or two with some fancy “new” investment strategy. The old saying “slow and steady wins the race” applies very well here. Just be patient with your investments and stay in communication with those that are handling your money. If you don’t have a money manager, pay attention to your accounts online and ask questions if you have them. The banks and the institutions that are handling the transactions have teams of people that are answering phone calls daily to help clients just like you.
There you have it, the four keys to a solid financial foundation – PROTECTION – DEBT MANAGEMENT – EMERGENCY FUND – INVESTMENTS. If you’re like most Americans, you probably haven’t even given much thought to any of these. But don’t worry, it’s not too late to start. Just pick up the phone and give TermLife2Go a call. We can walk you through the process, provide you with your options, and let you choose what makes the most sense for you and your family.
TermLife2Go is an agency that represents over 60 top rated life insurance carriers. We are not bound to any one company which provides us with the freedom to align our clients with the best type of insurance, along with the best company at the best price based on each individual client’s unique health and lifestyle. And we do not have sales quotas which means we will spend time talking over your needs and then recommend the best insurance coverage for you, not us. So if you are ready to talk to a professional life insurance agent that puts your needs above all others, give us a call at 866-760-8740.
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