How to Create Financial Security: 3 Headed Approach

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Financial security can mean different things to different people. When looking up the definition of security, I found “freedom from risk or danger, safety” and “freedom from doubt, anxiety, fear; confidence.” So it makes sense that financial security would mean having a feeling of freedom with your money and feeling confident and safe about money situations and your lifestyle. What would it take to feel this way? What would it take to establish financial security? You need a three pronged approach.

 

You may desire financial security for yourself and your family. To know you can handle any financial situation, to have minimal money stress as well as live the life you desire. When establishing financial security there are three major considerations.

 

1) Money and Credit Management

How you manage your money will play a major role in your ability to establish financial security. Money management is about how you handle your income and your expenses. You need to have a pulse or in other words be aware of what is happening with your money. Here is what you need to know and do.

 

A) Design a budget. Start by just writing down where you currently spend your money. Look at the actual numbers and split the expenses into categories. The biggest overhead categories are fixed vs. non-fixed expenses. Create other categories depending on what your expenses are, e.g. personal care. groceries, entertainment etc. Now here is an important point! Don’t try to say how much you think you should be spending in each category. Simply start by writing down what the real numbers are in each category. Once you know your actual expenses then you can see clearly where you may be able to cut back or where you need to beef it up like in savings. You’ll get a better understanding how long it will take you to reach your financial goal or how realistic the timeline for your financial goal is.

 

A budget is a plan on how you distribute your money. This is crucial to achieving your financial goals. Let’s say your financial goal is to buy a house, take a vacation every year, conquer your debt, buy a new car etc. If you don’t plan out how your money is feeding your goals, it will take you longer to reach them or … you may never achieve them. Plan for your success! You’ve likely heard that you need a budget before, you may hate it or you may be fine with it, but you just can’t get it to work. One you were likely making it to restrictive because you didn’t start where you are and you didn’t put tricks and tools in place to help you stay focused and motivated.

 

B) Add a tracking system. You need to determine how you will monitor and track your spending. You can go old school and use a pen and paper, use a system like Microsoft Excel, or use an app like mint.com which allows you to up to date information about your budget with minimal effort from you. Or you can also use the envelope system If you’re not monitoring your spending, you won’t know how much money is left in a category. This can lead to overspending. Say you’re out shopping and see a shirt you want to buy … do you have enough money in the clothing category of your budget? If you have no idea and no way to check you can easily overspend.

 

Monitoring and tracking your money distribution is another crucial action to actualizing your dreams and goals. You can see your progress with decreasing overspending, increasing savings, growing investments … basically building your wealth.

 

C) Know your numbers. Regularly check your net worth, your level of positive cash flow, your credit history and credit score, and the exemptions claimed for tax purposes. These are indicators of how well you’re doing managing your money and creating financial security. Your net worth should continue to climb as you continue to increase your skills with money management. Your positive cash flow should continue to increase and you’ll have more money to put towards your financial goals, decreasing the amount of time to reach them. Your credit score should continue to rise as your amount of debt continues to decrease until you eliminate it altogether. If you check your numbers and see that they’re going in reverse then that is a red flag! Something is wrong and needs to be fixed pronto. Determine the problem and design a solution. If you don’t have the knowledge or what you tried didn’t work look for resources or an expert to help you.

 

2) Wealth Building

Saving money is important to your financial goals and wealth. After saving up an emergency fund you should be funneling your savings into investment vehicles. You want your money to grow to build your wealth, and you need it to grow faster than inflation. Although inflation is currently lower than it’s been in the past seven years, it fluctuates and was as high as 4% in the same time frame. An inflation rate means that the buying power of your money decreased by 4% that year. So you want to earn more money and protect the buying power of that money by having it grow faster than the rate of inflation. You do this through your investment vehicles that will have an average interest rate between 8-12%. Your money will increase at this rate trumping inflation.

 

Today, there are less and less pension plans so you are more responsible for your own financial security and stability once you retire. Now contribution plans are more popular. You’re expected to sign-up for a 401(k) and open an IRA. You’ll be responsible of having the money to maintain your desired lifestyle, even before retirement. So set aside savings for the times where you may have a disruption in your income such as getting further education or taking maternity leave. I don’t know why the U.S. still has unpaid maternity leave, but I digress. You’ll also need money set aside to achieve your financial goals such as investing in large purchases like a home or starting a business.

 

3) Risk Management

The only thing constant is change so prepare for the unexpected. What happens when there is an emergency? What happens when you’re laid off or become disabled? You have to protect your wealth against such occurrences. You want an emergency fund set up to handle household bills if you get laid off or are unable to work, or there is an emergency like your windshield cracking. You want to know the money is there and you can still run your household.

 

Another important branch of risk management is protecting your income, wealth and yourself. How do you do this? With insurance! Acquire term life insurance and disability to protect yourself against loss of income. If there is a disruption in the income to the household from you passing away or becoming disabled then your dependents can maintain their livelihood. Acquiring property and casualty insurance protects your real estate investments as well as your business and your car. A car is not an investment, but if you depend on it to get to work or in your business etc then it’s important. The last piece is to make sure you’re protecting yourself as you are integral to your wealth. Make sure you have health insurance. Your health is your wealth.

 

Photo credit: Miguel Virkkunen Carvalho

About Dr. Maria James

Dr. James, The Money Scientist, has expertise with designing income management, debt management, and wealth strategies to help you live your best life. She is the founder of Pocket of Money, LLC and the creator of The Wealth Protocol™. Dr. James has also been a guest financial expert on ESSENCE, WEAA, Madame Noire and more.

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