Building Blocks of a Solid Financial Foundation

I've read sometime ago that the reason why many people end up not being financially able even after years of working hard is because they do not know the basic financial concepts nor how to build a strong financial foundation.

According to an IMG book entitled "The Secret to Saving & Building Your Future," there are five aspects that one must build in order to have a solid financial foundation, re:

Having a proper healthcare coverage

Whether we like it or not, sickness is one thing that affects one's finances, especially during old age. Unforeseen circumstances can happen and having a proper healthcare or medical coverage can help. Many people who do not have this end up resorting to loans or selling their properties to finance their medical emergencies.

There are various healthcare providers these days and choosing one that suits one's needs and budget is advised. There's the short-term healthcare which offers yearly coverage. Another one called Senior Care which covers those people who are beyond 60. Then there's the Long-Term Healthcare which has a fixed premium and comes with other insurance coverage (life insurance).

Having a proper protection in the event of premature death

Like illness, death comes to any person. Having a proper life insurance will allow one's bereaved family to have an almost instant money to use in the event of sudden death which usually impacts a family's finances.

Whilst most of us buy insurance for our cars, house and other material properties, most do not really have life insurance because of skepticism or misunderstanding of what it really is. Nowadays though, even older generations are becoming aware of the benefits of having one.

There are various types of life insurance, re:

• Accidental Death Insurance

  This is also called the "Double Indemnity Coverage" which as the term implies covers only accident-related deaths. It can be a standalone option but is often included or bundled in most life insurance offers or policies.

• Joint Life Insurance

  This type of insurance covers two people, typically a couple. The purpose of this type is to protect a business or estate and the benefit is used to at least minimize or eliminate the burden of estate tax on the heirs.

• Key Person Insurance

  As the name suggests, it is a type that is meant to insure the most important person (owner or key employee) to a business. Some companies buy this insurance, pay the premiums and then be the beneficiary of the policy.

Managing and paying off all bad debts

Bad debts can drag one down especially when such debts are incurring interests. These days, lending companies are sprouting almost everywhere and make it so easy and convenient to get a loan. In some places, loans can even be approved and granted in a matter of minutes.

But what are bad debts?

These are loans that have no potential return on one's money. An example would be money borrowed (or charged to credit card) to finance a certain vacation or to buy a particular thing for personal use. Some people who do these tend to ignore or do not consider and understand that there are certain fees, charges and interest rates associated to the loans they are getting.

I personally know people who have incurred bad debts due to exorbitant interests that compounded over time. They ended up losing their properties (house, real estate and cars) just to pay the debts off. Such circumstances can be very stressful to a family.

It is wise therefore to avoid incurring this type of debt.

Building an emergency fund

No one is truly prepared when it comes to life and circumstances. The idea is to save funds that would last or cover at least 3 to 6 months of one's total expenses when unforeseen events, disasters and other situations may arise.

What are those instances where one might be needing such an emergency fund?

• We need funds for major car or home repairs.
• When a major appliance in our home breaks, we need a replacement.
• Sudden lose of jobs or source of income
• Or a serious illness and hospitalization etcetera.

It is advised that setting aside a certain amount of money from one's income on a regular basis and increasing it overtime. And these funds are best to be kept on a separate account where there is no online access or debit card for that matter.

Saving and investing

This is where the idea of paying ourselves first come into play. Personally, I didn't understand such a premise the first time I heard it and even when it was mentioned many times over. It was until I read the self-help book by George Clason, "The Richest Man in Babylon" which shares financial advice through parables, that I understood what the phrase was referring to. Funny you'd say but yes, I used to be one of those people who did not know any better on how to build something for the future.

Saving the right way

Proper formula: Income - Savings = Expenses

I think most of us usually do the opposite (Income minus Expenses = Savings) where we spend first and then save whatever is left which obviously for an average Joe, it isn't much. And then when the need arises, we take whatever is in our savings and we are back to square one. The cycle repeats and before we know it, years had gone by and we have nothing saved nor invested. I'm quite sure someone out there can relate to this.

But what does "paying yourself first" really mean?

Simply put, it's setting aside a certain percentage of your income (which is ideally at least 10% and should not go lower than that) and putting it into savings. It is supposed to be treated as another expense that must be paid on a regular basis no matter how small one's income is. When I first heard about this, I thought it is impossible. How would anyone with a small pay be able to live with just 90% of his income when the whole of it is barely enough? Does one need to sacrifice some of his bills? Obviously, that isn't what it meant.

As one's income grows, his spending habit also changes and his expenses tend to grow too. Based on personal experiences, this is very true. So how can one save then when almost everything goes to bills, daily living expenses, entertainment and the like?

This is why it is important to understand and identify our needs and wants so we can budget wisely. That is to say, reducing our expenses, sacrifice a bit of the unnecessary extravagances of today so that we can reap greater benefits and or rewards in the future. It can be surprising when we sit down and really list all those things that we can cut off from our daily expenses. Once we do that and start paying ourselves first, we begin to be really conscious about how we spend.

Like the saying goes, it's not how much one earns that count but it's how much one keeps. And the earlier we start keeping, the better. And of course, we don't just keep them, do we? These savings are meant to be invested for them to grow overtime.

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DISCLAIMER: Ideas expressed in this publication are based on my personal understanding of what I read. NFA

Lead image photographed on the cover page of the IMG book. No copyright infringement intended. 15052053/09:42ph

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