Content of the material
- What Is Financial Security?
- 5. Set emergency fund
- 2. You Dont Lose Sleep Over Finances
- 22. The Cost of Sending Your Kids to College Doesnt Scare You
- Watch our webinar on-demand to avoid these top 5 money mistakes
- Step #2: Your most important investment is yourself
- 8. Invest Everything Above That
- Understanding the Concept of Financial Stability
- 4. Block Out the Spendthrifts in Your Life
- 2. Recognize and Manage Lifestyle Inflation
- How Do I Create a Budget?
- 3. Set saving and expense budgets
- Examine Your Spending Closely
- Step 3: Spend frugally and pad your emergency fund
- Financial Security vs. Financial Stability
- Develop a trusted relationship with your finance manager
- Signs You Might Be Financially Unstable
- Tips for Reaching Financial Security
What Is Financial Security?
Financial security is reaching a point where you’re so stable with your money that you’re living without debt, paying your monthly expenses, investing for retirement, and keeping money in the bank for emergencies.
It’s having the confidence that you can survive financially, even when the unexpected hits. It’s knowing that you and your family will be okay, even if you lose your job. It’s having peace as you take care of a family member in the hospital, even when the medical bills just keep stacking up.
Financial security isn’t just something to hope for. It’s something you can achieve! But in order to get there, you have to know why it’s so important.
5. Set emergency fund
Economic uncertainty, illnesses, and accidental incidents can be happened at any time. To set an emergency fund for yourself, it is a must. The amount for this fund should be around 6-12 months. Furthermore, health and accident insurance are recommended too, as it will secure your bank account when you face with expected events. You then can live at ease and do not to bother your closed ones.
2. You Dont Lose Sleep Over Finances
When you go to sleep at night, you tend to sleep deeply and peacefully. And if anything does keep you awake, it’s usually not related to financial matters.
This is a non-financial benefit that people who are financially stable have as a result of their strong financial position. This isn’t to say that you don’t have any money worries at all, but rather that they are not significant, and never without some sort of reasonable solution.
22. The Cost of Sending Your Kids to College Doesnt Scare You
You’re looking forward to your kids going to college. You’re well aware that the cost is outrageous, but you’re making plans so that you’ll be prepared when the time comes.
This can be a combination of specifically saving money for each child through a college savings plan, streamlining your own finances so that you’ll be able to pay a large chunk out of your income, or working to help your children get scholarships that will contribute toward the cost.
Watch our webinar on-demand to avoid these top 5 money mistakes
There are some common money mistakes that people make every year that lead to added fees or debt and credit problems. This on-demand webinar will explain what the five most common money mistakes are and how to avoid them, so you can save money and avoid the frustration of these common financial challenges.
Step #2: Your most important investment is yourself
Before you ever think about investing money in the stock market, you should look to invest in yourself. Invest the time, energy and money to teach yourself the skills you need. This includes college degrees. It also includes other knowledge and skills. Learning things that don’t directly relate to your job can sometimes help you just as much as work-related skills. Employers typically want well-rounded employees who can contribute to a company in multiple ways. They also want someone who shows the drive and ambition to improve themselves.
Did your interviewing skills hold you back from getting that dream job? There are classes, books and online resources that you can use to improve for next time. Improving your skills is always a good investment. It opens you up to more opportunities and increases your career-earning potential.
At the same time, your health is vital for your success. One thing that drains a savings account very quickly is medical bills. While you can’t prevent all illnesses, a healthy diet with regular sleep and exercise can go a long way. That also means limiting your stress. Find ways to relax and unwind.
8. Invest Everything Above That
Once your emergency fund is adequately stocked, you can begin thinking about investing your money. This is important, because investing is about using your money to earn more money. The larger your investment portfolio becomes, the closer you get to financial independence.
Ideally, your efforts to save money should never slow down once you have built your emergency fund. Instead, increase your efforts to fund your investment accounts. That should be easier to do once you have an emergency fund in place.
Understanding the Concept of Financial Stability
When your income and your expenses are never the same, it can cause some serious stress. In fact, feeling worried about your financial situation can take a serious toll on your confidence and your mental health.
Worrying about how to pay that next bill can create a sense of panic and constant duress. When you're financially stable, you can start to focus your attention on other things that matter like family and home.
Even if becoming completely debt-free seems out of reach, there are some things you can do now to become more proactive about your financial health. When you take these small steps, it becomes much easier to reach your goals at a faster rate.
When you actually do achieve financial stability, you'll notice your stress levels start to dop. Your confidence will increase and you'll be free to enjoy things more openly without worrying about money and costs.
So, how do you actually get there and what can you do to reach your goals? Let's dive into some suggestions to help move you closer toward being completely financially sound.
4. Block Out the Spendthrifts in Your Life
Are there one or more people in your social circle who you could reasonably characterize as a spendthrift? If so, one of the sacrifices you may need to make to reach financial independence will be to either reduce your contact with this person (or people), or even eliminate them from your life altogether.
I know that sounds harsh, but is also totally necessary. The people who we keep company with can have a profound effect on how we view and spend money.
If you are surrounded by people who “live for the moment” – meaning they mostly spend their money having fun rather than saving for the future, you will inevitably get pulled into that behavior.
2. Recognize and Manage Lifestyle Inflation
Most individuals will spend more money if they have more money to spend. As people advance in their careers and earn higher salaries, there tends to be a corresponding increase in spending, a phenomenon known as “lifestyle inflation.”
Even though you might be able to pay your bills, lifestyle inflation can be damaging in the long run because it limits your ability to build wealth. Every extra dollar you spend now means less money later and during retirement, and higher disposable income today doesn’t guarantee higher income in the future.
As your professional and personal situation evolves over time, some increases in spending are natural. You might need to upgrade your wardrobe to dress appropriately for a new position, or, as your family grows, you might need a house with more bedrooms. With more responsibilities at work, you might find that it makes sense to hire someone to mow the lawn or clean the house, freeing up time to spend with family and friends and improving your quality of life.
As you enter into different phases of life, re-evaluate your personal budget to have it reflect the right conditions in your life. When preparing a list of your expenses, evaluate which costs are truly needed and which you can go without.
A helpful scenario is to consider what changes you were to receive a pay cut at work. If your income were to be cut 20%, how would that impact your spending or saving?
How Do I Create a Budget?
To create a budget, start by listing all of your income streams and how much you bring in each month. Then, make a list of everything you spend money and those amounts. Be mindful that some months may be different than others, so it may be helpful to create a monthly budget for the entire year.
The difference between what you bring in and what you spend is your household net savings. You can choose to spend this money on non-essentials or can save it for emergencies or retirement.
3. Set saving and expense budgets
Recording your expenses regularly is necessary. This is to monitor your spending pattern and use it for further financial planning. For the basic cost of living such as housing, utilities, food, and transportation, this should to be controlled to not over 50% of monthly income. Saving and emergency budgets should be set at least around 10-20% a month. Lastly, other expenses should be less than 30% of income.
Examine Your Spending Closely
One of the most crucial parts of real financial stability is having awareness about the money you spend. Whether it's your monthly Netflix subscription, that gym membership you never use, or weekly trips to Starbucks, overspending can lead to financial distress.
Sit down and make a comprehensive list of your monthly bills including things like movie services and other recurring charges. You should also be honest with yourself and mark down what you spend on fast food, coffee, or happy hour, too.
Once you have a clear picture of where your money goes, it can be much easier to know where to cut. Mark the items on your list that you can cut back or on completely eliminate. Think of it as more money to go towards reaching your financial goals.
A true examination of the money you spend can be an eye-opening thing. It's also a great way to start looking at money differently and thinking about spending it on the things you need versus the things you want.
After you decide where you can cut spending, do it! Log into accounts and cancel them, start packing your lunches, or make your own coffee each morning to help you save money on the things you don't need.
Step 3: Spend frugally and pad your emergency fund
One of the primary objectives of creating a budget, especially a detailed one, should be to identify how you can better put your money to work for you. This means, by creating a budget you’ll be on your way to making room for more savings, paying off debts, or even setting up an emergency fund that’s on the top of your priority list.
Living frugally doesn’t mean that you’re cheap or that you don’t enjoy what life has to offer. It simply means that you’re disciplined with your money and that you’ve identified areas in your spending habits where you didn’t necessarily have to be spending.Remember, every dollar saved (not spent) is a dollar earned that you can then reallocate and put to work for you, not against you.
As you work on trimming down your expenses and even completely eliminating spending in some areas, use those ‘extra’ funds you save to pad your emergency fund, or create one if you don’t have one yet.Your emergency fund isn’t just a rainy day fund, it’s more than that. It’s a separate account that can and should only be used in the case of financial emergencies such as unemployment, appliance breakdowns, or other unexpected costs.Financial experts recommend anywhere from 3 to 6 months of after-tax income as being a sufficient emergency fund to help you weather any storms should you find yourself in this position. You can invest this money much like you would with your retirement accounts, but just make sure that you are able to pull the money out without any penalties and in a timely manner. There’s a good chance that you will need to dip into this reserve, but make sure you only do when you absolutely need to.
Having an adequate emergency fund is one of the telling signs of reaching financial stability.
Financial Security vs. Financial Stability
People always ask what the difference between financial security and financial stability is. They sound practically the same, right? Well, there’s a slight difference.
Remember, financial security is being able to breathe deep and move forward in confidence—especially when the unexpected shows up on your front door (maybe in the form of a new HVAC system, a burst pipe, or a broken-down car).
It’s being able to pay for your life: take care of monthly expenses, save for retirement, and cover emergencies without worry.
Financial stability is just slightly different. It’s everything financial security is, but not as focused on the future. When you’re financially stable, you’re still able to confidently cash flow an emergency and cover your monthly bills—and even have a little extra at the end of the month to put in savings.
It’s what life looks like after you become debt-free but before you reach financial security.
Now, let’s talk about how you can achieve financial security—even if you’re up to your eyeballs in debt. Here are five ways to help you get there.
Develop a trusted relationship with your finance manager
To create a solid financial management system, it’s not necessary for a business owner to be an expert in finance. What a business owner has to have or develop is:
- Entrepreneurial vision, including a picture of a metrics-driven company.
- The ability to think strategically about how to achieve the company’s growth and profitability objectives.
- A financial manager—whether it’s a CFO or a bookkeeper—who can collaborate on financial strategy.
- Enough understanding of how money works in their business to be able to delegate rather than abdicate responsibility (e.g., preparing financial statements and budgets, generating metrics reports, performing banking functions, gathering tax-related documents for tax professionals, etc.) for the tactical work in finance.
The partnership Ilene has with her finance manager is essential to her leadership of EMyth. “Your finance manager has to be a skilled financial Technician, but also someone who you can communicate with honestly and openly. My relationship with Pauleen depends on my willingness to be vulnerable with her. I can’t hold back or she won’t be able to help me. She knows what I want, what I dream about, what scares me. That makes it possible for us to think strategically together.”
If you can’t let yourself trust your finance manager, you’ll send out signals about how you want your business to function that they won’t know how to interpret. “I can’t do my job in the way that I want to if I’m not allowed on the inside,” Pauleen told us. “I need to understand the Strategic Plan—I have to know what Ilene is trying to achieve and what she’s afraid might happen. Once I do, I can see things through her perspective and identify what will help her reach her goals. Otherwise, I’m just producing information and there’s no relevance to it.”
The more your finance manager understands you and your business, the more likely you are to receive the information you really need from them. They can play a critical role in educating you in finance, telling the story of your numbers and the narrative that makes your business, your vision and your decisions make sense to everyone who works for you.
Signs You Might Be Financially Unstable
Although I covered the definition and a bit about what it means to be in a good financial place, I want to share some warning signs that your finances might be a bit unstable first.
Sometimes you may not realize you are on the verge of instability or you might be in some form of denial.
Back in 2013-2014, I knew I wasn’t financially in the best shape but chose to pretend it wasn’t bad.
But until I really reflected and wrote down what was happening, I didn’t realize how bad my money mistakes were.
Here are the signs of unstable finances:
- Very low emergency fund or you have none at all
- Maxed out one more credit cards and barely making minimum payments
- Your credit score is extremely low, or the scoring has been sinking
- If you lost your job, you’d be financially screwed immediately
- You are not saving for retirement because you can’t afford to or know how to
- After your monthly expenses, you have nothing leftover
- Late fees or overdraft fees happen quite regularly
- Money is constantly stressing you out and losing sleep over it
- You end up borrowing money from family or friends more than you want to admit
- You’re drowning in total debt because you’re making bare minimum payments, trying to consolidate, or trying to push it off.
These are just some of the handful of warning signs. And five of the above, I dealt with for a few years after college.
Maybe you fit into only a few of the signs above or maybe them all.
The important step here is not to feel ashamed or feel that you are alone — as so many people of different generations are battling these too.
But the great news is you are learning and reading this post, looking to make changes with your finances.
In the next section, I’ll cover how you can become financially stable. These are the steps I took in order to reach a new level of financial health.
Tips for Reaching Financial Security
- Whether you’re saving for retirement through a work plan or an IRA, a financial advisor could help you create a financial plan for your needs and goals. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- An emergency fund will provide security when unexpected things come up. Where you keep your emergency fund is a personal decision. Some people keep their emergency fund in their regular savings account. If you decide that you need an emergency fund of $10,000 then you can just make sure there are $10,000 in your savings account that you never touch. It can be tempting to spend that money though. In that case, you could create a separate savings account or open a money market account.
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