5 Steps to Building a Solid Financial Foundation in 2016
It’s almost 2016, and after reflecting on 2015, most people will create New Year’s resolutions. According to a university study, 45% of Americans make New Year’s resolutions, and only 8% are successful in achieving them.
How can we overcome this very low success rate? When it comes to setting goals or resolutions, there are strategies to prepare yourself for success when it comes to financial goals.
You can structure your financial affairs in such a manner that you have a solid foundation within an automated structure with systems that only requires you to monitor your progress weekly or monthly.
Here are 5 steps to build a solid financial foundation in 2016:
- Create a Wealth Capture Account
The biggest obstacle we need to overcome when pursuing financial goals is the human element. Norcote Parkinson wrote a book called Parkinson’s Law, in which he isolates some limitations we all experience, and particularly focuses on the behavior of individuals within a group. In Parkinson’s Law he writes, “Work expands to meet the time envelope allowed.” This means that, if we have 5 days to complete a task, it will take us 5 days to complete the task. If we were allowed 30 days to complete the same task, we would take 30 days to complete the task.
Parkinson’s Law also states that, “a luxury, once enjoyed, becomes a necessity,” and “expenses rise equal to income” When our income increases, our expenses rise to meet or exceed that increase. We are always working against Parkinson’s Law.
One way to evade Parkinson’s Law is to establish an infrastructure and system to beat it. You can set up a separate account where we automatically transfer a percentage of every dollar that comes into our personal economy. We can automatically set this up without a bank or financial institution to transfer 10%, or the amount you feel comfortable with, into a separate wealth capture account.
This ensures that you will be paid first at all times and that you automatically capture 10% of every dollar that comes into your personal economy. There are many vehicles and options to utilize as a wealth capture accounts. You can automate this entire process and start growing wealthier today.
Your goal should be to have 6 months to 2 years of your household income in liquid savings in this wealth capture account.
2. Create a Flexible Spending Plan
Now that you have structured and automated your finances to pay yourself first, and set up a wealth capture account, you can create a flexible spending plan.
This plan is not as restrictive as a budget, and you can make adjustments as needed. As long as you never tap into your wealth capture account, you have the freedom to include items and services that can enhance your life experience. For example, if you need a weekly massage and feel that this massage helps you feel better and perform better in your business or in your job, it is something that the flexible spending plan encourages.
I created my flexible spending account in Mint.com and can track it daily, weekly and monthly as needed. It is important to have a software or tool in place to track and monitor your flexible spending plan. If you can track and monitor something, you can improve in that area.
3. Know and Improve Your Credit Score
If you live in the United States, a healthy credit score is very important to your financial well-being. Having a great credit score can save you thousands of dollars over your lifetime that you would have otherwise paid to banking and financial institutions.
Your FICO score is the most widely used scoring model and is made up of the average of three credit reporting agencies. Trans Union, Experian and Equifax are the three credit report agencies used to determine your credit score.
Your first action item is to get your free credit report score. You can get your free report from all three credit bureaus here. I have used MyFICO to stay on top of my credit report and score. It is one of the most complete products in this space but is a paid service.
You should thoroughly look at your detailed report and make sure your report is accurate. Contact the agencies in writing and provide proof if there are mistakes on your report. A mistake on your report can cost you thousands of dollars.
The second action item is to learn how the credit score game works and how to take action to improve your score. It is really important to understand how your score is calculated and what you can do to improve it.
The categories of information the credit report agencies use to calculate your score is payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and types of credit you have (e.g. credit card loans, installment loans like auto loans, mortgages).
A great resource to improve your credit score and win the credit score game is 720 credit score. They have great resources, including free videos and articles.
4. Review and Implement Protective Strategies
Having protective strategies in place is cardinal to a solid financial foundation. Any risks that you want retain yourself should be transferred to someone else.
Do you and your family have sufficient property and casualty insurance coverage like auto and homeowners insurance? Have you reviewed your policies with your agent and advisor? Do you know your available options with a lower or higher deductible? Not having the proper coverage set up could be catastrophic in a worst-case scenario.
Have your advisor or agent go over each section and explain your policy to you. Have your advisor walk you through the liability coverage, medical payments coverage, uninsured motor vehicle coverage, underinsured motor vehicle coverage, and all other sections. Please make sure you and your loved ones are properly insured, otherwise your family could be financially destroyed.
Do you need an umbrella insurance policy for a worst-case scenario, such as an automobile accident or an accident on your property? We live in a very litigious society, and an umbrella policy is a very cost-efficient strategy to add insurance for an unexpected accident. You can add $1 million in additional insurance through adding an umbrella insurance policy for a few hundred dollars per year.
Does your family have the proper health insurance coverage they need? Medical costs are very increasingly expensive, and in the United States, health care plans are rapidly evolving. The health care plan you had last year may not be the health care plan you have this year. It is important to review your plan with your human resources department at your company or a health insurance advisor, once a year, to make sure your health care coverage is adequate for your circumstances.
Do you and your spouse have the proper life insurance coverage and strategies to ensure that, if something happened to you, that your spouse and children would not only be able to maintain their current lifestyle, but be in an even better position financially?
Do you have an emergency preparedness strategy and plan for your household? If, for instance, there’s another Hurricane Sandy on the east coast, do you have sufficient food, water, blankets and a small generator to provide for your family? What else do you need to ensure the safety of your loved ones?
Do you need think you need to hold precious metals such as gold or silver? They have held their value for centuries, and could be a good insurance policy against inflation or even a currency crisis.
5. Tax planning
Taxes are some of the biggest wealth destroyers. It is extremely important to have proper tax planning as part of our financial foundation in order to increase our economic efficiency, control and safety.
Tax planning for 2016 starts as soon as our taxes for 2015 are filed. If you do not have a tax advisor or accountant, put this on your 2016 to-do list. Interview at least 3 candidates and have them all do a review of your last three years of income tax returns.
The good tax advisors will be able to find you tax savings in those returns that can be amended, helping you structure a proper tax strategy to limit and reduce your tax liability.
Please note: I am not advising that you do not pay your taxes and do not pay your full tax liability. You have to pay your taxes. There are, however, legal strategies you can implement with professional help in order to limit and reduce the taxes that you pay.
Look at strategies to pay taxes now; don’t defer them into the future. You can control your tax liability now, but there are too many variables in the future to plan properly for your tax liability. I would also much rather pay taxes on the seed than on the harvest.
Remember: you have to pay your taxes, but you do not have to leave Uncle Sam a tip.
An action you can implement immediately is to adjust your withholding from your income. Instead of giving Uncle Sam a 0% interest loan on your money for 12 months, you can use it to fund your wealth capture account, as discussed in step 1.
Another action you can take is research charities that you would support, and set up automated donations in your flexible spending plan. These donations are tax-deductible, and allow you to support causes that you have always wanted to support while simultaneously reduce your taxes.
Implementing these 5 steps in 2016 will help you build a solid foundation that then positions you to invest in other assets, like real estate, businesses, commodities and paper assets like stocks and bonds.
Structuring and automating your financial affairs, and meeting with advisors in the first quarter of the year, will help you be part of the 8% of people that successfully achieve their New Year financial resolutions.
Have a happy, healthy and prosperous 2016!
Yours in purpose and prosperity,