The dilemma that most people are facing are related to finances. Financial literacy weren't taught in schools and most of the things that we know now when it comes to finances are things that are being brought down from our parent's grandparents, the information is outdated!
Just like building a strong house, building the right financial foundation requires the right steps and tools. A house whose base and foundation is poorly built will soon topple down, just like a financial foundation that is poorly implemented.
The key in building a good financial foundation is not earning more nor finding more sources of income but rather in knowing the essential steps in building wealth. Many people who are earning well end up either struggling to make ends meet, broke, or down in debt because they failed to establish the right financial foundation. Without a good financial plan, a person could set the wrong priorities for his/her finances.
Knowledge is what separates the wealthy from the middle class and the poor. Studies have shown that wealthy people have basically the same financial framework (same as a house's blueprint). They may be technically different in their approaches but they follow the same principles.
Want to know how the wealthy do their finances? Here are the six very basics steps on how to build a strong financial foundation:
1.) Health care - Getting sick is very costly and is one of the top reasons why people get financially drained. Health care gives reasonable premiums for huge amount of benefits when the policy holder gets sick thus protecting savings and investments from being used up to cover for the expenses.
2.) Insurance - Insurance provides a measure of financial support when the bread winner/policy holder gets incapacitated or dies. Like health care, insurance premiums comes in reasonable and gives huge sums to cover the income generating capacity of the insured. Though it is not enough to cover the emotional burden, at least it is good enough to give peace of mind that those who are left behind are in good hands financially.
3.) Debt Elimination - There are two types of debt: good debt and bad debt. Good debt is a debt that could generate better finances such as loans to start a business or for investments. Bad debts are income or asset pulling debts. Debts, be it good or bad, are borrowed money that should be repaid. At this point, both good and bad debts should be eliminated and avoided. Good debts are better off after step 5.
4.) Emergency Fund - Emergency funds are for, as the name suggests, emergency. It's an amount of money that should be liquid and accessible as it is the money you'll get and use when the need arises (key word is need, not wants). The suggested amount of emergency funds is equal to at least ten times one's salary or monthly income.
5.) Investments - Investments are intended for long term and should never be touched when sudden need arises (emergency funds will take care of that). Several investment channels are mutual funds, UITFs, real estate, stocks and other securities, and even starting a business (traditional or digital).
6.) Estate preservation - Estate preservation is a plan to create more wealth, make existing investments grow, or transfer wealth during your lifetime or after your death. Estate preservation keeps your investments and savings from falling down due to lack or poor planning.
Summing everything up, the flow should go like this:
1.) Health care and insurance should come first as it would serve as a coverage for somebody who builds his/her financial foundation. Just in case whatever may happen, at least a financial support is at hand.
2.) The habit of saving is very important in eliminating debt and/or building an emergency fund. Develop the habit of saving and never think of loans (debt) as a solution for debt. Without the habit of saving, eliminating debt and building up an emergency fund would be an enormous task. Debt elimination comes in first because emergency funds is not intended to pay off debt. Get rid of debt.
3.) Investments takes time to build so it should come last. Invest with spare money or money that you can afford to "lose", emergency funds are there just in case the endeavor turns sour. Start small and learn consistently. Mutual funds and UITF are ideal for those who are testing the waters of investments.
Building a strong financial foundation isn't that complicated but it takes time to build. Start now, start young, tomorrow is already too late.
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