How To Build Your Financial House

A Firm Financial Foundation Matters Most

When building a house, the first thing you think about is a solid foundation. Without that, anything constructed above will be unstable and susceptible to collapse. In recent years, we are hearing more about sinkholes and the risks to houses built above them.

Building the First Financial Floor

  • An injury resulting in temporary time away from work (and your paycheck)
  • A leak in your water heater necessitating the purchase of a new one

More Rooms on the First Floor

Life and disability insurance are additional rooms to consider on the ground floor of your financial house. Term life insurance makes sense if someone else (or your entire family) is dependent upon your income to maintain a reasonable standard of living.

Constructing Level 2 of Your Financial House

Retirement

Defined here as the termination of active income generation, retirement is something everyone must consider. Or at least everyone who isn’t already there. This is truly a case where earlier is easier. Time is retirement’s best friend.

Homeownership

Once considered the American dream, and it may still be for some. For others, homeownership can be a nightmare. It usually is NOT a wealth-building tool unless you have DIY skills, inherit a property or live in a market experiencing a real estate bubble.

Bucket List

To this point, we have really only talked about the “should” of personal finance. These are smart, responsible and, let’s face it, a little boring. Now let’s get real and personal for a minute. None of us knows if we will even wake up tomorrow much less live to spend down our retirement accounts. All of us have goals and desires that fill our thoughts and inspire our dreams.

Legacy

Finally, now that you have some assets, it’s important to consider what should happen to them if your time on the planet is shorter than expected. Legacy sounds like a grandiose concept, but it is really just the gift of money by will or beneficiary designation.

Mindful Spending

The “staircase” between level 1 and 2 (and on up) in this model is mindful spending. This is a euphemism for ‘spend less than you make and make what you spend meaningful to you’ and without it, there are only a few ways to move from floor to floor. Windfalls from the lottery or a significant inheritance might be seen as elevators allowing you to speed up construction but they don’t change the fundamentals, and they obviously cannot be counted on.

Taking it Up Another Floor in Your Financial House

It’s impressive to consider the progress made in this financial house project.

Saving for College

Let’s start with education savings. Many people have strong feelings about paying to or helping to pay to, educate their children and emotions always play a role in personal financial decisions. One important point to remember — loans are possible for education but NOT for retirement. Assuming you’ve considered that and still wish to set aside money for future college costs, then there are a couple of considerations.

Savings and Investing

If you don’t have children or are not considering paying for college, then the next room to consider on this floor is after-tax savings. In truth, you already considered this room, but we specifically labeled it “bucket-list items” and suggested the creation of a separate savings or investment account.

Long-term Care and Umbrella Insurance

The final two rooms on this floor are additional types of insurance. The first is long-term care insurance which covers the cost of nursing home care. Medicare and other insurance policies will only cover nursing home stays if there is a medical (rehabilitation) need.

There’s Even an Attic — Estate Planning

Now that you have constructed the financial house of your dreams, it is time to add an attic. On this top floor, we will look at estate planning. This can be a challenging and emotional topic. But you’ve worked hard to get your house in order, and you deserve to be in charge of what happens to it.

The Financial House That YOU Built

It may be apparent to you why estate planning is assigned a floor all its own. It is a big subject, and this article is a summary blueprint or model. In fact, many of the levels and rooms of this financial house can and should be explored further and tailored to your particular circumstances.

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Women Who Money

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