For many, financial security can feel like an unattainable dream. To put it in perspective, a whopping 29 percent of Americans don’t have any savings at all.
However, financial security is a relative term, which means it’s possible for anyone to become financially secure.
In this guide, we share everything you need to know about financial security and how to become financially secure.
Let’s dive in.
- What is Financial Security?
- What Does Financial Security Mean?
- Financial Security vs. Financial Freedom
- The Importance of Financial Security
- How to Become Financially Secure in 10 Steps
- Summary: How to Achieve Financial Security
- Want to Learn More?
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What is Financial Security?
Financial security refers to the peace of mind felt when we aren’t worried about money. Often, this means having enough income to comfortably cover expenses, being debt-free, and having savings to cover emergencies.
What Does Financial Security Mean?
Some people believe you need to be a millionaire or even multi-millionaire to be financially secure. However, there have been countless entrepreneurs, athletes, and film stars who’ve made a fortune and then lost it all.
The truth is, you don’t need a mansion, sports car, or private jet to be financially secure – you don’t even need to have paid off your mortgage.
Ultimately, financial security just means that you’re in control of your money, and you’re not worried about paying the bills or covering an emergency.
Still, financial security means different things for different people. So, here are four types of financial security to help you define what this term means for you.
1. Being Debt-Free
It’s hard to feel financially secure when carrying significant debt.
Now, some types of debt are necessary. For example, very few people have the capital to pay for a house or a higher education in cash.
But spending on credit for everyday items, clothes, tech gadgets, or vacations isn’t likely to help you achieve financial security – especially if this debt is on credit cards.
Credit cards demand monthly payments and are known to have very high-interest rates – some even have interest rates up to 29.99% APR, making it very easy to spiral further into debt.
Bottom line, if you don’t pay back the money you’ve borrowed on time, you can be sued, your house can go into foreclosure, and your car could be repossessed. The threat of these scenarios isn’t likely to make you feel financially secure.
On the other hand, being debt-free can help provide a deep sense of financial security.
2. Controlling Your Money
If someone makes $100,000 per year but spends $110,000, are they financially secure? Nope. This person is digging themselves into debt and will struggle to pay the bills.
So, if we want to learn how to become financially secure, we must first learn to budget.
Budgeting is the process used to control money – to tell it where to go, instead of wondering where it went. When you’re in control of your money, you’re far more likely to feel financially secure.
When you consistently have money left over at the end of every month, you’re well on your way to achieving financial security.
As the Irish statesman and philosopher Edmund Burke once said, “If we command our wealth, we shall be rich and free. If our wealth commands us, we are poor indeed.”
3. Being Prepared for Emergencies
There are many people who don’t have enough money to pay for health, home, or renters insurance. And according to a Bankrate survey, nearly 4 in 10 Americans (41%) would borrow money to cover a $1,000 emergency.
Living pay-check to pay-check without savings or suitable insurance is guaranteed to affect your sense of financial security and mental health.
To feel financially secure, you need to have suitable insurance and a buffer in the bank for when things go wrong.
4. Increasing Your Financial Security
If you’re not becoming more financially secure, there’s a good chance you’re becoming less financially secure.
As a result, financial security also means steady, reliable progress. Perhaps this means paying the mortgage down every month, adding to a savings account, or investing for retirement.
Watching your savings and net worth grow is very likely to make you feel more financially secure.
Financial Security vs. Financial Freedom
Feeling financially secure and financially free are two different things.
A financial security plan focuses on generating feelings of safety by paying bills on time, increasing savings, budgeting, investing, and purchasing insurance.
On the other hand, financial freedom is about living life on your own terms. As the philosopher Marcus Tullius Cicero once said: “What then is freedom? The power to live as one wishes.”
For some, this could mean early retirement, long-term travel, luxury purchases, or the ability to quit a disliked job to find another without fear.
Financial security must be achieved before financial freedom becomes possible.
The Importance of Financial Security
Why is financial security important? Any type of insecurity, whether emotional, financial, or professional is bound to cause stress.
Plus, financial security and happiness are clearly intertwined. Dan Buettner, author of The Blue Zones of Happiness: Lessons From the World’s Happiest People, said:
“Financial security is also, obviously, huge. It really does deliver more happiness over time than most anything that money can be spent on.”
There are many benefits of financial security – it removes stress, fear, and anxiety, and replaces them with feelings of ease and safety.
How to Become Financially Secure in 10 Steps
The steps to becoming financially secure aren’t complicated. However, they do require persistence, hard work, and dedication.
If you want to master your finances, here are 10 tips to help you learn how to achieve financial security.
1. Evaluate Your Situation
Before you can become financially secure, you need to gain some clarity.
To do this, start by taking inventory. How much money do you make, and how much do you have in savings and investments? How much debt do you carry, and what are the interest rates? Finally, how much are your expenses each month?
Write everything down.
Doing this can take some time, so take it slow, and if you need to, break up the task into smaller ones. Once you’ve got a clear picture of your financial situation, you’ll be able to improve it.
2. Live Below Your Means
A crucial part of financial security management is living below your means. This means that you always spend less than you make.
This means that Buffet didn’t fall into the trap of “lifestyle creep” – this is when your income increases and your spending increases as well, leaving you with no savings.
So, create a budget, and make sure that you always live below your means.
3. Create Financial Goals
Have a think about your financial goals – what do you need to feel financially secure? Perhaps you’d like to pay off credit card debt, build an emergency fund, or save some money each month for retirement.
Whatever it is, write it down. Then, work out how much money you need to achieve each of your goals.
When you’ve defined all your goals, put them in order of priority – which ones are most important? Why? Perhaps getting an emergency fund is your top priority, or maybe you want to save up a deposit to buy a house. Try using a budget app to keep track of all incoming and outgoing money to ensure you are sticking to your budget.
4. Make a Financial Security Plan
Antoine de Saint-Exupéry, the French writer and pioneering aviator, said, “A goal without a plan is just a wish.” So, once you’ve written down all of your goals, you need to create a financial security plan.
Dig deeper into the details.
For example, if you want to save up a $1,000 emergency fund, how long will it take you to save it, and how much money do you need to save each month? What would prevent you from reaching this goal, and how can you avoid it?
Create a plan for each of your top-priority goals.
5. Reduce Your Expenses
Once you’ve created a financial security plan, it’s likely you’ll need to reduce your expenses to free up some money.
Depending on how much you need to save to reach your goals, you may need to cut back on small luxury items or large expenses.
When trying to save money, focus on consistent wins over time. For example, saving $100 by purchasing a cheaper sofa is great, but also look for ways to save an extra $100 every month.
6. Pay Off Your Debt
Whether it’s student loans or credit cards, roughly three out of four millennials in the U.S. are in debt, with an average balance of $36,000.
If you have debts that you want to pay off to achieve financial security, there are two main methods that you can use.
The snowball method suggests that you pay off the smallest debt first, and then work your way up, paying the largest debt last – regardless of interest rates. Personal finance expert Dave Ramsey said:
“When you clear that first bill and move on to the next, you’ll see that you are in charge of your money. And that’s so motivating!”
The avalanche method suggests that you pay off the debt with the largest interest rate first, then work your way down to the debt with the lowest interest rate.
This avalanche method allows you to pay the least amount of money in interest overall. However, the snowball method can help you to feel empowered, and so you may pay off your debts quicker.
7. Save, Save, and Save Some More
Saving consistently is a vital part of achieving financial security.
If you’re not sure where to start when it comes to saving, consider using Senator Elizabeth Warren’s 50/30/20 rule. Here how the rule suggests you spend your money:
- 50% on needs, such as housing, utilities, and groceries.
- 40% on wants, such as shopping and hobbies.
- 20% on savings, such as retirement plans and emergency funds.
Whatever you do, start saving!
8. Earn More Money
Another way to increase your financial security is to find ways to earn more money. For example, you could negotiate your salary, look for a higher paid job, or start a side hustle.
9. Invest in a Diversified Portfolio
If investing is a part of your financial security plan, make sure you don’t put all your eggs in one basket.
Instead, spread your money across multiple investments to create a diversified portfolio. This way, if an investment should fail, you won’t lose all of your money.
10. Be Consistent
Finally, remember that financial security management never stops – consistency is the name of the game.
To create long-term financial security, you need to focus on building sustainable habits.
Jim Rohn, the entrepreneur and motivational speaker, said, “Success is neither magical nor mysterious. Success is the natural consequence of consistently applying basic fundamentals.”
Summary: How to Achieve Financial Security
Financial security refers to the peace of mind experienced when you have relatively few worries about money. For many people, this often entails:
- Being debt-free
- Being in control of personal finances
- Feeling prepared for financial emergencies
- Steadily increasing financial security over time
Remember, there’s a difference between feeling financially secure and financially free – the latter refers to living in a way that’s not constricted by money.
If you want to learn how to become financially secure, here’s a 10-step plan to help:
- Evaluate your situation
- Live below your means
- Create financial goals
- Make a financial security plan
- Reduce your expenses
- Pay off your debt
- Save for things like emergencies and retirement
- Find ways to increase your income
- Diversify your investments to mitigate risk
- Be consistent in your financial security management
If you’re wondering whether or not you can achieve financial security, listen to the entrepreneur Henry Ford: “Whether you think you can or think you can’t, you’re right.”
Have we missed any great financial security tips? Let us know your thoughts in the comments below!