The Right Tools to Build Your Financial House
Similarly, you also need the right tools to build your financial house… that is, the financial situation you want to build to shelter the other aspects of your life.
Aside from the building blocks of personal finance, the tools in your financial toolbox are the most important things you need to tend to when it comes to your finances. Learning how to properly use the tools in your financial toolbox can have a tremendous impact on your financial success.
What are these tools, and how can you use them to build the financial life you want for yourself?
Tool# 1 - Your Career
Believe it or not, your career is going to be the single biggest investment you make. Think about this for a moment and let it sink in because it is really important. How is your career an investment?
First, some definitions.
A job is something you do for money from one point in time to another point in time.
When we say your career, we mean your entire professional life. Your career includes every job you’ve ever had, any professional affiliations you’ve ever had, and any working relationships you’ve ever had. Your career will span over your entire lifetime from the time you start your first job to the time you completely stop working.
You invest your time into doing a job and getting better at it so you can make more money or get a better job. In addition to time, most people also invest money into their careers. If you buy work clothes, you drive or take public transportation to work, or you pay tuition for school, you are investing money into your career. In exchange for the time and money you’ve invested into it, this investment provides you with income now and the possibility that your income will grow in the future.
If it cost you more to go to work than the salary you made working, it wouldn’t be worthwhile for you to invest in a job, unless the future prospects were such that you would make more money over an acceptable period of time.
If you’re going to be working for a long time, you should have an idea of what you want out of life and have a career strategy developed so that you know how you’re going to get there.
Tool# 2 - Your Checking Account
Think of your checking account as the tool you use to hold the money you’re going to need to live your life. This is the account that you will pay your expenses out of.
Having a checking account is important, but perhaps more important than simply having a checking account is making certain that the account has enough money in it to pay for your monthly expenses at all times. The idea here is to be able to cover any relatively minor, but unexpected, expenses that may pop up during any given month with the cushion you’ve established in your checking account, as opposed to having to dip into your savings account or overdrafting onto a credit card to cover the shortfall.
Tool# 3 - Your Savings Account
Your savings account is the tool that is going to hold the money you’re going to need at some point in the future. This account should be used to save for goals you have. Savings goals can be short term, such as saving money to buy a new computer, or long term, such as saving for a down payment on a home or saving for your child’s education.
There are two very important underlying concepts in having a savings account and using it in this manner.
The first is the importance of establishing goals and learning to achieve them. Goals keep you focused and keep you moving in the direction you want to be moving, which is monumentally important for your finances. Achieving those goals will increase your confidence and provide you with the motivation to continue saving.
The second is the importance of learning to save for the things you want. When you do this, you trade the feeling of instant gratification, when you get what you want right away, for a much healthier sense of achievement and accomplishment that will help promote good financial habits going forward.
Tool# 4 - Your Retirement Accounts
Your retirement accounts are going to be the tools that hold the money you will need to make sure you have plenty of income when you are older. Notice we didn’t say when you retire, but when you get older. You will still be working, or doing something related to your career, and that will provide you with income in your later years. The income from your retirement accounts will supplement your career income.
This is a different view than most people have of the reasons for needing retirement accounts, but we think given the long term trends that are beginning to take shape, this view of retirement is safer and more realistic than the conventional view shared by many.
Bottom line.. The more money you have in your retirement accounts, the more career and lifestyle options you’re going to have later in life.
Tool# 5 - Your Credit
Your credit is the tool by which you are judged by any institution that is considering putting their trust in you financially.
Whether you are applying for a credit card, a mortgage, an auto loan, or even a job; institutions check your credit in order to determine whether or not they want to do business with you. If your credit is bad, you may not be able to get the money you need to borrow or the job you are applying for. If you do find a lender that is willing to lend you money, they will probably charge you a high interest rate in exchange for taking a financial risk on you.
Credit Scores range from 300 to 850, and they give the lenders an idea of how likely you are to pay your bills on time and how likely you are not to default on your debts. Employers view low credit scores as signifying a lack of responsibility, and are reluctant to hire someone who may be irresponsible with their job duties or the company’s money.
You can see how having a low credit score can impact your ability to move ahead in your career, which you must avoid since your career is the most financially important thing you have.
Tool# 6 - Your Debts
Debts are tools of leverage. Leverage is when you use other people’s money to make more money for yourself. There are several kinds of debts, which we go over in our Building Blocks of Personal Finance lesson, and it’s important to understand the different kinds so that you’re able to use them in a way that benefits your financial situation.
Debt can be very useful in situations such as allowing you to afford to purchase a home that you are going to live in for years to come or taking out student loans so you can further your education and be able to get a better job when you graduate.
What you want to avoid doing is piling on the wrong kinds of debt and using debt to finance a lifestyle that is beyond your means.
Tool# 7 - Your Budget
True or False: You create a budget when you sit down and write how much you are going to spend on things in the future.
The correct answer is false. What you did was generate a forecast.
What is the difference between a budget and a forecast? Discipline. When you create a budget, you are making an agreement with yourself that you will have the discipline to only spend what you have projected for each expense category. Discipline is the most important component of a budget because without it, you are unlikely to stick to the spending goals you’ve established for yourself.
When formulating a budget, it is not only important to be disciplined, but also to be realistic. If your spending goals are not realistic, you are likely to overspend. What usually happens next is you become discouraged and then the budget goes out the door.
Tool# 8 - Your Insurance Coverage
Insurance coverage is the financial tool that protects you in case of emergencies. Ensuring you have good coverage is essential to keeping your financial house safe.
There are several types of insurance, but some of the main ones you should carry are health insurance, homeowner’s insurance if you own a home, auto insurance if you own an automobile, and life insurance if you have others in your life who are financially dependent on you.
The specific amounts of each insurance you should have vary from person to person and are dependent on how large your family is, how much your home and car are worth, and how many people you have depending on you, among other things.
Tool# 9 - Your Personal Financial Statements
Your personal financial statements are what you use to keep score financially. They let you know the status your finances and allow you to see where there is room for improvement.
The financial statements we are referring to consist of a personal balance sheet and a personal income statement. We will cover these in more depth in future posts, but here are the basics.
A balance sheet shows you what you have, what you owe, and what your net worth is. It tells you what the value of your assets are and how much debt you are in as of a certain date.
An income statement shows you how much you make, how much you spend, and what your net income is. It shows you how much money is coming in, where you are spending it, and how much you are saving over a period of time.
Some of the other questions your personal financial statements can help you answer are whether or not you are saving enough, whether or not your net worth is increasing or decreasing, and how you are allocating your money.
Tool# 10 - Your Finavigation Report
Your Finavigation Report provides you with your own personal financial statements, as well as personalized guidance to make you aware of problems you may have overlooked.
This report also helps you prioritize your financial goals and calculates for you how much you need to save every month in order to achieve those goals, in addition to figuring out for you how to best pay down any debts you have in the most financially-efficient way possible.
The best part about this is that we’ve put this together for you and it’s absolutely free.
Just create an account on Finavigation or log in to your existing account and you’ll have access to the My Account section, where you can enter your information and run your very own Finavigation Report.
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