How do you feel when you think about financial security? Do you dread managing your money and logging into your bank account?
Well, you're not alone. According to CNBC, just 29% of Americans are financially healthy. Most importantly, this explains why money is such a stressful topic for most people.
We believe money should be fun not stressful. However, you have to get on the right track and create a solid financial foundation.
Financially security simply means you're confident in your financial situation.
You're not worried about paying your bills, don't have a lot of debt, have an emergency fund, and you're investing.
Financial security doesn't mean you're rich, it's more of a mindset. Above all, it means you have a clear vision and plan for your money and you know how to achieve it.
This may sound hard, but it's not. It will require some effort to achieve but to reach financial security try these 7 steps.
Build an emergency fund to reach financial security
Having an emergency fund will give you peace of mind during a crisis. An emergency fund is a rainy day fund for when life happens – and things will happen so be prepared for them.
It's a good idea to start with an emergency fund even before you pay off debt. It's hard to become financially stable if emergencies keep you going into debt. So, having some money set aside for emergencies is a great first step.
Actually, most people just use their credit cards when an emergency happens, but that may turn the car issue into a money issue. The interest accrued from the credit card could create more debt and lead to stress. But, having an emergency fund in place allows you to simply get the car repaired with no stress.
Certainly, it can be hard to build up your emergency fund but it should be a priority. Start with saving 1-3 months of monthly expenses in a savings account. This will cover small emergencies while you're paying off debt.
After you're out of debt, you should increase your emergency fund to 3-6 months of expenses.
Related reading: Financial Security: The Secrets to Generational Wealth
Attack your debt
The fastest way to build wealth is by using your income. However, debt will delay the process and steal your income. Making payments to somebody else instead of keeping your money is not fun.
In fact, it's time to completely pay off your debt.
There are two ways to pay off debt. You can use the debt snowball or debt avalanche method.
Here's how the debt snowball works:
- List all of your debts smallest to largest regardless of the interest rate (except your mortgage).
- Attack the smallest debt first while paying the minimum on all of the other ones. Pay as much money on the smallest one that you can.
- Once that one is paid off, take what you were paying on it and roll it to the second smallest debt. Continue this process until you're debt-free!
Here's how the debt avalanche works:
- List all of your debts largest to smallest from highest interest rate to lowest (except your mortgage).
- Attack the highest interest debt first while paying the minimum on all of the other ones. Pay as much money on the highest interest debt as you can.
- Once you pay off that debt, work your way down to the lowest interest rate until you're debt-free!
Most importantly, choose a method that works for you and your situation. Personal finance is personal and it's crucial to choose a plan you can stay consistent with. In fact, paying off debt is also about behavior and not just math and numbers. If you need motivation while on your debt-free journey, then the debt snowball method is best. If you're focused on not accruing as much interest then the debt avalanche is best. Ultimately, attacking your debt will help you reach debt freedom and achieve financial security. Related reading: Paying Off Debt: Is It Worth It?
Live below your means
Reaching financial security is hard but living below your means will allow you to build wealth faster.
Your income is the most important tool you have for building wealth. This goes for building an emergency fund, investing, or paying off debt. Your income will help you achieve all of these goals.
Ultimately, the best thing you can do to have more money is spend less of it.
Trying to keep up with others and instant gratification will lead you to money problems. Learning to say no sometimes will help you be more financially stable than ever.
Yes, budgeting is important! Of course, not everyone likes to budget, but it's not as bad as it may sound. A budget gives you permission to spend.
A budget allows you to keep track of where you spend your money each month. It's very easy to spend money each month and not know how much you're spending. This is the best way to track your money.
There are essential things you need to spend money on and understanding how much money you have will help you create a plan.
You will need to budget for housing, utilities, food, transportation, clothing, etc. These items will account for about 50% of your income. Your mortgage should not be more than 30% of your take-home pay.
The remaining of your money should be used for paying off debt until you're debt-free, investing, giving, and saving. Once you do all of that, you should enjoy some of your money.
It's important to have budget line items for each category so you make sure you don't overspend.
Related reading: Budgeting 101: How to Create a Budget
Make your money work for you
You work hard for your money so it's important to make your money work for you. Investing is how you become wealthy and make sure you have money in retirement.
The best place to invest to build wealth is your company's investment account. That is a 401(k) for most people but could also be a 403(b) or 457(b).
Also, you can invest in IRAs with Roth as the best option.
It's best to only invest up to the employer match while paying off debt and then increase your investment to 15-20% of your take-home pay once you're debt-free.
You don't want to miss out on company match because it's free money to help your investment accounts grow faster.
Related reading: How to Invest for Retirement with a Small Budget
Find ways to increase your income
By increasing your income you can reach financial security a lot faster. Starting a side hustle or a 2nd job can bring in more income to pay off debt, invest, or build an emergency fund.
While a side hustle may start as little income, it can turn into a full-time salary in the long run. Certainly, it will take time and patience but it's very possible.
Are you good at writing, creating content, web design, or video editing? Perhaps you should pick up some freelance gigs to boost your income. These are just a few examples of ways to make extra money.
Above all, identify something you're good at and use that gift you bring in extra cash through a side hustle.
In a perfect world, we would all be rich and famous and have no worries in the world. Unfortunately, that's not the case and everyone has personal issues they are dealing with.
It's important to try and enjoy life despite the challenges you may be facing. It would be nice to not have car issues or never lose a job. But, it happens.
However, this is why we plan for life emergencies and prepare for the worst. Unexpected life events come up and it happens to the best.
Most importantly, try not to get discouraged when things don't go as planned. Stay focused and stick with the process even if you get off track for a few weeks.
The reason you create a plan is so you have a foundation. Life is all about learning from your mistakes and making adjustments.
Do your best to try and enjoy life a little more each day. Budget for things you like to do so you have time for enjoyment.
You have worked hard to get where you are today. So enjoy life!
Do you want to learn how to build wealth? What other tips do you have on the best way to reach financial security?