Here’s a closer look at what it means to have financial security and how you can experience it for yourself.
Definition and Examples of Financial Security
Financial security involves having enough money to comfortably cover your monthly expenses, recover from financial setbacks, and save for your future. It’s also about having low financial stress and feeling in control of your money.
Alternate name: Financial well-being
For example, Michael has a six-month emergency fund, no credit card debt, and is currently saving up to start his own business next year. When he gets an unexpected bill in the mail, he doesn’t panic because he has enough to cover it. He feels calm and in charge of his finances, which is a good sign he’s reached financial security.
How Financial Security Works
Financial security is a major contributing factor to your quality of life. When you have enough money to cover your current living expenses and to save for the future, a whole new world opens up.
You no longer panic when a financial setback happens. You have enough money to splurge on “wants” (like a vacation or fancy dinner) without digging yourself deeper in debt. You’re able to take risks in your career and chase opportunities that make you happy (rather than doing what makes the most money).
But here’s the catch: Having financial security requires you to be future-oriented. You have to make a financial plan to live below your means now, so you can buy yourself freedom, flexibility, and options later on. Most important, financial security is a state of well-being. It’s about feeling calm and in control of your money, rather than having a fancy job title or salary but still struggling with finances.
Example of Financial Security
Suppose Maria makes $50,000 a year. After monthly expenses, she still has 15% of her income left over. Financial security is important to her, so she uses this extra money to pay off debt, build an emergency fund, and save for future goals (like that two-week trip to Japan or a house by the beach). Jack, on the other hand, makes $150,000 a year and can’t figure out why he feels like he can never afford anything. He’s constantly scraping by until his next paycheck, and his mounting pile of debt keeps him awake at night. He dreads the day his car gets a flat tire because that will be just one more thing he can’t pay for. In this situation, Maria has more financial security than Jack, even though her salary is one-third the size. Unlike Jack, she feels confident and in control because she has enough money to meet her current obligations and save for future ones. She also has peace of mind knowing she can handle the financial setbacks that come her way.
How To Get Financial Security
There are many factors that contribute to financial security, but these three are the most important:
Create a Monthly Savings Plan
The first step to financial security is creating a safety net that protects you from the unknown. Unexpected things are bound to happen, whether it’s something bad like a flat tire or something good like a destination wedding. Having a built-in fund to cover these expenses helps ensure your long-term goals don’t get derailed when surprises happen.
Pay Down Debt
It’s difficult to build financial security when a huge chunk of your paycheck goes toward debt payments each month. So making a plan to pay off debt, especially the high-interest kind, can help set you up for success. Once you’ve paid off that debt, you use the extra money to build financial security.
Invest
Investing is a key part of building wealth, which makes it a critical component of financial security. Compound interest is a powerful force, and once it has time to get going, it can catapult you toward your financial goals. However, many people shy away from investing because they think it’s a form of gambling or that they need a ton of money to get started. Neither of these is true. Anyone can learn how to invest. If you need help, consider hiring a financial advisor.
Financial Security vs. Financial Freedom
Financial security means you have safety nets in place to recover from financial setbacks, you’re on track to reach your savings goals, and you feel more calm about your finances. Financial freedom, on the other hand, means you’re at a place where you can quit working for a salary and do whatever you want, whenever you want. You have enough cash and investments on hand to fund your ideal lifestyle and then some.
How Can You Tell if Someone Is Financially Secure?
Being financially secure has nothing to do with your education, salary, or credit score. Instead, it’s about how good you are at managing what you’ve got. Generally, someone who is financially secure exhibits these four characteristics: Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
