Many years ago I worked in a municipal permits and inspections department. Builders came in and applied for permits, we issued them and then took care of the inspections to make sure that homes and business were being built according to the current building codes. You wouldn’t think there would be too many money lessons to be learned in such a job, but many years later I realized that I’d learned how to build a stable financial life, in part, by watching houses being built.
I’m always frustrated by people who have the magical idea that a stable, successful financial life just somehow “happens.” They seem to think that they deserve to have everything fall into place or that someone or something (like a lottery win) will come along to take care of everything. They get frustrated and angry when the magic fails to happen and blame everything and everyone else. They seem to have missed the fact that, for the vast majority of us, a stable financial life has to be built over time. It’s no different than building a house, really. You don’t just go out and buy an inflatable house, set it on the ground, pull the rip cord and, poof, a house appears. No, you build it starting with the footings and working up to the roof. A stable financial life is no different.
In home construction, a footing is concrete that’s poured into the ground upon which the foundation will be built. Without this crucial step, the rest of the house will never be entirely stable and will shift as the soil moves.
In a financial life, the footing is your financial plan. It may take the form of a formal budget or a document generated by an advisor showing where you want to be in ten years. Maybe it’s just a fluid plan you carry around in your head. Whatever form it takes, your plan is what will support everything you do financially. Without a plan and direction for your money, your financial life will never be completely stable because your money will just go in and out without any real control.
A foundation supports the living area of the house. It may not be much to look at, but it’s sturdy and necessary to keep your living space from collapsing.
In a stable financial life, your foundation is your savings. You savings is what will see you through problems like medical bills that insurance won’t pay, expensive car repairs, job losses, and water heaters that go poof in the night. Without savings to support your financial life, you are always at risk of collapse due to every unforeseen emergency. At a minimum you need three to six months of living expenses saved up, but ideally you’d have a year or more. If you have to use some of your savings, you replace it as soon as possible, otherwise your foundation starts to look like Swiss cheese and it’s not as supportive as it once was.
Once you’ve got your foundation in place, you start building the actual house. You put up the walls, put in the utilities, and start making it look like something other than a hole in the ground. This process is what makes the house livable.
Financially-speaking, I call this step “building a life.” These are the things that you need to buy/pay for that make your financial house a home. You have to learn how to make sure you can always pay your utilities and your rent/mortgage and buy food. You need to make sure that medical care is covered somehow. You pay all of your obligations and adjust as kids or pets enter and leave the picture. Your framing is all the basics of life that must be taken care of before (and along with) anything else. If you aren’t taking care of your basics, your house is always going to be missing pieces and have trouble standing on its own. It will always be weak and you’ll always be running from room to room fixing problems and patching holes. You also have to make certain that your framing doesn’t get bigger than your foundation and footing. If you’re putting out an amount of money that your budget and savings can’t sustain, your house is going to collapse.
Once you have the outer walls up, the roof goes on. A roof protects the house and you against the elements.
In your financial house, adequate insurance, estate plans, powers of attorney, and other legal protections are your roof. These protect you and your assets from expensive problems like injuries, disabilities, and lawsuits. Without them, your lovely financial life will never be completely comfortable. If a cold rain falls in the form of a lawsuit or a career-ending injury, you’re going to feel every bit of it. With your roof in place, you can shelter comfortably through the storms.
Additions and Amenities
Once you’ve got your basic home built, you may decide to add on a room or to build a pool, add some outbuildings, or spring for some nicer features and fixtures. These are all optional and make life easier and maybe more attractive, but they aren’t necessary.
In your financial life, these are the things that come after the basics are under control. Vacations, newer cars, game stations, better furniture, etc. are all things that you may want but are not required. They are the rewards you achieve after your financial life is stable and strong and you have extra money to use for these things.
Very few people do all of these things at one time. They occur over a period of many years and some are going on simultaneously. You may generate your plan and spend a year putting your foundation in place. You may spend another ten years getting your framing in place and then it changes when kids come along. Your roof may come together in pieces as you discover you have additional insurance needs or you get older and require things like long-term care insurance and a will. Regardless of how long it takes to build a stable financial life, it never happens overnight and without a lot of effort on your part.
Too many people go straight for the amenities and additions without even putting in a footing. This is a recipe for disaster and why so many people end up in trouble. If you’re building glorious additions to a house that’s really a shanty, you’re going to quickly overburden your shanty and send it collapsing to the ground. Do things in the proper order, however, and you can have a financial house that stands secure and shelters you from the storms of life.
(Photo courtesy of Armchair Builder)