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Building a solid financial foundation is exactly like building houses and skyscrapers. They should be built from the ground up! No one starts building roofs without laying the foundation first.

The same holds true when it comes to building wealth. There are no shortcuts. It is not right to simply jump directly into investing while ignoring our cash flow or emergency fund or while failing to account for a sufficient insurance coverage, or when our debts continue to pile up. 

What is the right thing to do then? Build and cement your rock solid financial foundation by following these five simple steps:

STEP 1. INCREASE YOUR CASH FLOW

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Managing Cash Flow is all about accounting for how much money you are earning versus how much money you are spending. Ideally, the higher the amount of money that comes in, and the lower the amount of money that comes out, the better.

There are basically two effective ways to increase your Cash Flow:

1. Increase your Income. To boost income, you have to have different sources of active and passive income. Active income includes wages, salaries, commissions & business revenues, and Passive Income such as rental and investment income.
2. Cut Expenses. Look at your current monthly expenses and see how you can reasonably cut or reduce them.

STEP 2. PROTECT YOUR LIFE AND HEALTH THROUGH INSURANCE

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Life is full of risks or uncertainties such as untimely death, accidents, critical illness, disasters, and business shutdown. It does not matter how big your income is or how wealthy you are, if you do not have an insurance, any major illness or emergency can wipe out all your assets and savings.

Insurance provides a sense of security because it used as hedge against financial loss brought about by risks and uncertainties. In case of death or accident of a breadwinner of the family, a life insurance acts as an income replacement. It ensures that his/her beneficiaries will get a financial support through insurance proceeds. On the other hand, a health insurance policy is one that covers hospitalization expenses or treatment costs of those with health and medical conditions.

With the rising costs of medical expenses and increasing number of dreaded disease cases, it is crucial for individuals to get a sufficient health insurance coverage that can ease future financial burden and worries of the family.

STEP 3. PAY OFF YOUR DEBTS

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Debt payments for the principal plus higher interest charges normally add up quickly, and consequently, they eat up a big portion of one’s overall budget. That is when debts start to pose a threat to financial security. If you cannot really help but borrow, make sure it’s a good kind of debt in which the potential benefits of borrowing would exceed its costs.

To manage debts properly, create a budget and stick to it. Discipline yourself to pay your bills on time to avoid incurring penalties or additional charges. Try also to pay in cash and to pay balance in full. Other ways to pay off debt faster is to increase your income while delaying gratification and maintaining a simple and frugal lifestyle.

STEP 4. CREATE EMERGENCY FUND

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Financial experts recommend that at least 3 to 6 months of monthly income should be set aside as an emergency fund to cover for any unexpected events. It may be placed on a regular bank savings account that is accessible anytime.

STEP 5. INVEST, INVEST, INVEST.

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Why Invest? First, to grow our money. Second, to combat the enemies of wealth such as taxes and inflation. Earnings from investments such as capital gain and dividends from stocks and mutual funds, and interest income from bonds can help us grow our money over time thus, providing us a good opportunity to achieve our financial goals faster.

Whatever you build on top, whether it’s paying off debts or emergency fund or doing both at the same time, what matters most is that it has to rest on solid financial foundation such as managing your cashflow effectively in order for your financial house to weather the storm and stand the test of time.

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