3 By wisdom a house is built, And by understanding it is established;
4 And by knowledge the rooms are filled with all precious and pleasant riches.
Proverbs 24:3-4 (NASB)
Last week I began a short mini-series on what happens after you get out of consumer debt. I wanted to discuss where you need to apply all that energy and focused intensity you used to get out of debt.
If you recall, I equated a financial wellness, as a journey in three stages that are analogous to the building of a home: laying down a firm foundation, building up your financial household, and letting the trees grow.
Today I want to cover stage 2: building up your financial household. After you get out of debt your next step, to strengthen your financial position. You want to focus on increasing your savings and managing the risks to your finances.
Savings fall in three major categories: emergencies, large purchases, and wealth building. Just like when you are building a home, some rooms will have higher priority than others. In the list below, I would personally pay initial attention to items 1 & 2.
- Increase your initial emergency fund ($1,000) so you can cover 3-6 months of your monthly expenses.
- Start saving for retirement (15% of your annual household income) and college expenses if you have children.
- If you don’t own a home, this might be a good time to start saving for a down payment that will cover 20% of the purchase price. If you own a home maybe it’s time to save for that renovation project you have been putting off for a while. Or you could start paying extra on the mortgage principal so you can retire that mortgage earlier.
- Is it time to replace one of your vehicles? Well, start saving now so you can buy a nice, reliable, used car with cash a few months from now. Stay away from car loans and car leases. Remember, the name of the game is to stay out of debt.
- How about saving money for some fun? You know, the financial wealth journey has to include some stops for fun and rewarding your hard work. You don’t have to wait until you are in your 80s for that cruise around the world. How about saving for a short weekend getaway or a 2 week vacation? And don’t forget about saving for Christmas!
The skill of managing risks is essential because life happens. We don’t’ control many things that happen to us, but we can control how we prepare for them.
- Review your insurance needs. It’s time to make sure you are prepared for what might happen. You need to properly transfer that risk to someone else via the wise use of insurance.
- Prepare a will. We all come into this world with a limited time. You need to be sure that you leave accurate instructions for your loved ones when your time comes.
- Get into the habit of checking your credit report with regularity. Each of the 3 Credit Bureaus is required by law to provide you with a free copy of your report every year. You could end up with 3 free reports each year (one from each bureau). Pay attention to your financial reputation.
Question: Where do you need to put more focus today on your finances, savings or risk management?
This post is also available in: Spanish