Financial security isn’t about making or having a certain amount of money. We’ve all seen the attention-grabbing headlines about mega-popular performers, superstar athletes, and multi-million-dollar lottery winners who end up in bankruptcy court and financial ruin.
Financial security is about habits and feelings. It’s about planning, decision making, and achieving peace of mind—no matter what your income level. It’s about having enough money to cover your living expenses plus a cushion for emergencies and the future.
What Financial Security Looks Like
Financial security includes these basics:
- Having low debt
Unless you’re independently wealthy, you’re going to carry debt. However, you want to strive to have a reasonable amount, relative to your income, for necessary items. Going into debt for a mortgage, transportation, or education is usually OK. However, racking up big monthly payments for an extravagant sports car, an exotic vacation or a pair of crazy-expensive designer shoes probably isn’t smart. When you have to work just to pay the bills, you don’t have much peace of mind.
- Being in control of your expenses
“In control” means spending less money than you earn and saving a percentage of the rest. It may require moving to a less expensive neighborhood, driving the old dented car that’s paid for, or giving up the daily Starbucks latte.
- Increasing your savings/assets/net worth every month
People commonly live from paycheck to paycheck, and have little to show for their hard work. A car breakdown, medical crisis, or other financial emergency could leave them destitute. When you can save a little every month and watch your account balances grow, you’re on your way to financial security.
- Not doing work you dislike just to pay the bills
If you control your debt and expenses and increase your savings every month, you can gain the freedom to find work you enjoy. Money may not buy happiness, but in this case, it helps.
Three steps to financial security
According to Kiplinger, taking these steps will help achieve financial security:
Save For a Rainy Day Your “rainy day” can be a new-to-you reliable car or a vacation in Hawaii. Pay yourself first and contribute to your rainy-day fund every month. Set up automatic deductions from your paycheck to a savings account so you aren’t tempted to spend the cash elsewhere.
Be Prepared for an EmergencyEmergencies are a normal part of life, and can get derail even the best financial plan. Inevitably, the computer you need to use every day breaks down, or the air conditioner conks out during a heat wave. Prepare for emergencies by having:
- An emergency fund
- Health insurance
- Car insurance
- Homeowner’s or rental insurance
- Life insurance (if you have children)
Invest for retirement The earlier you begin investing for retirement, the easier it will be to turn even small amounts of money into substantial savings down the road. Invest in accounts with tax benefits such as a Roth IRA or 401k.