Stage 3 on the financial wellness roadmap is financial security.
From financial capability to becoming financially secure, the third stage is about peace of mind to meet the financial needs of life and unforeseen circumstances.
What is Financial Security?
Financial security means enough income to cover your monthly expenses and debt obligations. Being financially secure gives you the power and confidence to improve your financial health.
An emergency will not derail your economic outlook with financial security, and you have money saved to cover unexpected events or financial setbacks. You’re managing cash well and can pay for your basic needs and also afford some luxuries. Essentially, you’re creating wealth and on track to achieve financial goals.
At stage 3, you 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?
Financial Security Key Features
- an emergency savings fund;
- managing debt and controlling credit;
- savings accounts;
- retirement planning;
- and investment income.
Financial Security Defined
Financial security is the ability to manage your personal finances well – from the day-to-day and into the unknown future. When you’re financially secure, you have a financial plan for surprises and life events like having a baby, getting divorced, paying for college, or taking time off.
Being financially secure means you can handle economically tricky times like unexpectedly losing your job or working less due to illness or family emergency. It enables you to live more presently and have confidence in your ability to use money skills in creating more value in your life.
How to Become Financially Secure
Feeling secure is often less about the numbers and more about how you think 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.
Financial security relies on an active and proactive approach to your money and finances.
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?
The following is the best path to financial security:
1. Growth Mindset
A growth mindset will help you view challenges and setbacks with opportunity. Your mindset affects your relationship with money. It’s what informs your financial behaviors and habits. Money mindset influences your savings and spending habits. It’s a vital component to meet a financial emergency.
2. Envision Your Dream Life
It’s essential to have a vision for your life, not just financial goals. You want to understand how your goals relate to the life you want to live. Often people set financial goals that don’t create the life they want to live. Be clear about the vision for your life. You can do this by clarifying your values and aligning your goals to them.
3. Have a Financial Plan
When you have a financial plan, you mitigate risks about the future that often cause anxiety and stress. Financially security is knowing you have a plan to cover your monthly expenses, spend on your wants and needs, and save for future expenses and retirement.
4. Utilize Budgeting
Have a monthly budget to allocate your resources to achieve your goals and follow the plan to move towards your life’s vision. Budgeting helps you manage your cash flow–the money-in and -out–and pay living expenses. Budgeting is a necessary tool to manage your finances accordingly and meet basic expenses and monthly bills. And remember, budgeting isn’t an act of deprivation; it’s an act of direction. Learn how to budget to achieve your goals.
5. Diversified Income
Everything starts with income. You need money coming in to support your life and achieve your goals. You want to do what you can to get a pay raise at work. But, it’s also crucial to begin creating multiple income streams. Doing so can help you move on to financial independence. Having less reliance on a single source of income can help foster better peace of mind and wellbeing.
Financial security requires multiple sources of income. There’s a lot of stress associated with depending on one job to live your life and achieve financial goals. Start by getting a side hustle for financial security.
6. Emergency Savings Strategy
Set up multiple savings accounts allocated for specific purposes. Have a rainy day fund, an emergency fund, an opportunity fund, and a vacation fund. A typical financial situation is an emergency. Emergencies happen. It’s not a matter of if, but when it’ll happen. You’ll be financially secure knowing you can cover these unexpected events. Learn more about the emergency savings strategy.
Additionally, you’ll want to open separate savings for various goals like a car and home fund. When you save for specific reasons, you’ll be less likely to spend money in those savings accounts for unrelated reasons.
7. Conscious Credit Use
Being financially secure can mean getting easy access to credit and the ability to manage debt. It also means you consciously use credit as a tool instead of mindlessly spending and creating long-term credit card debt. You’re utilizing credit as leverage to create wealth. It’s essential to understand how credit can help you achieve financial goals. But, it’s equally important to know how it can derail you from achieving financial freedom.
Be conscious of how you spend using credit. A good rule of thumb is to limit credit use that creates consumer debt (i.e., purchasing items on a credit card that you can’t pay off in 30 days).
8. Debt Payoff
There’s no financial security if you’re in debt. Sure having a mortgage may not seem like a big deal but having one is a hefty monthly financial obligation.
Debt is a ball and chain that requires you to earn money to make debt payments. Having no debt frees your income to spend on happy-inducing purchases instead.
Want to feel financially secure? Eliminate your debt starting with unsecured credit cards, personal loans, auto loans, student loans, and mortgages. Learn how to pay off credit cards using the debt snowball method or debt avalanche method.
9. Contribute to Retirement Savings Plans
Secure your retirement years. First, make contributions to your employer-sponsored plans like a 401(k) or similar retirement plan. Do your best to contribute at least the amount to get the full employer match, if offered. Second, contribute to Roth IRAs and do what you can to invest the max allowed by the IRS. Finally, invest for retirement by buying shares of stock through a taxable brokerage account.
When you are confident about the money you’ll have when retired (either by choice, age, or physical condition), you’ll feel secure in knowing your finances can meet your needs.
10. Investing for Independence
Build your financial assets and investment strategies. Make sure you’re investing for financial independence (the next stage on the roadmap). First, investing requires making use of all tax-advantaged retirement accounts. Second, it involves using taxable brokerage accounts to invest in stocks, exchange-traded funds, and other investments.
The sooner you invest for retirement or independence, the less you’ll need to contribute monthly because of the power of time and compound growth. Start early, be consistent, and grow your contributions as your income increases.
11. Avoid Lifestyle Inflation
Lifestyle inflation is when your expenses rise at the same rate as your income. When your pay increases, your “extra money” is used for discretionary spending resulting in the inability to save for future goals.
There is nothing wrong with upgrading your life as your income increases. But an unintended effect may lead to living paycheck-to-paycheck to keep up appearances. Lifestyle creep can impact your ability to pay off debt, fund your goals and invest for the future.
12. Enhance Your Skills
Achieving financial security can help with economic mobility. As with any of the stages in the roadmap, you must continue your financial education to achieve long-term goals. Financial planning continues to support economic security.
Lastly, it’s vital to consult with a financial planner to help you assess your long-term financial security.