The first steps…

The first steps to Building your Client’s Financial Foundation

 Is your client’s financial foundation stable? While most of us prefer to discuss investment strategies initially, a very important precursory step needs to occur first. A solid financial foundation enables individuals and families to create security in which to build upon. The three most important components to a solid financial foundation are present financial situation, cash reserves and adequate protection.

Present Financial Snapshot

Before building a financial plan, it is important to step back to view a picture of your present financial situation. The first step involves calculating your Net Worth; assets minus liabilities. Next, create an accurate household budget. Be sure to account for both fixed and discretionary expenses when working on your calculation. Fixed expenses are those items that do not fluctuate from month to month, and can include rent/mortgage, utility payments and debts such as loans or credit cards. Discretionary expenses fluctuate, and can include entertainment, dining out, travel and clothing expenditures. The difference between your income and expenditures is your discretionary income. If this figure is positive, you can use those funds for building financial wealth and/or paying down any consumer debts.

Cash Reserves

Cash reserves refer to capital available for emergencies or financial opportunities. Households should maintain between 3-6 months of expenses in their cash reserves. Financial professionals recommend that these funds be tiered so that they earn interest, at least at the inflation rate, to protect the funds against earning power erosion. The first tier should include 1-2 months of reserves and should be the most accessible; examples could include checking or savings accounts. The second tier should still be liquid, but should earn a higher interest rate than the initial tier; examples include a high yield money market account. The last tier should be the least liquid while still cash; examples include laddered CDs.

Adequate Protection

The last piece to consider when building your solid financial foundation is protection. Are you presently protecting those things that you cannot afford to lose; your income, your health, your ability to work and the life of those you care about. Insurance is the most commonly leveraged solution for such protection. Life insurance and disability insurance should both be considered.

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