Do you have a strong financial foundation? If you have to think about this question, chances are that your financial foundation needs work. Personal-finance 101 is not taught in many high schools and many people don't learn the basics, such as saving money, budgeting and credit management, until their adult years. But whether you're just graduating high school or you're a fully grown adult, there are ways to build a strong financial foundation. Here are seven signs that your financial foundation is on the right track.
Even if you can’t deposit a lot into your savings account, the fact that your account is steadily increasing is one sign of a strong financial foundation. Having a savings account is important for various reasons. It provides emergency cash if you lose your job or have an unexpected bill; and if you're saving up for a house or retirement, a savings account can put you closer to your goals. To grow your account, deposit something from your paycheck each week, and save free money like work bonuses or tax refunds.
If you're relying on 401(k) or social security for retirement, you need to make improvements to your retirement plan. Both are a good start, but to ensure a comfortable retirement and to maintain your lifestyle, you need to diversify. For example, in addition to a 401(k), get an individual retirement account or look into other investments, such as stocks, bonds and certificate of deposits.
I recently read that the average household has approximately $13,000 in credit card debt. Consider yourself on the right track if your credit card balances are much lower or zero. And if you have huge balances, get a plan to pay off debt. Some people take extreme measures to get out of debt, such as not shopping for an entire year and selling personal belongings. Once your debt disappears, pay off new charges in full each month.
If you have auto loans or mortgage loans, and you pay more toward your principal on a regular basis, that’s a sign of a good financial foundation. Making extra principal payments reduces how much you owe in interest, and ultimately pays off a loan early. Call your lenders to see if they’ll allow biweekly payments. With this approach, you pay one half of your loan payment every two weeks, which is the equivalent of one extra payment a year.
Whether it’s health insurance or life insurance, having sufficient insurance is another sign of a good financial foundation. No one is invincible, and if you don't prepare for the unexpected, you could end up paying for property damages out of pocket. If you have a family, a life insurance policy can provide financial support after you're gone. Have a financial planner or an insurance agent review your policies.
People with a strong financial foundation have an estate plan and will. While alive, you’re able to decide how your assets will be divided after your death. And with a will, you can select a person to care for your children if you die before they turn 18. Without anything in writing, a court decides how to divide your assets and grants someone guardianship of your children.
It doesn't matter whether you have a little or a lot financially, budgets are necessary. This is the best way to know what's coming in and what's going out each month. And with a budget, there's a good chance that you won't overspend and have enough cash to cover all your bills.
A firm financial foundation is something to be proud of. But if your foundation needs work, that's okay too. It's all a matter of determining areas that need improvement, and creating a plan to reach your goal. What are other signs of a good financial foundation?