How to build a solid financial foundation

Most achievements in life begin with a good foundation. You can’t read a book before you learn the alphabet. You can’t do complex maths problems before you know how to add. And you can’t build a house before you lay the base structure. Paul Feeney from Map My Plan offers some tips.

The same is true for your finances.

We all have big, long-term goals for our money – yours might include saving for a house, putting the kids through private school or setting yourself up for a comfortable retirement. But you won’t be able to achieve any of them if you don’t start with a sturdy foundation.

That foundation is made up of three pillars. Here’s how to fortify them so you can give yourself the best footing and start working towards your goals.

1. Get in control of your lifestyle debt

These days it’s fairly impossible to live debt free. Most people need a mortgage to buy a house, and a student loan to finance their studies, for example. These debts are ‘good’ debts – they’re investments.

Even ‘bad’ lifestyle debt like credit cards can be okay. If you pay them off every month, credit cards can be a good financial aid. But when lifestyle debt from credit cards begins to pile up, it can also be the start of a slippery slope. Banks charge you interest upwards of 20% if you don’t make your payments on time – money that’s simply going down the drain. And there’s no building a solid foundation if you’ve got a great big hole in it.

So the first step is to get on top of your lifestyle debt. Pay off those credit and store cards, starting with the one charging the highest interest. Then commit to paying them off on time, every month. Depending on your situation, you might want to reconsider whether you need them at all.

2. Build up an emergency fund

Life has a habit of throwing curveballs your way at the most unexpected times. Whether it’s a plumbing crisis, a sudden illness, car repairs or temporary job loss, emergencies are a part of life. So it’s important to be prepared to deal with them.

You might be able to draw on credit to pull through – but that’s not the ideal contingency plan if you’re after financial stability.  So once your debt is paid off, the next step is to build up an emergency fund. This is money you put aside for the day you find yourself in a financial emergency. Depending on your profession and your family situation, your fund should equal three to six months of living expenses – or even more, if you’re a single-income family or a retiree.

Of course, the bigger the fund, the more protected you are. Your emergency fund should ensure you’re ready for anything that comes your way – and you won’t need to rely on credit.

3. Prepare yourself for the unexpected

What’s your biggest asset? Your house? Think again. The most important thing supporting your financial security is actually your ability to earn money.

If you are a graduate with a bachelor’s degree, you are likely to earn more than $2.9 million over your working life. That’s a lot of money. And you need to protect it.

Just like you insure your house and your car, getting income protection insurance is a smart financial decision that will safeguard you against losing your income if you find yourself unable to work due to a serious sickness or injury. Sick leave won’t cover you for months or years.

Life cover will also protect your family in the event of your death, and TPD (Total & Permanent Disability) insurance will provide cover if you suffer a permanent illness or injury.

 

If you’re feeling overwhelmed, Map My Plan’s personalised financial roadmap can help you get started. We’ll guide you through setting up your own financial plan step by step, starting with cementing these three pillars. And the best thing is it’s free to use.

Once you’ve got your three pillars in place – debt, emergency fund and insurance – your financial foundation will be sturdy enough to support your next goals.

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