How to build, strengthen your financial foundation

  • To help secure your financial life, it's important to learn how to control the way you spend income.
  • Set a budget, get proper insurance coverage, build an emergency fund and, if you own a home, consider starting your own HOA.

One of the best ways to learn is to try new things. We all tend to learn from past mistakes how to do things better. However, many people seem to make the same mistakes over and over again.

Maybe it's because most of us are not educated on the important facets of personal finance. Unfortunately, this makes us vulnerable to doing the wrong thing with our money. To help us secure our financial life, it's important to learn how to control the way we spend income.

Many of life's downturns can be weathered if you've already managed to build yourself a strong financial foundation.
EVERSOFINE | Getty Images
Many of life's downturns can be weathered if you've already managed to build yourself a strong financial foundation.

I've seen many families lose everything because they didn't have enough life insurance. I often hear about people who use their retirement investments to pay for unexpected expenses. I've talked with families stuck with high credit card bills because of sudden home repairs. These things can be easily avoided by employing strong financial habits. Here's a list of things you'll need to do to set a solid financial foundation.

1. Set a budget. A common financial mistake is not setting and keeping a monthly budget. Budgeting may not sound exciting, but it's the first thing you'll need to do to take control of your finances. Creating a budget doesn't have to be a complicated process. However, it needs to be detailed and easy to execute.

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2. Get proper insurance coverage. A strong foundation helps a building stay in place, while a weak foundation might cause the structure to fall over when faced with strong winds and floods. The main reason for having insurance coverage is to avoid paying out of pocket for life events. It's important to properly use life, disability, home, car and liability insurance. They are able to protect you from just about anything life throws at you.

My recommendation is not to skimp on the total amount of coverage. Do an analysis on what is right for your family. With one catastrophic event, your financial picture can be devastated if you have a low coverage amount. To save on premiums, you can take on more risk while building a sizable emergency fund. Raising your deductibles will help reduce your premiums.

3. Build an emergency fund. The amount of money to put into your emergency fund depends on the consistency of your paycheck. For most people, three to six months' worth of expenses should be enough. If you earn commission income that fluctuates from month to month, you'll want to grow a larger fund.

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As discussed, the safety of your emergency fund will help save money. This money should be invested in safe liquid investment. Examples include cash, money market funds and other low-volatility investments.

4. Create your own HOA. Homeowners' associations do well because of the ability to slowly raise money to be spent later on improvements. We all know our car will break down or our home will need repair someday. However, most of us do not have a plan to set money aside for when these needs occur. It's best to have a separate fund for these large, irregular expenses.

You shouldn't strive for larger goals until your financial foundation is set. It could become worthless to save for retirement if an unforeseen event forces you to cash out. A strong foundation helps lower the risk of having to steer away from your long-term goals.

(Editor's Note: This column originally appeared at Investopedia.com. )

— By Patrick Traverse, owner of MoneyCoach

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