Breaking Down Financial Security
Financial security is more easily achieved when you start saving and investing from a young age. But starting later in life does not mean financial security is not attainable, it just means it could be harder to reach. It is, however, important to know what financial security means for you personally, and to know how to go about becoming financially secure.
What does financial security mean?
In monetary terms, financial security means something different to each person. It is influenced by your age, whether you are working or retired, where you live, and even – to some extent – your lifestyle.
Financial security means being confident that you make – or have – enough money to cover all your expenses. Financial security means knowing you have money saved to cover emergencies, and other unplanned expenses. And financial security means you are well on your way to being able to meet your future financial goals.
For most people, financial security is made up of four components:
- Having little to no debt.
- Effective management of expenses.
- Continual growth of savings and net worth.
- Having a career you are at least content with.
A high income is not a component of financial security, and it is not uncommon to find high earners with no financial security. With the right planning, advice, and a conservative approach to spending, financial security is possible with almost any level of income.
Why is financial security important?
We all desire to live comfortably, and with as little stress as possible. We also all hope to retire with the means to continue living comfortably, and without worrying about our finances. Which is why financial security is important; without it, none of the above is possible.
When working, you need financial security to avoid struggling from payday to payday. To keep you from quietly dreading any emergency you cannot afford. And to keep you from having to work in a job you hate, but pays you enough to (barely) cover your expenses.
Job security is never guaranteed, and being financially secure won’t make losing your job less unpleasant, it can make it less stressful. If you have no debt – and have an emergency fund – you’ll be able to spend more time looking for a job you want, rather than accepting the first offer you receive.
And if you have children, financial security gives you the ability to comfortably afford taking care of your children’s education, health, and countless other needs.
Once you have retired, you want financial security so that you can afford the lifestyle you have become accustomed to. You want to know that your savings, assets, and investments will continue to provide you with an income that not only covers your expenses, but also allows you to confidently manage any financial emergencies.
Financial security is important because it means you are not only able to meet your current financial needs, it also means you are actively preparing to meet your future financial needs.
How does one achieve financial security?
Becoming financially secure is long-term process that is made easier the sooner you start. Measures you can put in place – at almost any age – include:
- Living within, or below, your means. This is more about being prudent with your money, rather than stingy. Create a budget for yourself that includes your current expenses, along with long-term savings goals. Don’t neglect items like health, life, and household insurance, which although being expenses also contribute to financial security. Savings, including retirement savings, should be treated as a recurring expense so that your disposable income is a more accurate reflection of what you can safely use during the month.
- Prioritising and tracking long-term goals. Your monthly budget must include saving for long-term goals, but some of these goals would naturally be further off than others. If you are young, saving for a deposit on a house, or setting up an educational fund for your children is more urgent than saving for retirement. Track what you spend it month so you can see that you are spending within or below budget on actual expenses, and also saving what you budgeted to save. Also monitor your long-term savings goals to make sure you’re on track to achieving them.
- Eliminating or reducing debt. Some debt, especially when you’re younger, is necessary. This could include buying your first car, or your first bit of property. But if chosen and managed wisely, property becomes a valuable asset and investment. Ideally debt – or borrowing – should always be used for investments, never to fund a lifestyle. But this is only effective where the return on the investment is greater than the cost of the debt.
- Creating an emergency fund. This is separate to long-term saving and retirement saving. Your emergency fund is for major, unplanned for expenses, like a health emergency, losing your job, or urgent repairs around the house. Ideally it should be equivalent to several months worth of living expenses.
- Speaking to a financial coach. It’s true that there is a wealth of financial advice available at no cost on the internet, but none of it beats professional financial advice tailored to your specific circumstances. A financial coach will be able to assist you with working towards financial security, advising you on budgeting, debt reduction and consolidation, and even how you can go about investing money for growth. There are a number of ways you can go about investing, but a financial coach will be able to guide you through considerations like diversity and risk tolerance.
At Think Money we focus on strategies to reduce your debt, not your lifestyle, so you are able to create financial security that benefits you now, and through your retirement.
Call me today to discuss how to start…