If you or I are ever going to achieve FIRE, we must put in the work of setting a firm financial foundation. Here at Gone on FIRE, we wish to inspire financial freedom. If we are going to have any financial freedom in our lives, we must have a solid starting point. In this post, I will cover how to build a solid financial foundation.
What is a Solid Foundation?
I’m glad you asked. Technically speaking, a foundation is the basis on which you erect a building. If the building is to last any amount a time, the foundation must be well built and structurally sound. The foundation is critical to any building’s success.
Here in Texas, many houses have foundation issues. The earth tends to shift as a result of the large temperature swings from winter to summer. When I say earth, I mean the actual, physical dirt. If the earth under and around a house is not properly taken care of, the typical shallow foundation will crack.
Foundational cracks can lead to minor issues like cracks in the drywall, but they can also lead to major issues. I’m talking major, potentially dangerous, issues like bursting water pipes, cracked gas lines, or even the structure collapsing if not taken care over time.
A Financial Foundation
So how does a foundation relate to achieving FIRE? To begin working your way toward Financial Independence, you must have a solid financial foundation! Just like in a physical structure, a poorly built financial foundation can leave you in financial ruins.
Think about the stories we hear of people who are elderly and have no money to support themselves. They depend on Social Security, other government programs, and family and friends if they have them. Sometimes that’s a result of misfortune, but usually it is the result of not have a firm financial foundation. They didn’t plan!
The list could go on and on about people having money struggles. The majority of Americans live paycheck to paycheck and have a significant amount of debt. Their net worths are negative (meaning they owe more than everything they own is worth.) The worst part is, most people have no plan to fix it. People tend to keep their head in the sand and keep living the way they are living.
They’ll continue on and eventually end up like the elderly person I mentioned, and unable to work to produce any income due to health, mobility, or cognitive issues.
It’s my hope that I can reach and influence these people. To be a lighthouse shining over their turbulent ocean swells. If this is you, you’ve come to the right place. You can start building your firm financial foundation NOW!
Related: 4 Steps to Determine Your FI Number
Building a Solid Foundation
Great! Now how do we do it? Here are a few steps that will help you lay a solid financial foundation.
Create a budget
A budget will help you keep track of your money and your spending. How much positive cash flow do you have? Or is it negative? A budget will tell you. And no, you don’t have to be a math nerd to do a budget. For the most part, it’s getting your numbers organized. Other than that, it’s simple addition. Sure, there’s a lot of statistical things you could add, but those aren’t necessary.
There are a ton of ways to create a budget, but I’m a big fan of the zero-base budget. With the zero-base budget, you create a plan for all the money you receive, before you receive it. Typically, this is done monthly. You can see how I create a budget here:
Stay out of Debt
Debt will drain your finances and will drain them fast. Do you have credit card debt? Student loans? Car payments? Get rid of them! Have a mortgage? Try your best to get rid of that too! All the debt payments that you are making every month is a paycheck in someone else’s pocket. Start putting that money into your own pocket!
Charles Conrad in The Richest Man in Babylon: Six Laws of Wealth said it best: “Avoid debt. The poor pay interest, while the rich earn interest.”
Once you are out of debt, you can focus solely on building your net worth. While paying of debt does increase your net worth, it can act as a distraction.
If you want to learn more about net worth, read 2 Simple Components for Calculating Net Worth.
If you want some to hear some of my reasons why net worth is important, read 4 Reasons Why Net Worth is Important.
Wisely choose a career
For most of us, a career is a means to an end. For those that are reading this, that end is probably financial independence and/or early retirement. So how do we get there? How do we get there without being miserable? We do that by wisely choosing a career path. Choose a career with low unemployment and high pay.
I can already hear someone complaining about not wanting a job like that because it’s not what they love to do. Really? There are a ton of jobs that meet those qualifications and not a single one is interesting? I don’t believe it. Sure, everyone is going to have bad days at work, but that doesn’t mean you don’t enjoy the rest of the time and get pleasure/fulfillment/satisfaction from it.
Fix a Crumbling Foundation
If you are living on a financial foundation that isn’t in the best shape, and perhaps, is falling apart, I’ve got good news! You can use these steps to repair it. These steps will not fail you no matter if you’re up or down.
Create your budget. Math is math; it’s going to work no matter what. The longer you wait to start repairs, the longer and harder you will have to work to make it to a fully repaired foundation.
If FIRE is not your goal, these steps will still help you succeed through life. Even if you’re older, you can still do these steps, including choosing a new career, if needed.
Go build yourself a solid financial foundation, and you’ll soon be ready to start building your castle on top of it.