Starting on the Road to Financial Security
Reaching financial security can be compared with building a home. You must start with a foundation; then add floors, rooms and a roof before you can move in. Just as constructing a house takes time and skill, building a secure financial future doesn’t happen overnight. But by starting the process early, you can put time on your side.
What is financial security?
Financial security means different things to different people. Among them are:
- The ability to afford your current needs as well as enjoying a few “luxuries”.
- Having confidence that you can afford what you may need in the future.
- Enjoying the peace of mind that comes with building financial security.
Why is it important?
Handling the financial issues associated with adulthood can be stressful. A solid financial foundation can help you spend less time and effort worrying about your finances so you can devote your time and energy to other important matters like your job, your family and your future.
Steps to building your foundation
- Identify a few very broad goals. Think about:
- What you want to accomplish in the next 3-5 years.
- What you want to accomplish long-term.
- How you plan to reach your goals given your budget and finances.
- Steps you need to take to reach your goals.
It’s a good idea to put your goals in writing to serve as a constant reminder of what you need to do financially to reach your objectives.
- Components of a strong financial foundation
- Don’t spend beyond your means.
- Establish a good credit record.
- Maintain positive financial habits.
- Take steps to begin building your net worth.
Control your spending
- Determine how much money you have coming in each month. Assuming you have a job, you get a weekly, semi-monthly or monthly paycheck. However, your pay is reduced by taxes, employee benefits (primarily health insurance) and any other deductions you may have. The amount remaining is your monthly disposable income. That is how much you have to pay your bills and save.
- Complete a budget or spending plan. Break your expenses into those that are fixed and those you can control. Fixed expenses include rent, utilities, food, parking, renter and auto insurance etc. All other expenses are not fixed and can potentially be reduced or eliminated.
- Subtract your fixed expenses from your disposable income. To avoid overspending, make sure you manage your other living expenses to make sure you have some money to save to build your net worth.
Build your net worth
Accumulating net worth takes time and some discipline. Here are three ideas that can help:
- Manage your cash flow. If you haven’t already done so, open a checking account with a debit card and online banking. Use your check card as you would cash for minor purchases such as food and gas, and pay any bills you have online. You’ll get practice managing your cash flow, as well as receive 24/7 online access to your accounts to assist you with budgeting.
- Save what you do not spend. It doesn’t matter how much you save, but start saving consistently. Utilize direct deposit or setup an automatic recurring transfer from your checking account to your savings account.
- Contribute to your employer’s retirement plan. Most 401k plans have some type of employer matching provision where the company matches all or part of your contributions. This is free money – you’re missing out if you’re not participating.
Establish a good credit record
Three large companies compile information on the borrowing history of almost everyone. They get their information from credit card companies, utilities, financial institutions and other companies. Every time you apply for credit, whether it is completing a credit card application, getting an auto loan or signing a lease for an apartment, the company you are working with will probably request a credit report. Also, employers are more commonly requesting credit reports before extending an offer of employment to a candidate. So it’s critical that you take steps to ensure your credit history is positive.
To maintain a solid credit rating:
- Be sure to pay every bill before the due date. Promptness counts and you want to avoid any late payment fees.
- Pay your credit card balance off in full each month. If that’s not realistic, then strive to pay more than the minimum payment due.
- Don’t have too many credit cards—even if you don’t use them. Every time you apply, it is noted in your credit record. Limit yourself to one or two cards.
- At least once a year, order a free credit report on yourself. If you notice an error in your report, be sure to contact the credit agency and have it corrected.