You wouldn’t design a house that leaves you exposed to outside elements, so why do the same when building your financial house? A well-constructed house first and foremost needs a strong foundation. Only then can the walls go up and the roof be installed.

As you build your financial house, it’s critical to get this order right. By neglecting to create a plan and instead focusing too much on your investments, you’re likely to face significant challenges in retirement.

Joel Johnson, CFP® joins Better Money Boston with WCVB Channel 5 to share the proper sequence of steps when building a solid financial structure.

Foundation: Checking, Savings, CDs

Your most stable assets form the foundation of your financial house, including CDs, insured accounts, and other sources of guaranteed income that protect your principal. This represents your “safe money,” such as emergency savings or income for the next two years. Although every investment carries some degree of risk, these core assets offer a consistent income stream, even in times of market fluctuation or personal financial hardship.

Walls: Bonds, Inflation Hedge

As you build on the foundation of your safe money, you need sturdy walls to create an inflation hedge and generate cash flow. This may include bonds, annuities, and real estate investments. While these assets may expose you to moderate risk, they are not meant for exponential growth. Instead, they serve to provide an income base and increase the diversification of your financial portfolio.

Roof: Stocks, Mutual Funds

Finally, you need a dependable roof that can withstand the elements but can also be repaired or replaced if needed. The roof represents your investments with the highest level of risk you can tolerate, such as stocks and mutual funds. As long as the rest of your house is securely built, you should feel confident taking on some risk. These investments are necessary for growth, helping to combat inflation over the long term.

It all begins with a blueprint. When drawing up the plans for your financial house, it’s important to consult with a financial professional. By carefully reviewing every aspect of your design, they can help you manage your investments and secure a stable financial future.