7 Steps to a Solid Financial Foundation

Have you ever wondered why some people never seem to get out-of-sorts when faced with an expected car repair bill or decreased hours at work? Why are some people able to roll with the punches while others are left floundering in a financial mess? Some people are able to adapt to less-than-desirable financial circumstances because they have built a solid financial foundation. The good news is that you can too!

What is a Financial Foundation?

A financial foundation is the groundwork you lay and continue to build on with every money decision you make, whether you realize it or not. If your financial foundation is solid, you will continue to build up and grow stronger.

Your financial foundation began to take shape when you were a kid and has been influenced by your upbringing, your parents, your friends, your spouse, and even the economy you were thrust into when you started working as an adult. My husband and I graduated from college and entered the workforce at the beginning of the Great Recession, and that has had an enormous impact on our financial foundation as a couple.

No matter what kind of financial history you have and what kind of foundation you have in place, you can start improving it right now. Think of how a new house is built and how much care is put into the excavation and concrete work before any framing takes place–that is the foundation, and much work is put into making it solid.

If you think you’re too far along to start over, consider a well-built old house. Many wonderful old houses sit on damp, moldy, dirt floor “basements” that start to cause problems around the foundation. Sometimes people will dig out basements one shovel full at a time until there is enough room to reinforce it so that the house can continue to stand.

Matthew 7:24-27

These words from Matthew 7:24-27 reference building a house on a solid foundation, but they apply to building everything in our lives on a solid foundation:

“Therefore everyone who hears these words of mine and puts them into practice is like a wise man who built his house on the rock. The rain came down, the streams rose, and the winds blew and beat against that house; yet it did not fall, because it had its foundation on the rock. But everyone who hears these words of mine and does not put them into practice is like a foolish man who built his house on sand. The rain came down, the streams rose, and the winds blew and beat against that house, and it fell with a great crash.”

How to Build a Solid Financial Foundation

Building a solid financial foundation will take work. However, it doesn’t actually take a lot of money or expertise. You need basic financial literacy (which we will cover) and a willingness to think (and talk) about money in a new light. The following 7 steps will guide you as you start building your solid financial foundation.

1. Ask Yourself Why You Need Money

This is not a hypothetical question!

The answer to this question is the driving force behind most of your financial decisions. Where you live, what you do for a living, how you spend your free time, and so many other life choices are tied to your attitude about money and why you need it.

Grab a sheet of paper and write down at least 5 reasons you think you need money.

2. Name Your Goals

On that same sheet of paper, list your goals. Financial goals, retirement goals, family goals, fitness goals, all your goals.

How many of these goals are money-oriented? How many are not? Compare your goals to your 5 reasons from Step 1. Do they go together? If not, it’s time to start rethinking why you actually need money.

If your goals include things like paying off debt, taking a dream vacation, building a new house, or accumulating enough savings to retire early, you have money-based goals. In order to accomplish these things, you will need to establish and stick to a detailed and personalized financial course of action.

If your goals include things like reading, hiking, volunteering, or gardening, you have experience-based goals. In order to accomplish these things, you will need to plan for living expenses and emergencies and follow basic sound financial principles. However, you may not need a detailed and personalized plan if your goals are well within your means.

3. Track Your Expenses

Does the thought of recording every single purchase you make and bill you pay overwhelm you? It can be time consuming, but it’s also eye-opening! Many of us have no idea where all our money is going because so much of it is done via online bill pay or credit card. It’s easy to lose track of how much we spend on Amazon when it’s lumped into the monthly credit card statement with groceries and fuel and life insurance premiums.

But that’s exactly why making the effort to track your expenses is so important to building a solid financial foundation! Before you can get a handle on our finances, you have to be aware of what your current situation is and what habits you have created.

One of the easiest ways to start tracking your expenses is to use a spreadsheet template like “Annual Budget” in Google Sheets or “Personal Monthly Budget” in Excel. In this step, focus on your actual expenses. Don’t worry about your projected budget yet. It makes so much more sense to figure out what your actual monthly expenses are before you develop a realistic budget.

Enter each purchase made on your credit card according to the date you made the purchase and the category of the item. Don’t lump a month’s worth of credit card purchases into one category.

After tracking your expenses for at least a month or two, take a look at your spreadsheet. What surprises you? What frustrates you? Where are you spending more or less than you expected?

4. Set Up a Budget

Now that you’ve been tracking your actual expenses and have a real idea where your money is going, it’s time to set up a budget. There are several benefits of having a budget, but the most important is that it lets you direct your money where you want it to go.

To start a budget, first enter your monthly income. Some people prefer to start with gross income and then budget in taxes. Others prefer to start with net income and not budget in taxes. Do whichever makes more sense for you.

Discretionary v. Non-Discretionary Expenses

Next, take your actual expenses from Step 3 and divide them into two categories: non-discretionary (meaning they are necessary–housing, utilities, loan payments, etc) and discretionary (meaning they are by choice–entertainment, clothing, gifts, etc.). Add up each category. How does each spending category compare to your monthly income?

Now enter your individual non-discretionary expenses into your budget spreadsheet. Be as detailed as possible, separating out each utility, each loan payment, etc. The more specific you are in this step, the more you will be able to track and direct your money going forward.

After you account for all your non-discretionary expenses, it’s time to go to work on your discretionary expenses. Do you want to include all of what you’ve been spending in your actual budget? Or is this the right time to pare down and become more intentional with how you spend that “extra” money?

At this point, look at how much you should have left to save after the expenses you’ve budgeted for. Now ask yourself how much you actually want to be saving. What can you cut back on in order to reach your goal? Adjust your discretionary expense budget accordingly.

Is giving important to you? If so, create space in your budget for giving as well. Again, adjust your discretionary budget until you have allowed for monthly giving.

Use your budget and continue tracking expenses for a month or two while monitoring how sustainable it is. Make any adjustments needed as you go.

Bank Reconciliation

Keep a running record of every payment you make from your bank account. When you receive your monthly bank statement, take the time to review it and match up your records with the bank records. This is called a bank reconciliation, and it will allow you to keep track of anything you might have forgotten to record as well as any checks that haven’t cleared yet. Do the same thing with your credit card purchases and credit card statement.

For more help with setting up a budget in the Excel “Personal Monthly Budget” template, check out this post on creating a budget in Excel.

5. Start Planning for the Future

Once you have a sustainable budget in place, it’s time to start planning ahead.

Take another look at the goals you wrote down in Step 2. What will you need to reach those goals? Do you need to save a certain amount? Do you need to pay extra towards your debt?

Now think through what you will need to have in place before you can reach those goals. What if you lose your job? What if your car were totaled? Consider what you will need to have in place if faced with hardship so that your life and your goals are not completely derailed. None of us knows what the future will bring, but we all can learn to expect the unexpected.

The first step of your plan is to save up and set aside at least one month’s expenses. We’ll build on this as we go, but it’s really helpful to stay focused on achievable “checkpoints.”

After saving one month’s expenses and setting them aside, decide what to tackle next. Do you need to continue saving up to six month’s expenses? Or do you need to focus on paying down debt? Remember that the more debt you pay off, the lower your monthly expenses will be!

Cool Tool: Here is a link to an interactive credit card payoff calculator that will let you see the changes to total interest and number of payments depending on how much extra you pay each month. It works for other debt as well.

http://www.cewilliamsfinancial.com/resource-center/money/paying-off-a-credit-card

Once you save a little and pay off some debt, reevaluate what your next step should be. Keep this process going, knowing that you are doing the work to lay that solid financial foundation!

6. Assemble Your Financial Team

Who do you need to recruit for your financial team? It will depend on your specific situation, but generally you will want to build a working relationship with the following people: financial planner, tax preparer, insurance agent, attorney (specifically one who specializes in estate planning, wills, trusts, etc), local bank lender/manager, accountability partner, and an emergency contact.

This is not something to rush into. Research experts in your area. Ask people you trust who they use. Search Google and LinkedIn. There are many qualified professionals out there, but it’s important to find one you feel comfortable with. Some will offer free consultations. Reach out to your top 2-3 choices and meet with them. Bring your relevant questions and concerns and ask how they approach those situations. Don’t ask them to prepare specific plans or advise unless you’re ready to hire them. This step is not about getting free advice; rather, it’s about building rapport and finding a good fit.

Where to Start

Not sure which professional to seek out first? Look at your situation and determine what you think you need help with first/most. For example:

• If you just started your own business but aren’t sure what that means for your taxes, look for a tax preparer first.
• If you have a blended family and are concerned about how assets will be divided when you pass away, start seeking out an estate planning attorney.
• If you are concerned about ever having enough money set aside to comfortably retire, find a financial planner.
• If you don’t know where to start, see if you can find a trusted friend or mentor to be an accountability partner.
• If you handle your family finances and no one else knows your account numbers, passwords, whether or not you have life insurance, etc., start by finding an emergency contact person.

Your financial team will bring a wealth of knowledge and resources to you. This is the group of people who will help you stay on course for the long haul. There is peace of mind in knowing who to call when the unexpected happens and disrupts your plan.

7. Keep a Healthy Perspective on Money

Money is a resource to be used, not a goal in and of itself. Money really can’t buy happiness. At best, money can be used to create a life that matters to you.

As you work on building a solid financial foundation, keep a long-term perspective. Solid foundations are laid block by block, row by row, over time. Start doing the things today that will get you where you want to be next month, next year, and in your next phase of life.

One Last Note

Don’t get discouraged and overwhelmed. Focus on one or two things right now that you can change. Track your expenses instead of wondering where all your money is going. Adjust your budget so that you can direct more money towards your debt, even if it means cutting out something fun for awhile (and then find free fun things to do instead). If you’re really struggling, go ahead and find an accountability partner or a financial planner who can work through it with you.

Money does play a huge role in our world, and we have to learn how to manage it. But the more important you think money is, the more it will manage you. Do the work to lay your foundation, and then remember to enjoy the life you are building.