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Building a Financial Foundation

Think of building a concrete foundation for a house. Without proper mixture in concrete the concrete will become weak and eventually crack. This is the same concept of building a foundation for your finances. We need strong support pillar in order to have comfortable lives. How do we do that? There is several ways.

Budgeting – How much are you spending & earning? Write down every dollar you spend that way you can develop a habit to track your money. I recommend trimming any unnecessary expense; do you eat out for lunch often? Brown bag your lunch, instead of driving, try biking or walking depends on your location. Look for bundle package deal for entertainment like your internet, television, and phone. Make sure you’re not spending more then you make.

Debts – Having tons of debt will be a setback, find ways to trim expense and add more to your payment. Student loan can be both good and bad. Although it can further your education it can also leave you in a position drowning with debt. Search for marketable skills that will be useful and have employment growth. Only you can decide if it’s worth going for a major that is in demand or going for a major of your passion.  Pay off credit card if you have high interest rate. It does not make sense if you have a credit card bill with a interest rate of 6%+  and also putting money in an saving account earning less than 1%.

Emergency Fund – Consider opening a saving account for emergency enough for 3 – 6 month. This will be your last resort fund, and should not be touch unless you absolutely need it. Like for car repairs, medical emergency, and etc.

Retirement account – Do take advantage of your employer company 401k, you should contribute enough to get your company match. If you have excess money you can contribute up to the max $17,500 for 2014. If you still have more left over consider opening a Roth/IRA account the max you can put is $5,500 for 2014 and will vary between your incomes. Check with your tax advisor to see if you are eligible for Roth there is an income limit on an ROTH IRA.

Investing – If you still have money left over consider investing in index funds. I advise not to invest in individual stock it is too volatile, you can try if you would like but only invest in a certain amount that you’re willing to lose. I prefer investing in Vanguard due to their low cost index fund, but there are several other companies you can go with. I recommend figuring out an asset allocation like 80% stock and 20% bond, depends on your comfort zone.

By taking these small steps you can build a strong foundation, that way when you have several small cracks you can weather the storm.