Four Steps to a Healthy Financial Future

Unbiased Financial Information Provided by Financial Finesse

Remember learning about the food pyramid in school? Maybe you didn’t pay attention when the school nurse talked about it. After all, adults were responsible for giving us our meals. But look at the food pyramid today. We get our own meals now and the food pyramid can be a useful guide for helping us know what foods we should eat to maintain a healthy lifestyle.

Much like the food pyramid, there is a “financial pyramid.” Being an adult means not only having to feed ourselves but also having to manage our finances by ourselves. So by adhering to the basic behaviors in the financial pyramid, you can do a lot to ensure that you have a healthy financial life.

Step 1: Create your foundation – The Budget

“Living within your means” is the base of the financial pyramid. Are you like a lot of people who wonder where your money goes? Then it might be helpful to start keeping a financial diary. Log your spending daily and at the end of the month you’ll be able to see where it all went. You can then divide up your expenses into categories of wants or needs.

• NEEDS are essential items. They are those items that you have to have in order to live; items like housing expenses, food and clothing.
• WANTS are non-essential items. They are items that we don’t absolutely need to keep living day to day. These expenses could range from meals at a restaurant to MP3 players, from magazine subscriptions to designer shoes.

You can find extra dollars every month by cutting back on the WANT items. Once you are living within your budget, the next step of the financial pyramid awaits you.

Step 2: Start Building an Emergency Fund

After dividing your expenses between wants and needs, you’ll want to add another item to the needs: Saving for emergencies. Why? Because you could become disabled. You could lose your job. Your home and/or personal property could become severely damaged by a storm. These are things that happen to people like you and me everyday and people who don’t have adequate savings struggle to get back on their feet. Put this item near the top of your list of NEEDS. When you have a healthy emergency fund (generally 3 – 6 months of living expenses) you can then save for other financial goals.

Step 3: Contribute to your retirement

If your company offers a retirement savings plan (e.g. 401(k), 403(b), 457), use it. You should at least contribute enough to receive the company match. For example, if your company matches 100% of the first 3% of your contributions, you should contribute at least 3%. But remember, ANY amount you can contribute will help. If you don’t have access to a company-sponsored retirement plan, contribute to a Roth or Traditional IRA.

Step 4: Establish Credit

Credit is the very top of the pyramid. But use credit wisely. You can start by applying for a “secured” credit card where your credit limit equals an amount secured by a savings account. As you use your credit card, try and pay off the balance each month and minimize purchases that could be made later with cash. Understand the true cost of credit, (i.e. interest rate), and know what your grace period is so you can avoid late payment fees.

Congratulations! You now are well on your way to establishing a healthy financial future. And you didn’t even have to eat broccoli.