The Road to Financial Wellness Starts with 6 Steps: Building a Strong Financial Foundation

When I started my career in financial services as a teller, I quickly realized my passion for helping others reach financial wellness. Over time I came to understand that the key to financial wellness is forming a strong financial foundation. To meet the challenges of rapidly changing, volatile economic conditions – both current and future – it’s essential to have a solid base upon which to build.

So what are the building blocks of a strong financial foundation? First, it’s important to grasp that it’s never too early or too late to start. Achieving financial wellness is a lifelong journey, not an endgame. And although this journey will look different for each individual, there are some tried and tested steps that work for everyone.

A solid financial foundation is built around healthy practices and habits that create the financial security you need to live your desired lifestyle, both now and into the future. That foundation gives you the power to make strategic life decisions, set future financial goals, manage debt, and start creating wealth. The basic measure of a strong financial foundation is when you have more money coming in than going out (positive cash flow) and own more than you owe (positive net worth). This article details six vital steps to build that powerful base.

Step 1: Evaluate Where You Are in the Moment

The absolutely essential first step is to know exactly where you are right now. What is your total income, and where is all your money going? This initial step takes a little work, but it’s definitely worth the effort to paint an accurate picture and get a baseline starting point from which to go forward.

You can start by gathering your most recent pay stubs and logging into your bank and credit card accounts to get the past few months of statements. Document all your income from every source. Then go through all your spending and purchases. Separate the items into categories: needs, wants, and future. “Needs” are the expenses you must pay for your own survival like rent/mortgage, groceries, transportation, insurance, and utilities. “Wants” are purchases you make for fun like dining out, gym memberships, or TV streaming. “Future” includes contributions to an employer’s 401(k) program and automatic deposits you make to your savings account.

Now total up your income and each of the three spending categories. Compare how much you’re spending to how much you’re earning.

Step 2: Make Adjustments

Now that you know your income and expenses, you can make adjustments to help move closer to your financial goals and secure your future.

• Are you spending more than you earn? If so, look for ways to change that. Be intentional about spending. Can you cut back on some of your “wants” or switch to less expensive services you need? Or investigate ways to supplement your income, like taking on a side hustle or landing a higher-paying job.
• Are you earning more than you spend? If so, congratulations. You’re on your way toward building a solid financial foundation.

During these first two steps, you’ve done all the work that goes into creating a written budget. Writing and following a budget is how you make sure your money is doing what you want it to do every month.

Step 3: Build Up an Emergency Fund

No matter how well you plan or budget, financial emergencies will occur. That’s simply a fact of life. Accidents, illnesses, car breakdowns, job losses – some financial crisis is bound to happen, which is why you need to set up an emergency fund. The basic target should be to have enough in your emergency savings to cover at least three months’ worth of your essential expenses. That way, you have a buffer in place when the inevitable occurs.

Step 4: Take Advantage of Employer Retirement Plans

Does your employer offer a 401(k) or other type of retirement savings plan? If so, be sure to take maximum advantage of the plan they offer. Many employers have a matching feature where they match a certain portion of every contribution you make. One common matching plan is 50% up to 6%; that is, if you contribute 6% of your income, the employer will match it with a 3% contribution. You can’t afford to pass up a 50% return on investment. Be sure to find out what plan your employer offers and take full advantage of it.

Step 5: Manage High-interest Debt

Carrying debt month-to-month is detrimental to your financial health for many reasons. But high-interest debt, like credit cards, is the worst because interest compounds – so you end up paying interest on interest.

When you took a look at your credit card statements in Step 1, you got an idea how much you owe and the interest you’re paying. Make a plan to pay off any debt with high interest rates, that is, 10% or higher. By making more than the minimum payment each month, you’ll progress toward paying off that high-interest debt, which is another step along the way to building a strong financial foundation.

Once you’ve paid off your high-interest debt, you can use the same strategy to pay off any additional debt with medium or low interest rates. When your debts are paid off, you’ll have more disposable income to invest toward your long-term financial goals.

Step 6: Get Ready to Invest

Investment forms the ultimate building block in your financial foundation, the basis for starting to create wealth. First, consider your retirement planning. Everyone needs a retirement plan, no matter their age. As noted in Step 4, you should maximize your participation in any employer-sponsored retirement vehicle available to you, if you’re not doing so already. If your employer doesn’t offer a plan, you can open an IRA. Investigate the options and select strategies that work for you to set aside funds for your golden years.

Getting ready to invest involves assessing your risk tolerance, setting aside risk capital you can afford to invest, having an exit strategy, doing due diligence research on any investments you choose, and putting a trusted team of advisors in place. Once you’ve achieved these actions, you’ll be ready to take that plunge.

Conclusion

Everyone can achieve a strong financial foundation and feel confident about handling their money. And the sooner you start taking action, the more time you’ll have to accomplish your long-term financial goals, like buying a home or starting your own business. The process starts with developing a positive mindset and continues with developing solid money habits and sticking with them. In the long run, having that strong foundation in place will ensure that you can live the lifestyle you desire at every life juncture.