How to Achieve Financial Security

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Financial security — putting yourself into a position to be confident enough with your money situation that you can live the life you want.

We’re all working to achieve it, but to get there, it helps to understand what it means and what it takes to obtain financial security. Unfortunately, that isn’t something that’s typically taught in school.

But what is financial security and why is it important? Let’s take a closer look.

What is Financial Security?

Financial security is achieved when you have enough money to put yourself in a comfortable financial situation — not worrying about how you’ll pay the rent or if you have enough to cover your bills in the short term, or living the life you want in the long term. It’s the peace of mind that comes with knowing you have the funds to cover expenses for an extended period of time.

Keep in mind there is no magic number associated with financial security. After all, all of us are different. The magic number for you largely depends on your lifestyle and your financial goals.

In most cases, financial security comes down to having the ability to do what you want, when you want to do it. For example, this may include taking a sabbatical, switching jobs or careers, or starting a business. Or it may include retiring early and focusing on larger life goals — like traveling, pursuing personal studies, or starting a charity.

Steps to Achieve Financial Security

Here are some time-tested ways to build financial security.

Keep a Budget

If you want to build and maintain financial security, you need to sharpen your budgeting skills. This helps you avoid overspending and racking up credit card debt while allowing you to save money and ensure your cash allocation goes to the right areas — like bank accounts and investments like mutual funds.

If you don’t have a budget, it is very difficult to build financial security. You’ll wind up guessing about your finances and spending haphazardly, which is a recipe for disaster.

Understand that investors of all types — even extremely wealthy ones — typically have budgets to keep their spending in check.

TIP: Check out our Top 6 Budgeting Apps to get started.

Get out of Debt

Regardless of your situation, you’ll want to quickly pay down debt. It is impossible to have true financial security if you’re constantly worried about paying expensive credit card bills or paying off student loans. Credit cards and loans are among the top forms of financial stress in life. It won’t necessarily be quick or easy, but you can get out of debt.

Once you are out of debt, the trick is doing whatever it takes to avoid getting dragged back into it. This, of course, is something that is much easier said than done. Stick to your budget, reduce your number of credit cards, and think twice before making any large-ticket purchases like expensive new cars.

Create an Emergency Fund

In addition to paying down debt, you’ll also want to protect yourself and your family by setting aside enough money to cover basic living expenses in the event of job loss or illness. As COVID-19 showed us, emergencies can arise when you least expect them, changing your financial situation abruptly.

It’s also a good idea to set up a healthcare savings fund so that you can plan for any potential doctor’s visits or hospital bills that may arise unexpectedly. If you are eligible, consider setting up a health savings account (HSA) and making contributions.

Best practices call for building a reserve fund to float you and your family for six months to a year. Keep your money in flexible savings accounts that earn high interest so that you can access the money when it’s needed. And whatever you do, avoid tapping into the emergency fund until you actually find yourself in an emergency (and no, needing the latest tech toy is not an emergency). Keep it stashed away for a rainy day.

Diversify Your Investments

Once you’re out of debt and you have an emergency fund put away in savings accounts, the next step is to diversify your investments.

Most investors should look into the following types of accounts.

Brokerage Account (for Short-term Investing)

A brokerage account is one that allows you to buy individual stocks, exchange-traded funds, index funds, and other securities. You’ll have to pay taxes on dividends and capital gains from these accounts when you sell and create a taxable event. But if you make the right investments and manage risk effectively, you can potentially generate stronger returns than keeping your money in a regular bank account.

TIP: Here are some of the best online brokerage companies.

The stock market averages a return of roughly 10% a year, so even investing in an index fund that tracks the market could boost your pile of money far more than a savings account.

Retirement Account (for Long-term Investing)

In addition to investing through a brokerage account, you’ll also want to set up a retirement plan — like an individual retirement account (IRA), a 401k, or Roth IRA — for long-term, tax-sheltered growth. Retirement savings plans enable you to keep your money tucked away until retirement, meaning you won’t have to pay taxes on any gains or dividends for decades.

Retirement accounts can help you build long-term financial security so you can live comfortably during your golden years.

FAQ

Below are answers to some of the most common questions I receive about achieving financial security.

Is Social Security enough to live on in retirement?

Living off Social Security checks can be accomplished, but relying entirely on them is not recommended. First and foremost, you don’t want to be reliant on the government for living expenses if you can avoid it. What’s more, there is widespread concern that Social Security may eventually run out of funding in the coming years.

The best thing to do is treat Social Security like it doesn’t exist. Put your own money aside and forget about the funds that get removed from your paycheck every month. Plan ahead for retirement so that you don’t get caught in a situation where you don’t have money to live a nice lifestyle in your golden years.

If you start planning now, you can most likely build a nice retirement income for yourself, letting time and tax-sheltered plans do the bulk of the work for you.

How do you avoid losing all your money?

Oftentimes, people lose their savings due to poor planning. Of course, circumstances can play a big role, too. But it’s often because people fail to put enough money aside to cover an emergency and wind up going into debt to pay for it. Or they dwindle their financial reserves by making poor choices like overspending or gambling.

The best way to avoid losing your money is to focus on building a strong financial foundation for yourself. Avoid going deep into debt, put money into accounts that have high interest rates, and let it sit there so that you can access it if needed. If you build a safety net for yourself, you’ll have an easier time planning for difficult times.

One of the hardest lessons to learn about investing is you can lose everything if you’re not careful or you treat stocks like lottery tickets instead of investments. Don’t let this happen to you. Avoid penny stocks, don’t chase the “hot ticker,” watch out for “pump-and-dump” schemes, and buy shares in great companies that will stand the test of time.

Should I work with a financial planner to build security?

Working with a financial advisor can be a helpful way to build financial security for yourself. A financial advisor can help you form strategies to maximize your savings, minimize your taxes, and grow your wealth. They can also help you reduce mistakes along the way, putting you in a stronger position down the line.

Find a savvy financial planner that you trust to steer you in the right direction and take their advice when it comes to allocating money. Financial planning is a critical need for investors — and something that can help your money grow. If you aren’t confident handling that responsibility yourself, talk to an advisor … but remember that you are the person ultimately responsible for your financial situation.

If you decide to go it alone with investing and financial management, educate yourself about all the available options so you can minimize the wrong decisions.

Can buying real estate make you rich?

Absolutely. But it largely depends on the type of property you buy, and its location.

For example, if you buy an affordable rental property in a town with heavy year-round tourism, you may be able to quickly pay down your mortgage and turn a healthy profit. But if you buy the wrong property, you could wind up sinking into problem debt.

Be smart about the investments you make so that you put yourself in a position to succeed and make money. In real estate, in particular, the best deal is sometimes the one you walk away from.

If you are skeptical about buying a piece of property due to high costs and taking on risk, consider putting your money into a real estate investment trust (REIT), which you can obtain through a brokerage firm. This will enable you to invest your money in the stock market while also becoming a real estate investor. You won’t have to worry about liabilities like tenants or weather events, and you’ll have a much easier time liquidating your investment if you decide to.

Is it hard to achieve financial stability?

Unfortunately, achieving financial stability can be very difficult. It takes patience, dedication, and hard work. However, it’s a lot harder being destitute in life.

By making tough financial decisions now — like limiting your spending and putting money away toward retirement — you can build a better life that is richer and more secure for you and your loved ones.

As time goes by, you’ll be in a better position to reach your long-term goals and become financially stable.

Does having $1 million make you financially secure?

Reaching $1 million has long been a benchmark of financial success in the United States. But it’s not necessarily a means to total financial freedom.

Of course, $1 million is a lot of money. But there is a difference between reaching $1 million in your 30s or 40s and reaching $1 million at retirement age. It largely depends on what you do with the money and what you want to achieve in life.

What is financial independence?

Financial independence is a financial state where you are in complete control over your money and your destiny.

When you reach financial independence, you’ll have the power to choose what you do and where you go. That means leaving your dead-end job, launching a new endeavor, and living the life of your dreams.

Financial independence is one of the most empowering positions to attain in life — and something all investors should strive to reach.

The Bottom Line

When it boils down to it, anyone can build financial security. With a little bit of planning and research, it’s possible to create a financial plan that sets you up for short-term and long-term success.

The fact is that almost anyone can reach their financial goals in life by making the right choices and allocating money into the correct investment accounts. Focus on saving money, avoiding debt, and diversifying your investments, and you will be on the path to financial independence.

This is a remarkably powerful idea if you think about it. As an investor, you have unlimited earning potential. It may require taking on extra work or being more aggressive about your savings plan. But if you try hard enough and create the right opportunities, the sky is truly the limit.

Here’s to making the right personal finance decisions that enable you to be secure in your finances for years to come!

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