How to Be Financially Secure

Three Parts:Building A Financial FoundationCovering Your NeedsMaintaining Financial Health

Becoming financially secure doesn’t have to a chore. However, it does take discipline and careful planning. First, you should figure out what your financial goals are, and then take steps to achieve them. Regularly reviewing and updating your plan will ensure that you stay financially secure.

Part 1
Building A Financial Foundation

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    Determine what financial security means to you. Before you can take the actions you need to become financially secure, you have to figure out what you need to feel at ease.[1] For some people, financial security comes with achieving a particular net worth (such as a million dollars). For others, it may mean something more personal, such as the pride of owning your own home, or being able to support a family member.
    • Make a list of the financial or personal achievements that you think will make you feel financially secure, and use it as a basis for forming a specific plan.
    • Keep in mind that financial security at age 25 may look and feel different than at age 50.[2]
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    Develop a financial plan. Specific goals are an important part of any financial plan. If you have the resources to take care of your needs and wants, you are more likely to feel financially secure. However, goals will also vary from person to person. Write down a list of the financial goals you have, and rank them in order of importance. Knowing where to begin means you have plan. Common goals for achieving financial security include:[3]
    • Preparing for retirement
    • Buying a home
    • Paying for education (your own, your child’s, etc.)
    • Getting rid of debt
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    Assess your finances. To make a solid plan for your financial future, you will have to have a good sense of your current financial status. If you have a positive net worth (your income and assets are greater than your debts and financial obligations) then you can start using extra cash to achieve your goals.[4]
    • You can calculate your net worth by adding all of your assets (income, investments, property, etc.) together, then subtracting all of your debts from this sum.[5]
    • If your net worth is negative, you will need to either increase your income/assets or reduce your debts before you can be financially secure, unless the situation is temporary. For instance, if you are enrolled in school and not working full time, your income may be lower than you want, but will probably rise once you graduate.
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    Save money. Any plan for financial security starts with saving as its foundation. Having a substantial amount of money set aside is necessary for many specific goals, such as purchasing a home. More fundamentally, having money set aside protects you against emergencies of all kinds. This protection has an additional psychological effect that can increase your sense of financial security.
    • Many experts recommend the saving practice of “paying yourself first.” This means that you make sure to set aside a certain amount of money from each paycheck, before paying any bills or other expenses. This ensures that you save regularly.[6]
    • Many financial institutions will let you automatically deduct a portion of your paycheck and place it in a savings account. Talk to your bank for details.
    • The most important thing is to save regularly. Even if you can only save a small amount, it will make a difference over time.
    • The exact dollar amount or percentage of your income you should save varies widely depending on things like your location and its cost of living, as well as your financial and personal goals. Talk to a financial advisor if you have questions about figuring out how much to save.
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    Invest wisely. Investing can be a smart way to increase your net worth, and bring you closer to your financial goals. In a good market, your money can make money as the value of the investments increase and/or you receive dividends and other payments. However, markets are not always strong, and investing always carries the risk that you may lose money. If you find that you cannot reasonably take on this risk because of financial or psychological reasons, then investing may not be the right choice for you.
    • Generally, you can take on more risk when you are young, since you have more time for investments to grow in the long-term, and to survive short-term losses. [7]
    • Common investments include stocks, bonds, mutual funds, and real estate.
    • It is important to diversify your investments. Having your money put into a variety of areas prevents a major loss in any one investment from wiping out your finances.[8]
    • Avoid "get rich quick" promises when investing. They are almost always scams.

Part 2
Covering Your Needs

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    Budget carefully. Few people have the resources to spend without ever having to worry about running out of money. Creating a budget allows you to determine your financial needs, get a sense of your overall financial health, and decide how to spend your money. Many people find a monthly budget a practical way to keep track of their finances.
    • A budget will list all of the fixed expenses you have each month, such as rent/mortgage or a car payment. Don’t forget to include the amount you set aside for savings!
    • Your budget should also take into account expenses that may change each month, such as groceries and utilities.
    • Subtract your expenses from your income to find your disposable income.
    • You can also find budget worksheets online.
    • Living according to a budget doesn’t have to be brutal. As long as you are in relatively good financial health and on track to achieve your goals, you can leave aside a part of your budget for things like entertainment and treating yourself.[9]
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    Build a safety net. Once you’ve started to get in the practice of saving regularly, you should keep at it. If you save regularly, even a small amount a time, eventually you will have a substantial amount set aside. Many experts recommend having enough set aside to cover all of your expenses for at least six months. This safety net can give you peace of mind and a great sense of financial security.[10]
    • You can adjust your safety net as needed. For instance, if you can only save up enough to cover all of your expenses for two months, you will still feel much more secure than if you had no savings. Alternatively, you may decide that you need to save more to feel financially secure.
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    Get insurance. If you are seeking financial security, then it is important to purchase insurance for your health (and your family’s, if applicable), home or rental unit, car, etc. Insurance is essentially paying for extra financial security, but you will sleep well knowing that your family members, valuables, and investments are protected.[11]
    • Purchase as much insurance as you can reasonably afford, given your budget.
    • Talk to an insurance broker or financial advisor if you have questions about how much insurance you need, or what types of insurance to get.
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    Prepare for retirement. For many people, saving for retirement is important for long-term financial security. Knowing that you have enough set aside to fully or partially cover your needs once you stop working will give you real peace of mind. Treat saving for retirement as its own expense, separate from your other savings accounts.[12]
    • Work with a financial advisor to determine how much you’ll need to save for retirement. Many experts recommend having 70-90% of your pre-retirement income available to you as retirement income.
    • Just like saving for other purposes, making regular contributions to a savings account for retirement is the key to successfully preparing.
    • Take advantage of any opportunities to maximize your retirement savings. If your employer offers a pension or a 401(k) plan (with or without employer contributions, take advantage of them. You can also open your own IRA or Roth IRA as a retirement plan.

Part 3
Maintaining Financial Health

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    Reduce debt. If you carry any kind of debt, then you have to set aside money to cover it, when ideally that money could be used for saving, preparing for retirement, or helping you achieve other financial goals. For this reason, getting rid of any debt you have will increase your sense of financial security. In addition, you will probably find some satisfaction in reducing your debt, which can boost your emotional sense of security.[13][14]
    • Keep in mind that some types of debt are generally approved. For instance, taking out student loans (within reason) can be a wise choice if your future career will pay off. Likewise, taking out a mortgage to purchase a home can be a wise choice, if the value of your home increases over time.
    • Credit card debt is often high-interest, and many experts suggest making it a financial priority to pay it off, if you have any.
    • Don’t take on debt for lifestyle reasons. If you’re convinced you need to purchase a second home or a yacht to live the lifestyle you want, stop and think about whether or not you can work these desires into your financial plan. If you have to take on debt to acquire such a purchase, then it is probably not in your best interest.
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    Meet with a financial advisor. Financial decisions can be very complex. To help make sense of everything, you can meet regularly with a financial advisor, like a certified financial planner. Developing a relationship with your advisor is a good way to touch base and make sure you are on track to financial security. It can be especially important to meet with a financial advisor before making any major purchase or financial change, such as buying a house, paying for education, or retiring.
    • You can also find financial counselors and financial education materials online.[15][16]
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    Reassess your goals periodically. As you move forward, your financial situation, needs, and goals may change. To ensure that you stay financially secure, you will have to review your plan and priorities, making changes as necessary.[17]
    • Make it a point to review your budget on a regular basis, such as once a year on your birthday. Double-check to see how your expenses have changed, if you are saving enough, etc.
    • Make sure to review your financial plan anytime there is a major change in your life, such as the addition or loss of a family member, a change in career, or a major unexpected expense (such as an illness). When changes occur, you will may have to alter your budget to remain financially secure.

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Categories: Budgeting | Managing Your Money