What’s the Key to Wealth-building? Create a Solid Financial Foundation

If there’s one thing my three decades of experience in banking and wealth management have taught me, it’s the importance of fundamentals. The first key to start a person down a path toward building generational wealth is creating a solid, basic financial foundation. That stable financial footing is crucial for achieving long-term goals while staying prepared for life’s uncertainties.

Navigating one’s personal finance journey successfully also requires a mindset that values independence. With thoughtful planning, discipline, and a fundamental understanding of the volatile economic environment, individuals and families can establish a strong financial foundation and move closer to lasting prosperity. This article offers essential steps toward building that financial base.

1. Understand Your Current Status
The first step in building a solid financial foundation is understanding where you stand now. To clarify your status:

• Create a budget. Track your income and expenses to get a picture of your spending habits. Distinguish between your essential “needs” versus your discretionary “wants” to clarify areas where you can save.
• Assess your net worth. Calculate the difference between your assets (savings, property, investments) and liabilities (debts, loans). This process gives you a clear picture of your current financial health.
• Set financial goals. Define your personal finance goals for the near term, medium term, and long term. Examples include paying off debt, buying a home, or planning for retirement.

2. Develop a Culture of Savings
Savings form the cornerstone of one’s financial foundation. In these times when unexpected expenses and economic instability are common, maintaining a robust savings habit is crucial.

• Emergency fund. Set aside money that would cover you in unforeseen circumstances like medical bills or a job loss. Aim to save three to six months’ worth of living expenses.
• Automated savings. Set up automatic transfers to ensure that a portion of your income goes directly into savings each month.
• High-interest savings accounts. Some banks now offer high-yield savings accounts or fixed deposit options (like CDs) that grow your money over time.

3. Manage Debt
Carrying a debt load poses a major obstacle to financial stability. Your financial foundation requires staying on track to manage credit and debt.

• Avoid excessive borrowing. Only take out loans for essential purposes that move you closer to your goals. Education, home purchases, or business expansion are good examples.
• Pay off high-interest debt first. Focus on clearing debts with the highest interest rates first, like payday loans or credit cards.
• Negotiate loan terms. If you’re struggling to repay debt, talk with your creditors to find out if you can renegotiate loan terms or explore refinance options.

4. Protect Your Income and Assets
Safeguarding what you’ve built up is just as important as growing your money. Risk management requires protecting yourself from unforeseen circumstances.

• Insurance. Insurance policies offer a safety net in times of crisis. Health, life, and property insurance are essential pieces of a financial foundation. Many insurance companies offer affordable plans.
• Estate planning. Create a will to ensure that your assets are distributed according to your wishes and avoid disputes among your heirs.
• Diversify income streams. Relying on a single source of income is risky. Consider starting a side hustle, entrepreneurial endeavor, or investing in stocks or property that provide passive income.

5. Invest for the Future
Investments are the key to allowing your money to grow over time and building future wealth. There are several investment options to consider. However, every option carries risk, so it’s important to understand your risk tolerance and have some capital you can afford to lose before you begin to invest.

• Stock market. Stock exchange-listed companies with strong financial performance offer growth potential. Apps are available that enable you to invest in local and foreign stocks.
• Real estate. Buying property or land can be a lucrative long-term investment, especially in rapidly-developing areas.
• Agriculture. Platforms are available to allow individuals to invest in agriculture, a potential growth sector.
• Treasury bills and government bonds. T-bills and bonds are low-risk investments with guaranteed returns, suitable for risk-averse individuals.
• Mutual funds. These managed funds pool your resources with others to invest in diversified portfolios, reducing risk and yielding potentially steady returns.

6. Plan for Retirement
Faced with the day-to-day challenges of money management, many people overlook retirement planning. But this step is critical for financial independence as we age.

• Enroll in a pension scheme. Based on where you live, there may be employer-sponsored or state-sponsored retirement plans in which you can enroll. In Nigeria, the National Pension Commission (PenCom) regulates the country’s Contributory Pension Scheme. Employees contribute a portion of their salary into a Retirement Savings Account (RSA) and employers match those contributions.
• Supplement with personal savings. Besides retirement plans or pensions, it’s a good idea to create a separate retirement fund as part of your savings plan. Even if the contributions you make now are small, they can help ensure that you have adequate resources in your golden years.
• Invest in long-term assets. Real estate or dividend-paying stocks can create additional income streams for retirement.

7. Become Educated About Money
When it comes to building a solid financial foundation, knowledge is power. At a time when financial scams and misinformation are prevalent, becoming educated is vital.

• Attend workshops or seminars. Many employers and other organizations offer free or low-cost financial literacy programs.
• Access online resources. Websites, blogs, and YouTube channels provide tips on budgeting, saving, and investing.
• Locate a trusted financial advisor. Consult professionals for personalized advice on making significant financial decisions.

8. Leverage Technology
Technology has revolutionized the financial landscape. A growing number of digital platforms are available to simplify saving, investing, and tracking expenses.

• Budgeting apps. Budgeting apps help you automate savings and monitor your expense.
• FinTech. Financial Technology (FinTech) provides platforms that offer convenient banking, lending, and payment services.
• Online investing. Investment apps provide opportunities to invest in global markets with minimal entry barriers.

Achieving a sound financial foundation requires a long-term mindset. People must resist urges to overspend or seek quick investment returns. Cultivating habits like living below your means, prioritizing needs over wants, and avoiding get-rich-quick schemes helps you establish and maintain that firm foundation. Reviewing your progress on a regular schedule allows you to adjust your plans as necessary.

Building a solid financial foundation happens through careful planning, disciplined execution, and commitment to lifelong learning. While you are likely to experience challenges like economic instability and inflation, you can face that volatility by leveraging available resources, adopting prudent practices, and seeking opportunities for growth. Financial independence and long-term success are achievable by taking small, consistent steps toward securing your financial future.