Budgeting

Building Your Financial Structure

Start With a Strong Foundation

There are a lot of elements that go into building strong finances around your life. Many people start with savings for retirement but too few think beyond that aspect. What else should you be paying attention to in order to make sure the financial structure you are building for your family is one that will last through good times and bad?

Step One: Foundation

Think of this financial foundation like the foundation of your home or the roots of a tree. This is what keeps everything else together. When you have a strong foundation in place, you won’t need to withdraw money from your other assets that are building for your future. Something is going to go wrong at some point. Whether this means there is a crash in the market or you have a life event that requires you to dip into your savings, it is only a matter of time. If you do not prepare for it, this inevitability can cause bigger problems than it needs to.

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This foundation should be built with an emergency fund for your living expenses and appropriate insurance to protect yourself and your family. The insurance products you should have include health insurance, disability insurance, and possibly life insurance and long-term care depending on your age and living situation. Your emergency fund should be large enough to sustain you for six months. This means that you have six months of expenses set aside that can cover rent, groceries, bills, maintenance and other things during that time. This emergency fund will sustain you if you ever lose your income unexpectedly.

Step Two: Accumulation

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Once you have the foundation of protection in place you can start thinking about the structure your building around yourself. Accumulation is the framework of your financial wealth. This can be looked at a number of ways. Retirement savings and investments will be the first thing that most people think about, and that is a good place to start. Any financial investment tool can be considered a part of this bucket. Whether you have a 401(k), an IRA, a ROTH, a 403(b), or something else, they are all working towards this same goal of wealth accumulation. Other things that could be lumped into this category of wealth accumulation include your equity in properties, your share of businesses you own, and any additional liquid savings you have above your emergency fund.

Step Three: Distribution

Something important to forming the right structure of your wealth building is how these vehicles will look in the future. This is an important consideration for the final step of the process, the distribution phase. After spending time accumulating the wealth that will provide for yourself and your family, you want to make the most sensible distributions of that wealth so you don’t lose more than you need to through taxable events. Also, be aware of when you will be forced to make distributions. Some retirement vehicles require you to make withdrawals at a certain age. If you still have income you would like to invest, you must prepare to have another place to do that.

Each of these steps should be considered when building around any of the others. Strategies you use for the protection phase can create buckets of money that you can use for creative planning in the distribution phase. Explore the range of financial vehicles to plan for taxing advantages in your future and have money where and when you need it most.

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