No matter where you are in your financial journey, it’s good to note that building wealth is a marathon not a sprint. It takes time, patience, discipline, and accountability. As with building a home, financial success starts with a good plan and a solid foundation. Many investors make a couple of key mistakes – starting without a plan and skipping the foundation.
What makes up a solid financial foundation? There are four core pillars. The first one is your debt (or hopefully lack thereof). Ideally the best footing is to be debt free or debt free except for paying off your home. If you are not debt free, priority number one is to create a plan to become debt free (except your home) within two years. The second core pillar is a fully funded emergency fund. This cash should be set aside in a savings account and totally accessible at any time.
Keep in mind, not all emergencies happen during banking hours (meaning you may not be able to get to your cash if you absolutely needed to on a Sunday morning). Having a little cash at home in a safe is a good way to offset that risk. Your emergency fund should equal somewhere between three and six months’ worth of living expenses. The third pillar is addressing all insurance needs, including life insurance and disability insurance. What would happen if you didn’t wake up tomorrow? Are there loved ones who depend on the income you earn? Having the appropriate amount of term insurance is essential. Disability insurance is another often-overlooked risk, despite the fact that the probability of becoming disabled is greater than the probability of dying. The last core pillar is to make a plan. Work with an advisor to help create, implement, and maintain your plan.
With a solid foundation in place, the pathway is clear to begin building wealth. As Dave Ramsey says, the greatest wealth-building tool we all have is our income. If you are debt free, have a fully funded emergency fund, have the right amount of insurance, and you are implementing your plan with an advisor, then the wealth you build can withstand all the storms life can throw at you.
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- Can You Tolerate the Speed at Which Your Investments Have You Going? - November 29, 2017
- Return on Investment and Expectations - November 1, 2017
- Did you know October is National Financial Planning Month? - October 11, 2017
- The 5 Stages of Building Wealth - October 4, 2017
- What Is Fiduciary Advice? - September 27, 2017
- Where Should My Retirement Income Really Come From? - September 20, 2017