4 key pillars to help build a solid financial foundation
Last updated: March 2022
If prioritizing your finances feels like an overwhelming task, you're not alone. Many people put off dealing with their personal finances simply because they have no idea where to start: Should I max out my retirement plan or spring for life insurance? Save for a house or put away money for my child's college fund?
To make the planning process simpler, it may help to break down financial tasks into smaller, achievable steps. Consider the following as you start to build a financial roadmap for you and your family:
1. Budget and save
Managing your current income and monthly living expenses can be the cornerstone of your financial life. "To-do" tasks here may include:
Creating a budget.
If you don't already have a budget, creating one can help you better manage your current finances. It may help to start reviewing your current spending by tracking what you purchase.
Creating an emergency fund.
An emergency fund can serve as a safety net to help you avoid racking up debt if the unexpected happens. For example, if you end up in the emergency room or your car's transmission fails, you could tap your emergency money to help pay for expenses. Some experts recommend saving three to six months' worth of living expenses.
Saving for short-term goals.
Once you've established a budget for regular expenses, consider planning for larger expenditures you may be expecting in the near future. Depending on your situation, your short-term financial goal might be saving for a down payment on a house or getting married. Saving for these events now may help you avoid breaking the bank when the bills start to roll in.
2. Protect what's most important
As you get established in your job and personal life, you might begin to think about protecting your loved ones and the things you own from the unexpected.
If you have a spouse, children or other family members who depend on your income, you may want to consider purchasing life insurance. If you pass away, it's intended to help provide money that could be used to replace your income. An insurance agent can help you compare term or permanent life insurance policies so you can decide what makes the most sense for your family.
It can be hard to think about, but how would you pay for care if you developed a medical condition that made it difficult to care for yourself? Long-term care or disability insurance may be some options you want to consider. Long-term care insurance may help pay for health care services or personal care services in your home, or in an adult day care, assisted living, nursing home or rehabilitation facility. Disability insurance may help you replace a portion of your income if you're unable to work due to an accident or injury.
Liability car insurance coverage is required by law in most states. You may be able to purchase additional car insurance coverage, however, to help protect you, your passengers and your vehicle. Check with your agent to see which coverage options are available where you live.
- Typical components of an auto insurance policy
- What is auto liability insurance?
- What is collision insurance?
- What is comprehensive insurance?
Homeowners insurance helps protect your home's physical structure and your belongings if they're damaged by a covered peril, such as fire or theft. A home insurance policy also typically includes liability coverage in case someone is injured while visiting your home.
3. Invest for your future needs
Planning for long-term goals is also key when it comes to your finances. For some, this may include investing for retirement and their kids' college educations. Investment options you may want to consider include the following:
A mutual fund is a company that pools money from multiple investors (like yourself) and invests it in things like stocks or bonds. Mutual funds are commonly offered by many employee-sponsored 401(k) plans, and these funds are often what your money is invested in when you start an IRA plan.
529 college plans.
529 plans typically come in two options: prepaid tuition plans and college savings plans. Prepaid tuition plans allow you to purchase college credits at today's price that can be used for your child's future enrollment in that college. A college savings plan allows you to open an account where the money you invest is typically placed in bond mutual funds, stock mutual funds or money market funds.
- What's the difference between prepaid tuition and college savings plans?
- What's a 529 college savings plan?
- 5 myths about 529 college savings plans
Individual retirement accounts, or IRAs.
Traditional, Roth and rollover individual retirement accounts (IRAs) all allow you to invest in tax-advantaged savings for the future.
A 401(k) retirement plan is typically offered by employers. You may be able to have money withdrawn directly from your paycheck and invested into a traditional 401(k) plan on a tax-deferred basis — meaning you usually don't pay taxes on the money until you withdraw it during retirement. In addition, some employers may contribute money to the plan on your behalf.
An annuity is an insurance product that allows you to invest a lump sum or periodic payments into it. In turn, you are able to draw a fixed amount of income from it that is guaranteed to last throughout retirement — as long as you live.
4. Consider retirement
You may need to adjust your investment strategy as your retirement years approach to help make sure your investments and savings last. It may be helpful to talk to a financial professional and use savings calculators to help you determine how to make your money work harder. In addition to your personal retirement investments, consider the following in retirement:
Social security benefits.
According to the Social Security Administration (SSA), about nine out of 10 Americans age 65 and older receive Social Security benefits. The SSA also reports that the amount you receive is based on factors such as your age, years of work and average lifetime income, as well as any additional income you receive after retirement.
When you retire, your budget and your living situation may change. When your retirement approaches, it may be a good time to chat with your insurance agent about whether your life insurance policy still suits your needs.