While investing in the newest currency, technology, or financial instrument out there can be both interesting and lucrative, the reality is that true sustainable wealth is built when you have a strong financial foundation in place. That means starting with the basics. I recommend streamlining and simplifying as often as possible, which is why I want to spend some time emphasizing the four basic pillars of financial health.
Emergency Fund
I’m always confused when I get pushback from my clients on building an emergency fund because this is the most basic and foundational piece of your financial health. In a country that doesn’t have many social safety nets in place, this is your safety net. Get laid off? Emergency fund. Have legal trouble? Emergency fund. Need to patch your roof? Emergency fund. Especially in a world where we have all survived (are surviving?) a global pandemic, it should be more obvious than ever that an emergency fund is a financial imperative.
Many of my clients don’t like the idea that a fully-funded emergency fund is several thousand dollars sitting in a savings account. However, I do urge my clients to keep these funds in an FDIC insured account. If you’re in an emergency that necessitates using a good portion of your fund, it’s highly likely that there is a larger macroeconomic crisis going on that would also affect your portfolio. Why risk a potential dip in your savings when you need that money the most?
I also want my clients to make sure that their emergency funds are in an account to which they have easy access if they need to use the money right away. While I do recommend keeping those funds in a different bank than where you have your primary spending account, you should have them in a place where you can transfer funds in 2-3 business days via an online portal as opposed to having to set up a taxable sales event or speak with a broker.
Spending Plan
Pillar two in your financial foundation is your spending plan. You may think of this as a budget, but I consider the spending plan to be your truest financial strategy. I start all of my clients with a goals-based budget that takes their monthly net income, emergency savings needs, saving and investment goals, and monthly variable spending into account. Regardless of your financial situation, it’s important to do a few things: always be saving, make sure your money is going toward something you are excited about (a goal), and have an idea of how much you can afford to spend on variable expenses each month.
Once you have your spending plan figured out, the easiest and most effective way to stick to it is to automate as much as possible. Split your direct deposit to have some funds going toward your emergency savings, some going towards your life goal savings, some going toward your fixed expenses, and some going toward other investments. Autopay as many of your bills, including credit card bills, as possible.
Determine how much you can afford to spend on variable expenses and give yourself an “allowance” of that much money into a separate account so that when the funds are gone, you’re forced to stop spending. The goal here is to know that you have money strategically and consistently going toward all of the categories that are most important to you without having to spend a lot of time thinking about it.
Retirement Fund
Regardless of your age or temperament, we should all be so lucky to live to an age where we no longer want to or have to create an income in order to live our lives. Ideally, we will all reach a point where we have enough savings set aside that our money can create that income for us. Whether you’re 24 or 54, it’s imperative that you start saving for your future, because for some of us the need to stop working won’t be a choice. If you have access to a tax-advantaged retirement account at your work, make sure you’re using it at least up to any available match your employer offers. That match is free money and it does not behoove you to leave it on the table. Even if you’re self-employed or a freelancer, there are retirement accounts available that will help you save money on taxes now or when you’re using the funds in retirement.
Getting this piece of the equation right will help you make sure the future version of yourself is taken care of and is the first major brick on the road to generational wealth. While we tend to think of generational wealth as having major investments, businesses, real estate, or a huge college fund for our kids, by making sure you can pay your own bills and take care of yourself in retirement, you’re allowing your kids to know that they can focus on taking care of themselves as they move forward with their careers.
Unfortunately, a lot of us are in a cycle of having to pay a “success tax” or use a significant portion of our current resources to support those around us who didn’t prepare as well. While this is something we want to do for our loved ones, it also makes it that much more challenging to maintain financial health. Break that cycle for your future generations by taking the steps today to make sure you can take care of yourself in the future.
Life Goals Plan
The final pillar of your financial foundation is your Life Goals plan. The part of my job that I love the most is helping my clients get clarity around their big life goals. These can and will change multiple times over the course of your life, but it’s imperative to have an idea of what you’re working for and what you want your financial resources to do for you. One of the first things that I ask my clients is what they want their lives to look like over the next 1-3 years, 4-5 years, and 5 years and beyond. The important thing to remember is that in our capitalist society, our life goals are money goals, so you have to think beyond strictly financial terms such as, “I want to have a fully funded emergency fund” or “I want to pay off my credit cards.” Sure, those goals are great, but it’s important to understand the effect they will have on your actual life.
A life goal that you may create is something like, “I will earn over $100,000 this year in order to start contributing toward a monthly pampering fund, save for a down payment on a personal getaway cabin, and start investing an additional $2,000 per month so that I can reach F.I.R.E. within the next 10 years.” This type of goal speaks to the “why” of your financial needs, which makes your goals more meaningful and therefore easier to stick with.
In order to do something well, no matter what that thing is, you must have a strong foundation in place. I consistently encourage all of my clients, regardless of where they are in their financial journeys, to go back to these basics. Keeping these four pillars strong allows room for my clients to either take some risks or rest comfortably in the knowledge that they’re setting themselves up for financial health.
Bevin Morgan is a Financial Trainer at The Financial Gym who has paid off over $200K in debt to become debt free. She is a real estate investor and self-proclaimed personal finance nerd. She specializes in helping Black female entrepreneurs and creators gain confidence in their financial futures with a touch of woo woo. She is on a personal mission to help bridge the racial wealth gap in this country. Black families hold less than 10% the average wealth of white families. Instilling financial confidence in Black women is one small step she’s taking to help change that.
Find her at www.bevinmorgan.me or on Instagram, @bevinmorgan.
