From financial capability to becoming financially secure. Welcome to Stage 3 on the Financial Wellness Roadmap. Financial security gives you the power and confidence to make the most of your money and improve your life. Stage 3: Financial Security
The third stage is about peace of mind and facing little to no financial stress. Financial security is when your income is enough to cover your monthly expenses and debt obligations well into the future.
With financial security, an emergency will not derail your financial outlook, and you have money saved to cover unexpected events or financial setbacks. Money is managed well. You can cover your basic needs and also enjoy some luxuries. Essentially, you’re creating wealth and on track to achieve financial goals.
At stage 3, you’re can answer questions like: what’s your budgeting method? what’s your net worth? how much is in your emergency fund? what’s your debt-to-income ratio? savings rate?
- an emergency savings fund;
- managing debt and controlling credit;
- savings accounts;
- retirement planning;
- and investment income.
Financial security is the ability to manage money well – from the day-to-day and into the unknown future. When you’re financially secure you have a financial plan for unexpected surprises and life events like having a baby, getting divorced, paying for college, or taking time off.
Being financially secure means you can handle financially difficult times like unexpectedly losing your job or working less due to illness or family emergency.
Financial security is peace of mind enabling you to live more presently and strong confidence in your ability to use your money skills in creating more value in your life.
It’s also about how you feel
Feeling secure is often less about the numbers and more about how you feel about your given situation. Having your finances in order and systems in place to earn, grow, and save money can contribute to a feeling of financial security.
Ask yourself these questions:
- Do you feel secure about your income?
- Does money cause you to feel anxious?
- Do you have enough to cover the unexpected expenses?
- Do you have a little extra to take advantage of opportunities?
Financial security relies on an active and proactive approach to your money and finances.
Have a plan
When you have a financial plan and budget, you are mitigating some risks about the future that often cause anxiety and stress. Financially security is knowing you have enough coming in to cover your expenses, spend on things you want and need, along with saving for future expenses and retirement.
Purposeful Savings Strategy
To be financially secure, start by having a set of savings accounts that are allocated for specific purposes. One of these accounts includes an emergency fund. An emergency fund isn’t used for “unexpected” expenses like paying to fix a flat tire. Its purpose is to cover the loss of income if you become unemployed, underemployed, or need to take time off because of sickness or family care.
Having savings helps you avoid using credit that can lead to debt. It will lessen the need to borrow and the stress that can induce when payments are due.
There’s no real financial security if you’re in debt. Sure having a mortgage may not seem like a big deal but having one still requires you to make on-time payments.
Having no debt obligations frees your income to be spent on happy inducing purchases or invested. Debt is a ball and chain that straps you into working more to earn income to satisfy the payments.
Want to feel financially secure, eliminate your debt starting with any unsecured credit cards, personal loans, auto loans, student loans, and mortgages. And repay all your “borrowed” money from family and friends to keep you feeling secure about your relationships.
Avoid Lifestyle Creep
It doesn’t matter how much more money you make if you continue to spend at the same rate you did prior to that increase. Lifestyle creep is when the cost of your life rises on par with the increase in your income. So when you said you would save after the next raise, you find yourself spending that additional money to up your lifestyle.
There is nothing wrong with upgrading your life as your income increases. But doing so may cause you to live paycheck-to-paycheck. This can impact your ability to pay off debt, invest to make more money, and fund your retirement goals.
Enhance your skills
Command more money with your day job by improving your skills, gaining new work experiences, and expanding your professional network. The seemingly easiest way to increase your income is to make more from your primary job. And if your current employer won’t pay you for your value, then you have the new skills, experiences, and network to find another.
Additionally, knowing your skills are keeping with the times can give you a sense of employment security.
Multiple Income Streams
Financial security requires multiples sources of income. There’s a lot of stress associated with depending on one job to live your life and achieve financial goals. Focus on creating multiple income streams whether active or passive.
Invest in Retirement
Make contributing and investing in your retirement a priority. Start early, be consistent, and grow your contributions as your income increases. Start with contributing to any employer-sponsored retirement account such as 401ks.
The earlier you start investing for retirement, the less you’ll need to put away because of the power of compound interest.
When you are confident about the money you’ll have when you retired (either by choice, age or physical condition), you’ll feel secure in knowing you’re needs will be met with your investment accounts.
Next Stage: Financial Independence