There are two ways to define the term financial security. The first is to approach financial security in terms of the actual safety and security of any given transaction. This could relate to passwords and encryption used when conducting an online transaction and the resulting protection of sensitive information from prying eyes. In fact, it’s such a critical part of business that worldwide expenditures on cybersecurity are expected to top $101 billion by 2020.
While the safety and protection of financial data is important, the more common way to understand financial security and the one that we will focus on is an individual or family’s financial outlook as it relates to savings, planning, investments and long-term income.
Planning for a financially secure future involves several key factors, including defining long-term goals, budgeting, having enough savings for both the near- and long-term, managing debt, having an investment strategy, and – perhaps most importantly – staying on track.
Without a goal, the road to financial security will likely be a rocky one. Set goals by being specific. For example, writing “I want to retire in 2035 with $2 million in income-earning investments” coupled with a detailed plan on how you’re going to reach that target is much more likely to succeed than one that says, “I’d like to retire at some point with enough money to live on.” Write down your goals, look at them frequently and revise them as needed.
Creating a budget can be as simple as a list of income vs. expenses or as detailed as a spreadsheet that tracks every last penny that goes into and out of your household. However you tackle it, committing to a budget is the first step to getting expenses under control so you can begin the next step, saving.
Remember, savings aren’t just about the long-term. Emergencies arise, hot water heaters go out, cars break down. For these times, it’s recommended to start with a $500 emergency fund that’s easily accessible – such as in cash or a high yield savings account. From there, you can build to larger amounts to deal with unforeseen circumstances as they arise.
The first quarter of 2017 saw American consumer debt rising to $12.73 trillion, with student loans accounting for nearly 11 percent, according to the New York Times. The rest of this debt is distributed among car loans, credit cards and mortgages. While not all debt is bad, most financial advisors recommend maintaining a very low debt-to-income ratio to avoid running into problems if your income unexpectedly changes. The Consumer Financial Protection Bureau recommends keeping this debt to income ratio to 43 percent or lower.
Investments – Retirement Planning
Gone are the days of company-sponsored pensions and golden watches at age 65. And, for anyone expecting to rely on Social Security upon retirement, think again, says the Office of Retirement and Disability Policy. By 2035, Social Security is expected to only be 75 percent funded, according to ssa.gov. These days, American workers are largely on their own when it comes to their retirement savings. To remedy this, many companies offer full-time employees 401(k) plans with matching contributions up to a certain percentage of income. It is never too late to get started on investing in your future. A few strategies for investment and retirement planning: Set a goal, use personal financial management tools to monitor spending and savings growth,take advantage of 401(k) programs, establish an individual retirement account (IRA), and consider investing in regular accounts.
Stay on Track
Creating a budget and set of long-term goals is one thing, but it takes patience and discipline to stick with the financial plan over years and decades. But with a singular focus on the end goal, it is possible to build wealth and long-term security through consistent application of basic financial principles. The key is to maintain a balance where you’re not completely depriving yourself to save for tomorrow.
While there are many facets to financial security, the above tips are a good starting point.