By Daniel Archibald | CFA
After all the noise that has filled the financial world over the past year, its probably a good idea to take a step back, breathe, and have a good look at where you are at. It can be quite easy to be caught up with all the drama and focus on the bigger, but far-removed financial crises, and forget about some of the smaller, yet vital, parts to your own financial well-being. I'm talking about the basics, the essentials.
- Budget
No matter how much, or little, you earn, you're not going be able to build wealth if you spend it all. Budgeting is more than just making a list of all your expenses, and it is more than just trying to spend less than you earn. It is about taking control of your spending. It is about knowing where every cent you spend is going. It is about giving you the best information possible so that you can make wise decisions.
One more point on budgeting – start with a goal, a dream. Spending less can be hard, and is that much harder if you do not have any plans for the money you save (e.g. a holiday, renovations, new home, etc). Use your goals as the motivation to budget and spend wisely. - Insurance
Protecting assets is not the role of insurance cover. Protecting your financial well-being, which can be adversely affected by the loss of assets, is the role of insurances (i.e. insurances will not put out the fire in your kitchen, but it will give you the money you need to rebuild your home). And what is your biggest asset? Answer = you. Or in other words, your ability to provide for your family (salary, looking after the kids, etc) is of greater value to your family than your house, car, or contents.
Life insurances are there to help you manage the risk of financial loss should you suffer:
i. Death – death cover will pay a lump sum in the event of death or terminal illness to your family
ii. Disability – total and permanent disability (TPD) will pay a lump sum in the event that you are never able to work again; income protection will pay a monthly benefit (usually 75% of your income) in the event that you cannot work for a temporary period of time
iii. Serious illness – trauma cover will pay a lump sum in the event of being diagnosed with one of life's "dreaded diseases" (e.g. cancer, stroke, heart attack, etc) - So yes, you should look to have all 4 of these covers – how much to take is a question for another day. - Emergency funds
Saving for a rainy day is an essential part to your financial well-being. Whether the rain be in the form of retrenchment or a blown engine, having between 3-6 months worth of expenses saved in an "out-of-sight/out-of-mind" bank account can help immeasurably in difficult times.
Cash need not be the only form of emergency funds as well. 3-6 months storage of long-life foods, planting your own veggie garden, or breeding your own livestock (probably not) can also provide your family with much needed "free" resources in times of trying circumstances. - Social security
Most people tend to fall into 1 of 3 categories when referring to welfare. (1) The more the merrier, (2) It's a good safety net to have but I probably won't need it, (3) No thanks, I definitely don't need it. Regardless of what category you belong to, understanding your entitlements, and how to access those benefits, is an important part of your future financial security.
Like the wise man of children's song fame, let us build our houses upon a solid foundation of rocks and not sand. The 4 rocks mentioned above will help sure up your financial well-being and assist you in maintaining your standard of living, even when things go horribly wrong. With these in place you can then look to build and grow your wealth with the comfort and knowledge that you have taken care of the important elements of your financial affairs and put first things first.