7 Steps To Building A Solid Financial Foundation

Photo by Tim Webb

More often than not, people focus only on their investments, especially here in the Philippines.

Now there's nothing wrong with focusing on your investments. It's actually a good sign that people are now starting to become aware of what they need to do financially to secure future financial well-being. My issue though comes from the fact that people focus only on investments and disregarding the rest of their financial foundation.

It's true that investments will determine whether we will be facing money problems or not after we retire. But in investments is just one aspect of the overall financial foundation of person. In fact, it is the last thing that people should be working on, when they are trying to build a solid foundation for their financial future. Investments, without a solid foundation below them will crumble early on in the face of crisis or emergencies that comes our way.

That's why for investments to do what they're suppose to do, prepare for our retirement, a solid foundation is needed to be built below it and here's 7 steps to building a solid financial foundation for our investments to stand on.

1. Increase Cash Flow - Before addressing anything else, people should first start with increasing their cash flow. Doing this first will make addressing the other things that people need to build their financial foundation easier. Most of us rely only on our salary, and more often than not, its not enough to even address our most basic needs. So find way to increase your cash flow first so it will be easier to build a solid financial foundation.
2. Healthcare - Once you increase your cash flow, everybody should focus next on having healthcare, especially long term healthcare (more on this on future posts). Without healthcare, any problems or emergencies caused by unexpected health issues will eat into our investments and disrupt its earning cycle. Having healthcare will solve health problems without touching our investments.
3. Insurance - Insurance is the next thing that people should have for their foundation. Insurance is important to have in case something happens to you or your ability to earn money while your investment is still in its early stages. If something happens to you or your ability to earn money, you or your family will have no choice but to use the investment to shoulder or pay for whatever responsibilities or liabilities that you left behind, even if it is not yet enough to cover everything. So insurance will answer any problems caused by sudden demise or permanent disability that your investment won't be able to do at an early stage.
4. Estate Protection - If you, your parents or grandparents have assets to declare, what usually happens to them when you die? They get transferred to the heir, but this usually takes a long process and it costs money (the tax that needs to be paid is dependent on the value of the asset). It would be a problem for the heir if he/she doesn't have the financial means to pay for the tax and other costs that comes with it. If they have investments, chances are they'll be using the money for investments to pay for the taxes and other costs. Solution? protect your estate, by having your own corporation or holdings company (more on this on future posts).
5. Eliminate Debt - Having zero debt is the next step of building a solid financial foundation. People tend to focus too much on building their investment first before settling their debt. This is a problem, especially for bad debt (check out post on Good Debt and Bad Debt), because interest on debt is usually higher than the interest on your investments. You may have an investment that earns you 15% interest per year, but if you have debt that has interest rate of 25% per year, you're actually losing money per year instead of earning. So settle your bad debts first before you focus on your investments so the high interest rate on your loans won't kill the interest rate you earn from investments.
6. Emergency Fund - This is the money that you put in the bank for easy access. Emergency funds, as the name suggest are for emergency purposes, your house or car needs repair,  a family member needs money, you lost your job, etc. Your emergency money should have the amount of at least 3 months of your salary saved in a bank with ATM for easy access. You need to have this as well so that you don't have to touch your investment in case certain emergencies arise.
7. Investment - Of course once you've established your foundation, you can now start with your investment. With a solid foundation in place, your long term investments will be able to grow without crisis, emergencies or problems disrupting it.

Yes having investments that will make us money and prepare us for our retirement is the ultimate goal of everyone. But it is also important to note that investments alone won't be enough to cover for whatever responsibilities, crisis, emergencies or problems that may arise. So it's important that we build a solid financial foundation to ensure that we covered all of our bases and have the kind of retirement that we want for our life.