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Knowing how to increase your financial security is key to building stability and feeling at ease and in control of your money situation. But what exactly is financial security, and how do you reach it?
In short, financial security is when you feel comfortable affording your regular expenses and optimistic about your financial life in the future. Not only does it mean worrying less about money, but it also has tangible impacts: less debt, more savings and the ability to set and reach long-term goals. Here's what you need to know about financial security and how to build it.
What Is Financial Security?
Financial security is a state of well-being that comes down to being able to afford your expenses without stress. In other words, when you're financially secure, you don't experience constant worry about money.
In practical terms, financial security looks like spending less than you earn, having ample money in savings to cover emergencies, having a healthy relationship with debt and feeling in control of your finances overall.
Why Is Financial Security Important?
Financial security is important because it plays into feeling financially safe and resilient when crises hit your wallet. When you're financially secure, you may possess a sense of confidence that you're equipped to cover yourself and stay afloat, even if life throws you a curveball.
For example, having no high-interest credit card debt can boost financial security because you won't spend time worrying about the money you're spending on interest. With that peace of mind, you can focus on saving more for your future or spending your money on something that adds value to your life.
As another example, if you have an emergency fund with enough savings to cover your basic expenses for three to six months, you won't be as prone to stress over worst-case scenarios. The idea of losing your income or being hit with a large medical bill still won't be pleasant, but it can be easier to focus on the present when you know you're covered.
How to Achieve Financial Security
Financial security comes down to living within your means and building a savings buffer around yourself. Here are steps to take to get there:
- Create a budget. Spending less than you earn is the foundation for building financial security, and a budget is how you lay that foundation. Start by comparing your net income with your basic expenses like housing, bills and the like. Then create a plan for how you'll allocate funds toward your variable expenses, discretionary spending and saving.
- Build your emergency fund. To be financially secure, you need to feel confident that a sudden reduction in income or large, urgent expense won't leave your financial life in shambles (or leave you relying on high-interest debt). Focus on building up your emergency savings so that you can cover yourself when the unexpected happens.
- Get out of debt. To be clear, you can still be in debt and be financially secure. It's not atypical to have a mortgage, an auto loan and student loans while also having a comfortable income, an emergency savings fund and a sense of overall financial wellness. That said, high-interest consumer debt like credit cards and personal loans can become a big financial burden and stand in the way of feeling financially secure. If you're carrying these types of balances, create a strategy to pay off debt to improve your financial well-being.
- Set long-term financial goals. Set forward-thinking goals for how you'll continue to build stability and wealth down the line. You could meet with a financial advisor to devise an investment strategy that works for you. You can also focus on saving for retirement using workplace savings plans like a 401(k), alongside setting other savings goals like achieving homeownership.
Financial Security vs. Financial Independence
The difference between financial security and financial independence is that financial security means living comfortably within your means with a foundation for your financial future, while financial independence means that your investments provide you with enough passive income that you can support your current lifestyle without needing to work anymore.
Financial independence is a great goal, but it's also a huge goal. It can be helpful to think of financial security as what you're actively striving to create now and work toward, whereas financial independence belongs in your long-term plan.
Financial security definitely plays into financial independence, though. For starters, if you aren't spending less than you earn, you won't have the extra money to invest more for retirement. Second, without the cushion of a healthy emergency fund, your investing efforts could be thwarted if you end up selling assets or investing inconsistently when money's tight.
The Bottom Line
Financial security is the foundation of everything else in your financial life. Managing your money well, building emergency savings, planning for retirement and avoiding bad debt can all help you feel more secure and reach the savings goals that matter to you, whether that means buying a home, sending kids to college, furthering your education, paying cash for a car or retiring comfortably.
In addition to striving for an improved financial life, be sure to pay attention to your credit score. To start, sign up to monitor your credit for free through Experian. You'll be alerted to changes in your score, and you'll also receive personalized advice for how you can improve your credit over time. That way, you'll have access to good rates when you need to borrow.