Whether we think of it or not, we all aspire to achieve financial security.
Not worrying about paying the bills each month; not stressing about an unexpected expense; not panicking when disruptive events threaten the stability of our main source of income – this is what we all long and strive for each day. Simply put, peace of mind. Which comes with achieving financial security.
The million-dollar question on all of our minds – and the reason you’re probably here:
How do you achieve financial security and the peace of mind that comes with it?
The answer is not that straightforward. And depending on your life goals, achieving financial security can be a long process, requiring a lot of focus. The good news is that those of us who do think of it have already made a major step toward achieving it. But before we get into the how, it’s important to clarify the what. You’ll see why.
So what is financial security?
First, let’s establish what financial security is NOT. This will help clear up some misperceptions about the concept.
1. Financial security does not mean “different things to different people.”
It means one thing, and that is having enough money to cover your basic needs. What differs is what each of us is willing to pay to fulfill each basic need.
2. Financial security is not the same as financial independence or financial freedom.
As mentioned above, financial security means having enough monthly income to cover your monthly basic needs – food, house, clothing, utilities, transport, insurance –, including any debt or emergency expenses. Financial independence means having enough monthly income to cover your monthly basic expenses PLUS leisure activities, sports, travel, etc. And financial freedom means having enough monthly income to cover all of the expenses from the financial security and financial independence stages, PLUS saving enough money so that even if you quit your job and retire, you can still afford the lifestyle you desire.
In a way, financial security is about preserving the status quo. And that is fine, if you’re pleased with your current situation. But if you want to take it to the next level and be financially independent, you need to take additional steps. And if you’re looking to achieve financial freedom, then keep in mind that only after you’ve reached the financial security and then the financial independence stages, you have a good chance of reaching financial freedom.
Also, financial security is not as loose a term as it may seem. It is based on math, structure, and discipline – you have to plan for it, track and measure results, and adjust your plans as needed. But it’s not just about planning and numbers. As a concept, financial security also has a very important emotional component: motivation, or the why.
Identifying the why helps you set clear goals for yourself. Which, in turn, gives you a place to start. And this is what most of us struggle with in the beginning. Once we do figure out where to start, the path becomes clearer.
So let’s talk about motivation: your why.
Why do you want to be financially secure?
Take a few moments to think about why you want to be financially secure.
For most people, the main motivation is removing the stress associated with making sure they have enough money to cover their basic needs, so they can focus on achieving even higher goals in life.
Now, if you’re thinking about retiring early or affording some luxury item, you may have already achieved financial security, and now you’re aiming for things that might motivate you to reach the next stage: either financial independence or financial freedom. And we’ve discussed these topics in more detail in other articles:
But if you’re still stressing about how to make ends meet or how to pay back a loan in case you’re out of work for a few months, then you’re not financially secure yet. However, that does not mean you should put your higher goals on the back burner. It means you need to be very organized in how you set your goals and prioritize their achievement. In other words, you will need to plan very carefully your steps toward achieving financial security first, and then the higher goals associated with financial independence and financial freedom.
Okay, now that we clarified these two important aspects – the what and the why of financial security – let’s talk about the how.
How to achieve financial security?
In a nutshell, the how is about the planning, the math, and the discipline needed to achieve financial security.
What follows is a set of best practices recommended by financial experts, as well as folks who’ve started their journey toward financial freedom, and already have passed this first stage.
1. Define your goals
As mentioned above, first and foremost, you need to define your goals. These are based on your current needs and wants, as well as aspirations for the future. Think in terms of ongoing, short-term, and long-term goals.
- Ongoing might be paying utilities on time every month
- Short-term might be making a down payment on a house or a car
- Long-term might be raising money for your kids’ college education, moving to a beach house when you retire, or saving for retirement.
Your goals need to be very specific. So specific that you can visualize yourself achieving them.
2. Track income versus expenses
Once you have your goals figured out, look at how much you make and how much you spend on average on a monthly basis. Track your income versus expenses for a couple of months.
Take a closer look at your expenses – which ones are living expenses, and which ones are related to purchases you could have done without? Keep them separated for now. This exercise will prove useful later, when you’ll have to prioritize your expenses based on the goals you’ve set for yourself.
Draw a line and calculate how much money you’re left with after you pay off your basic expenses. The delta is potentially the amount you can save or allocate for more useful purposes.
3. Pay off your debt
Becoming debt-free is key to achieving financial security.
Picture this scenario: You feel secure in your job, and you decide to take a home loan. The interest is good, and everybody’s doing it. So you sign up for monthly payments, over the span of three decades.
Now, think of the interest you’d have paid by the end of those thirty years. Wouldn’t that money that you’ve worked hard for look better in a savings account? You could use it later for your benefit, and not the bank’s. On the same note, after a while, as much as you plan around it, that debt might start putting some constraints on your overall budget.
Not to mention that debt can also cause mental constraints. Studies show that debt can cause stress, anxiety, and even anger. And it doesn’t have to be a home loan to get you feeling trapped and anxious. Credit card debt is even more likely to be associated with negative mental health, because it isn’t associated with any major life event, such as buying a house.
To be able to free yourself from these constraints, you need to start focusing on paying any debt you may have accrued. If you have multiple debts, start with the smallest one – a quick win to get you motivated. Then attack the larger ones, one by one. In the meantime, train yourself not to accumulate more!
Once you are liberated from debt, you’re also free to save more and invest in your future. You are free to focus on savings that help you achieve financial security, then independence, then freedom.
4. Prioritize long-term goals
While working on eliminating debt from your life, think about the long-term goals you’ve set for yourself. Let’s say there’s more than one.
One way to start working on achieving them is to create a separate fund for each. Then establish an amount of your income that you can afford to allocate toward each fund.
Look at those expenses with purchases you could have done without (#2 above). How much could you have set aside for each fund, each month?
Don’t feel bad for not doing so in the past. Just allocate that amount starting next month. The sooner, the better.
One good practice that experts recommend is ensuring that the first “payments” you make each month – before you start paying your “basic” bills – are toward your long-term goals. Once you got those out of the way, take care of the rest.
5. Create an emergency fund
Emergencies can happen to each of us. Say your car breaks down unexpectedly or a leaky pipe turns into a household nightmare right before your paycheck. Do you have the money to cover your living expenses and the sudden damage?
Or a world economic crisis causes you to lose your job. What do you live off until you find a new one?
In other words, are you prepared for challenging times? If not, you should be. In fact, financial experts recommend you get prepared by creating an emergency fund. It will not only save you the stress and anxiety that come with unforeseen expenses, but it can also give you time to get back up on your feet, should something like job loss happen.
Start with saving at least three months’ worth of your living expenses. Look at your monthly expenses and income, and decide what amount you can set aside each month for this goal. It can be as small as you are comfortable with. Bear in mind though that the smaller it is, the more time you’ll need to reach your goal.
When you’ve gathered the targeted amount in your emergency fund, continue adding to it – your new goal should be to have six months’ worth of your living expenses in your emergency fund. Then, continue saving until you reach one year’s worth of living expenses.
Sound like a tedious, lengthy process? It is. But just think about the prospect of having enough money to live off of for an entire year, even when the job market turns bleak.
Just like paying off debt, creating an emergency fund is key to creating a solid foundation for financial security.
6. Get in control of your expenses
This is another pillar of financial security, along with paying off debt and creating an emergency fund.
After going through the exercises described at the previous points above, you must have a good sense of how much you earn, spend, and potentially could be saving – and for what purposes. But it’s not enough.
To gain 100% clarity on your financial situation, you need to centralize and visualize the income, expense and savings components. In other words, you need to create a balance sheet. Add your income and your monthly expenses by category, including debt payments, emergency fund, and other funds associated with long-term goals. And keep adding to it on a monthly basis, for tracking purposes.
A couple of things to keep in mind here: your monthly expenses, including debt payments, emergency fund, and other long-term goal funds should always be equal or less than your total income.
- If they’re higher, then you’re probably accruing some debt. So re-adjust your saved amounts and re-allocate them to paying off the accrued debt. Look at non-essential purchases and make sure you eliminate those in the future.
- If they’re lower, then you’ve got some more pocket money to spend or save each month. Choose wisely.
Essentially, getting in control of your expenses means establishing an expense budget that does not exceed your income, and is divided into funds and expense categories.
7. Set, but never forget!
Make sure you keep funding your long-term goals. To make the process easier, you can set up monthly direct debits to automatically transfer money into the long-term goal funds.
But don’t forget to record each payment and to check the total amounts saved each month. This practice will give you a sense of purpose and satisfaction, and will motivate you to continue your mission.
8. Find other sources of income
By now, your income must look stretched to a maximum. And not far from now, you might get the feeling that you’re depriving yourself from things you’d like to have. You might even start wondering ‘what’s the point in all of this if I can’t enjoy life now?’
To that, we say: Work on your mindset! Think again about your goals and why you’re doing this. Then start looking for ways to achieve them faster.
This is where additional income comes in – it not only helps you support your long-term goals, but it also helps alleviate any constraints you’re perceiving.
Research ways to create new sources of income – ideally, passive income. Look for investment opportunities. If you don’t have much knowledge or insight into investment tactics, keep in mind that everything has a learning curve.
There’s a bunch of eye-opening resources out there – not only blogs, articles, and books, but also communities of people with the same interests as yours. Join them, listen, ask questions, and enjoy the learning ride. When you feel ready to start investing, you may also want to engage a financial advisor to guide your first steps.
9. Live simply and healthy
When they decide to start their journey to financial security, financial independence and ultimately financial freedom, many people adopt a frugal lifestyle. This lifestyle is based on drastic expense cuts and huge income savings, both of which can be achieved by forming frugal habits. Here are some examples:
- Having a strict budget for each category of living expenses
- Always being on the lookout for discounts, coupons, etc.
- Stockpiling items when found at low prices
- Opt for DIY, whenever possible
- Participating in yard sales
- Reducing eating out instances to a minimum
This method works and has yielded incredible results: People in their twenties have managed to reach their first million dollars, and soon after, they retired.
However, frugality may not be for everyone. If you don’t see yourself living a frugal life, don’t.
What you can try is simplicity – simplify your life to an extent that feels comfortable to you. Detach yourself from the consumerist practices our society has taught us. Buy only essential items. But never, never compromise on quality: quality food, quality clothes, quality resources – anything that helps living a good, healthy life.
10. Stay on track
Once you’ve built a savings system and a process that work for you, all you have to do is STAY ON TRACK. Sometimes it will seem easy; other times it will feel like a burden.
If you know that you may be prone to emotional spending or impulse buying, try to account for this eventuality when you establish your monthly expense budget. Set aside a specific amount of money or create a separate fund that you can use whenever you feel the need to buy something nice for yourself.
Be mindful though and stick to the amount available in the dedicated fund. If, say, you don’t get to use it one month, you can leave it there to accumulate more money, or transfer it to a savings fund. Either way, such a practice should help you control your finances and stay on track.
Ready to start?
Financial security is achievable. The process requires a lot of focus, commitment, and determination, which may sound difficult. The key here is not to think of it as a process, but as a journey – one that involves self-discovery, mindful living, and continuous education.
So, are you ready to start?
Figure out your whys and establish your short- and long-term goals. But maintain a flexible mindset: If your life situation changes, adapt your goals as well.
