What is financial security? Recent events in the world have made the concept of financial security harder to achieve than ever before, with one study suggesting that 49% of Americans believe their level of financial security is worse since the pandemic started¹.
To achieve a level of security with one’s finances, there must be a degree of understanding around the topic. By learning and educating oneself on what it means to be financially secure, improved choices can be made to ensure one reaches this state.
What is Financial Security?
Financial security is a state of mind that's achieved when you feel in control of your finances. If you are financially secure, you should comfortably be able to deal with financial challenges. This could mean you make mortgage repayments every month without any issues at all. Alongside this, you have enough money to live a comfortable life, paying bills on time and having money spare for other purchases.
When you achieve financial security, you're not impacted by sudden events or emergencies. If your car were to break down, you'd have money saved up to cover the cost of repairs. It's easy to see why this state of mind is so sought after - life is easier when you're financially secure.
How Do You Achieve Financial Security?
Knowing what financial security is is only part of the conversation. Ideally, actions should be taken throughout your daily life to help elicit this state of content. Addressing different factors of your financial life is the easiest way to do this.
According to data from Shift Processing, 80% of Americans have consumer debt². It's almost expected that you will be in debt for long periods in your life. The same research pinpoints mortgage debt as the biggest in America. Reducing your debts is the best way to achieve financial security.
When an individual owes money to different institutions, it adds a strain to their finances. Each month consists of numerous payments, restricting the budget. It becomes harder to live comfortably, so working on paying off debts is a good first step.
Everyone should have an emergency savings fund just in case problems happen without prior warnings. Shockingly, a Bankrate survey found that nearly 4 in 10 Americans would borrow money for a $1k emergency³. If you have emergency savings, you can fall back on them without needing to borrow more money. The idea is that these funds act as a safety net in case emergencies happen. This fund can be a separate savings account, or it could be cash that you keep in your home somewhere. Consequently, you have the funds to deal with situations rather than being forced to borrow money to cover them. As a result, this connects to the previous point as it reduces your debts by restricting the need to borrow.
Furthermore, general saving should be done alongside an emergency fund. In this case, you are saving money for specific goals. As an example, you have a fund that helps you save up to afford a mortgage. Or, you may have a savings account that helps you raise money for your child’s education. It’s good to have goals in place as it encourages you to save money.
To be financially secure, you must know how your income compares to your expenses. These two variables should be tracked at all times as they impact one another. Lots of expenses weighed up against minimal income is not a recipe for financial security. Instead, the aim should be to have enough money entering your account to cope with your expenses. Factor in all the essential things you spend money on every month - food, clothing, transport, debts, bills, etc. Compare these costs to what your household earns, and you can soon figure out how to reduce your expenses and make life more manageable.
Budgeting also helps you see how much money you can save every month. Many experts will recommend the 50/30/20 rule when budgeting. 50% of your income goes on living expenses, 30% is spent on personal expenses, and 20% goes towards debt payments and saving⁴. Combining this advice with the previous point, you should set aside 20% of your budget to pay off debts, put money in an emergency fund, and add funds to your additional savings pots. Your own personal situation may differ, so make sure to adjust it accordingly to fit your specific needs.
In conclusion, financial security is the peace of mind you feel when you no longer have to worry about your income covering your regular expenses. You are in a comfortable financial state, and it is achievable by addressing certain financial behaviors and being more responsible with your money.
Do you consider buying a home a form of financial security? MortgageQuote.com might be able to help you with this process.