With Canadians facing all time highs in consumer debt, understanding what it means to have a solid financial foundation is critical to long term financial stability. You see, many companies try to provide you with certain services and products that only benefit the company and are not always the best solution for you and your family. When you have someone trying to sell you on locking in your savings into a low interest rate GIC (guaranteed investment certificate) that can't even cover inflation (we'll discuss that in another post) or someone advising you to invest into mutual funds when you have a lot of credit card debt, these companies are not putting your best interests at heart. They are not taking care of all aspects of your financial situation in an effective order.
We need to grasp the fact that a solid financial foundation comes from an understanding of how to arrange our financial priorities. It can be broken down into four different levels of needs: protecting yourself and your family, managing your debt, developing an emergency fund, and investing in growing assets.
Let's start with "Protect yourself and your family":
Protection comes in the form of insurance. Now, think about it like this: if you became disabled and couldn't work, you would lose income that would help support you and your family. What if you passed away suddenly and your family was left with the burden of paying the mortgage, car payments, utility bills, groceries and more, and that pay cheque they relied on no longer comes in every two weeks? With insurance, you can protect your family from such risks of financial hardship should that unfortunate event happen too soon. The small cost you pay each year is worth the peace of mind for life.
This leads me to "Manage your debt":
Now that your family is protected, you can start focusing on paying off the car payments, the credit card debt, etc: the debt with high interest rates. You want to focus on this step next because not paying off debts high in interest could end up being very costly in the long run. Who wants to pay 22.95% interest on their credit card purchases? Not me! Pay off the highest interest debt ASAP. If you can't pay off the bill each month, changes need to be made on your spending and you may even have to consider consolidating your debt at a lower interest rate, but we'll talk about those things another time.
Once you have your debt managed and in control, this is the time to "Develop an emergency fund":
Some of us work for ourselves and some of us are employed with job stability. No matter the situation, sometimes life happens and we end up in a position where the money coming in isn't covering the bills going out. Setting up an emergency cash savings fund you can access in a heartbeat will help secure your family in such a position.
Lastly, we can then look to "Invest in growing assets":
Now that we've built a financial foundation, we can top it off with our investing needs. Money doesn't hold its value over long periods of time. Thanks inflation! Because of this, investing our extra funds into growing assets like stocks, bonds, real estate and more, can help beat inflation, grow our wealth and fund our retirement (and if we're tackling it right, even early retirement)!
You see, with these four principles, we can organize our behaviour and choices with how we manage our money. We should focus on building the base before tackling the top. Just like a house, you don't build the roof first! You lay the concrete foundation, build the walls and cover it with the roof. Setting up a solid financial foundation is important because it organizes how we prioritize our cash flow and its overall effectiveness in wealth creation. Tackling these principles in the proper order allows for a better chance of achieving financial freedom sooner. It is possible and the knowledge is out there for you to learn how to take control of it yourself. Join one of our free workshops to learn more.