It’s ironic that we live in one of the wealthiest countries in the world, but we always have money problems because of the lack of a solid financial foundation. We can work hard all our lives but retire poor. We do so much to raise our kids just to see them finish college with a lot of debt. Debt becomes a way of life.
We all know that the COVID-19 pandemic has triggered an unprecedented wave of business closures, placing millions of Americans out of work. It has also exposed a deeper, more structural problem with the United States economy that has been looming just beneath the surface for some time. Many Americans are living hand-to-mouth and have almost no savings.
Why Should You Build A Solid Financial Foundation?
According to a recent survey from America Debt Statistics, almost half of the families in the United States live paycheck to paycheck. 19 percent of Americans have zero dollars set aside for an emergency. Two out of ten Americans use at least 50% of their income to pay back what they owe. 13% of Americans expected to be in debt for the rest of their lives.
The cost of raising a child in Americans around $250,000 from birth to age 18. Medical costs have increased by 33% in the past 30 years, while income has only grown by 30%. The average consumer debt is $38,000 excluding mortgages. The average American household mortgage is $189,586. Mortgage debt is the biggest debt in America – with $9.44 trillion owed collectively and 80% of Americans have consumer debt.
We don’t have much, and we don’t know much. Nobody teaches us how to manage our money in schools. Financial issues are not often discussed, and financial products are not always explained. Most people have trouble balancing their own checkbook and reading a financial statement. We use credit cards every day and don’t always understand all the hidden charges.
We buy insurance policies and stick them in a file cabinet. We contribute to our 401k or 403b and hope someone will take care of it. We all want to have a comfortable retirement, but few have a plan. We may be active spenders but passive savers. Building a solid financial foundation will help us reduce or eliminate some of the above-mentioned problems and live a life of financial freedom.
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Four Pillars Of Building A Solid Financial Foundation.
Many Americans want to build a solid financial foundation or live a life of financial freedom, but few of them don’t know how to do it. Like building a house we must start to build it from the ground up. Here are the four pillars of building a solid financial foundation;
1. Protection – You should have the proper protection in the event of disability, health problems, or premature death. People must prepare in case they die too soon and also if they live too long.
2. Debt Management – You should reduce your liability and get out of debt.
3. Emergency Fund – You should set aside 3 to 6 months of your income to deal with sudden changes in your job or business or to pay for unforeseen accidents or repairs.
4. Investment – You should save and invest for the long run or your future.
A strong financial foundation will build a sturdier, more enduring financial house. Otherwise, it won’t remain standing when the storms, tornadoes, and earthquakes strike. Thus, the 4 financial foundation layers will build a solid ground for your financial future.
Understanding How Money Works.
Wealthy people tend to spend time learning and understanding how money works. They look for advice and solutions to get better returns for their money. A lot of poor people lack knowledge about personal finance. Some don’t care to understand. Many have no plan and little savings. What savings they have are usually put into accounts with a low rate of return. Their money doesn’t work for them.
Compounding interest works both ways. It can make you, and it can break you. If you owe money, the compound interest on your debt can ruin you. As a result, many people keep paying the bill with high interest. Despite numerous payments, the balance of the bill barely goes down because high interest on the balance continues to compound. Sometimes, it feels as if it’s impossible to pay the balance off.
The Power Of Compounding Interest And The Rule Of 72.
The Rule of 72 is a simplified way to estimate the doubling of an investment’s value, based on a logarithmic formula.
The Rule of 72 can be applied to investments, inflation, or anything that grows, such as GDP or population.
The formula is useful for understanding the effect of compound interest. Here’s how the rule of 72 works:
Assuming that you saving $10,000, At 1% rate of return, it takes 72 years for $10 to turn into $20,000.
At 4% rate of return, it takes 18 years for money to double. It’s a simple formula. Now, instead of your money doubling once over your lifetime, you could experience two or multiple doubles depending on your rate of return.
At 8% rate of return, it takes half the time, 9 years for money to double. What if your money doubled four or five times in your life? Let’s look at the rule of 72 this way. At 29 years old, if you had $10,000 earning a 4% rate of return, your money would double in 18 years. You would have $20,000 at age 47.
If you earned 8% rate of return, your money would double in only 9 years. At age 38 you would have $20,000. Let’s double it one more time in 9 more years you would have $40,000 at age 47 and one more 9 years $80,000 at age 56. Now you can see the power of the rule of 72 and compounding interest. The more rate of return you earn your money doubles faster.
If you earned 6% on a $10,000 investment, after 36 years, you’ll have $80,000. That’s three doubles in your working lifetime.
If you double your return from 6% to 12% you double every 6 years. Your money could double 7 times in your lifetime. At age 65 you will have $640,000.
The difference between $10,000 at 4% versus 12% is $600,000. $600,000 is equal to 20 years salary of someone who earns $30,000 annually. The Rule of 72 unveils the powerful impact of compounding interest on money. It also reveals 2 types of people. People who don’t understand how money works- end up working for money. And people who understand how money works-they let money work for them.
Be Your Own Money Manager And Control Your Future.
You won’t be free until you are financially free. You can be free from the burden of debt, just start with a simply written budget. Look at your bank accounts, add it all up and see where your money is going. Look at the reality of your situation, and don’t be afraid to make changes. Financial concepts and solutions may not be the most exciting subject, but with discipline and patience, you can learn and understand the fundamentals. And you can build a good financial foundation. Financial independence is not a dream. It is a priority. Take control of your future.
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NB: The purpose of this website is to provide a general understanding of personal finance, basic financial concepts, and information. It’s not intended to advise on tax, insurance, investment, or any product and service. Since each of us has our own unique situation, you should have all the appropriate information to understand and make the right decision to fit with your needs and your financial goals. I hope that you will succeed in building your financial future.