Harry N. Stout
89- Fixing Your Financial Foundation
Updated: Jan 15, 2021
Today is an update of a 2019 piece I wrote about what you need to do to fix your financial foundation to enable you to live through the financial ups and downs of life. I thought you might want to revisit this topic as it truly describes where we find ourselves today. We now read and hear the daily reports of the perilous and insecure state of the financial affairs of most American families. People are standing in line at food-banks, rent payments have been missed and millions of mortgages have gone into forbearance. American families are experiencing the highest level of financial stress in their lifetimes. This stress is being caused by:
The economic impacts of the Covid-19 lockdown
A federal and state financial safety net that needs to be reinvented for current times
Higher living expenses driven by increased inflation, particularly for healthcare costs
Technological innovation and the related impacts on job security and growth
Increasing automation replacing many jobs
Low wage levels and growth
Having little emergency savings and almost nothing saved for their retirement
Consistently record low interest rates; and
The pressures of the rising costs of higher education, including the drag of large amounts of unpaid student loan debt.
Overall, the financial state of the average American family is experiencing a regular barrage of vicious hits and challenges. Covid-19 is only the latest in a series of powerful body blows. What can these families do to protect their financial security? How can they protect their incomes, plan for increasing life expectancy, wade through health insurance reform, and deal with the impact of the costs of higher education? It is time to get back to the common-sense financial basics. As families emerge from the current economic conditions, they need to become more financially educated and understand the reality of what having a strong financial foundation does to reduce stress and anxiety in their day-to-day lives. Seven Basic Principles for Building a Strong Financial Foundation Based on my over 25-year career in the financial services business, here are the seven simple actions that consumers should be taking: 1. Save on a systematic basis. As older Americans can attest, they have seen the importance of systematic savings plans. It is amazing what can be accumulated with a small amount put away each pay period or by using money received from special occasions. Individuals need to start building their financial foundations by using available tax advantaged 401K, IRA, Health Savings Accounts, or other plans plus life insurance and annuities as basic building blocks. A little put away today can grow to a very reasonable sum using these tax advantaged products and plans.
2. Use time to your advantage. The time value of money and the power of compounding are concepts that are based on putting money to work over an extended time horizon. Most households aren’t saving enough for their 30 years of life expected after they stop full-time work. Individuals need to create a plan and have the discipline to accumulate money for later life despite setbacks and unexpected life events. Life insurance and annuity products can help make this a reality.
3. Protect against the loss of employment income and premature death. A basic concept in financial planning is to protect against your downside risks. For most people, the main risks are the loss of their income or life. Protections for these risks can be purchased today at the most affordable rates in decades with life insurance and disability income products.
4. Feed savings for later life. Life expectancy continues to increase. Can people save enough during their working lives to have assets they can draw on to last that long? In order to fund living expenses for up to 30 years after full-time work ends savings need to be fed often and on an ongoing basis. Adopting a private retirement savings plan, as early in life as possible, is a must.
5. Invest in health and wellness. Having basic health insurance coverage and performing basic physical and mental self-care are essential to a strong financial foundation. Just over a third of Americans have basic dental insurance coverage in this day and age.
6. Live below your means. This is the hardest principle for most people. Distinguishing between what we need and what we want is one of the keys to building a strong financial foundation. Controlling spending to get just what is needed takes discipline but will pay major dividends over a lifetime.
7. Use debt carefully. Over their lifetimes, consumers will likely need to use debt for a mortgage, car loan, or to obtain an education. Using debt wisely is key, but to have mandatory repayment amounts that require borrowing of next week’s pay to cover this week’s bills is self-destructive. Families should only incur the debt they can comfortably afford to service.
Summary Like the Hall of Fame basketball player Michael Jordan has said, he did not worry about being productive in key games because he had practiced enough to have the right fundamentals in place. For individuals and families the financial fundamentals are just as important. You will not be able to financially succeed in life if you don’t follow the seven basic principles.
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