How to Build a Financial Life

Have you ever been inside a house or building that is in disrepair or feels like at any moment, it's going to fall down? Not too good of a feeling if you have been in that position, right? 

If your financial life represents that feeling of disrepair or worse yet, like it's going to collapse, you might want to consider some rebuilding options. If you were going to start over and build anew, where do you think the most logical place to start would be? The foundation of course!

Did you know your financial life represents a structure, much like a building or a house? In order for a building not to collapse, the foundation has to be strong. The foundation of your financial life consists of normally 5 or 6 components:

1. A Plan

2. Legal Strategies - wills, trusts, estate planning, POA, etc.

3. Proper coverages for auto & home insurances

4. Emergency Funds

5. Identity Theft Protection

6. Life Insurance (the "right" kind)

Having these protections in place will ensure any unforeseen life events from getting worse...a car accident, air conditioning goes out, roof repair, identity compromised, premature death of a household income earner, etc. Many people are 1 event away from a financial disaster. Multiple surveys point out that many families could not handle a $1,000 emergency expense. Scary stuff but entirely preventable with a little pre-planning and action.

As we move up into the walls of your home, we've got debt. As a previous article mentioned, debt is consuming people's wealth in this country. With credit card, student loan, and private debt skyrocketing in recent years, it's no wonder why many people list debt as a high financial concern. The best way to approach debt is to acknowledge that (A) I have got a problem & (B) curtail spending that aligns with your lifestyle. Don't hide from creditors but instead establish a communication and payment plan with them in order to not destroy your credit, if that's something that's important to you.

Secondly, list all of your debts in order of least to greatest with the following parameters established: name, amount owed, minimum payment, actual payment, and interest rate.

If there is excess money going towards your debt budget, focus this on the smallest amount first while still paying and remaining compliant on the others. Mark them off as you pay them and celebrate the small victories over time. Be considerate of adding to your Emergency Fund at the same time as to avoid any future "unforeseen" events.

Retirement savings is another "wall" component. The number one rule of finance is to pay yourself first and certainly funding retirement initiatives ranks highly in matters of importance. To get a gauge for how much to put away on a monthly basis, use the annual spending x 20 strategy. For example, if you're going to live off of $50,000 per year for 20 years, that's $1M needed. If you're 40 years old at this time and you have 25 years until retirement, then monthly savings should be around $3,333. Don't forget to add a little for inflation, which is the cost of living going up annually. 4-5% increases are considered sufficient but if comfort levels align with higher amounts, then adjust for that.

Finishing off the walls of the home are education planning for kids. It's certainly not inexpensive to send kids to college these days but much like retirement planning, the sooner you begin the better. Set a target goal and deduce the monthly savings required to get there. Be advised, tuition for college goes up on average more than 10% per year.

Finishing off your financial house is the roof. Your roof consists of two components: (1) A Self Pension Plan & (2) Long-Term Care Insurance. Regarding the self pension plan, the focus in your retirement years is twofold--not lose money and not run out of money. Developing a self pension strategy represents nothing more than having at least one (or more) income streams for life. These can come from investments, real estate, or anything that has a monthly payout. As long as it doesn't stop or decrease, which will impact your quality of life.

Lastly, long-term care insurance will defeat the biggest unknown in retirement: an unforeseen or unplanned medical event. Major medical challenges in retirement often lead to aggressive spend downs in retirement assets, liquidation of non-retirement assets, and using equity in homes. To avoid these pitfalls, it's wise to begin planning for these occurrences both financially and proactively, with wise health choices.  For a baseline, most long term care events last between 3-5 years with memory-related conditions lasting longer.

As with any house, your financial home will require updates and maintenance so be sure to pay attention to anything that needs refreshing, tweaking, or changing. Often the use of a financial professional in this area helps to keep you on track and aware of any adjustments that need to occur.

Take care of your house and it will take care of you forever :)

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About PhilanthroInvestors

PhilanthroInvestors combines traditional venture capital financing tools with philanthropic principles to achieve social impact. By secure, meaningful, and profitable investments, they bring capital and also change people’s lives.

PhilanthroInvestors are currently working in four sectors – Housing, Water, Health and Environment – and will be adding more investment sectors in the future. PhilanthroInvestors founder Ivan Anz owns companies on three continents and has investors in 14 countries.

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