5 Steps to Help You Achieve Financial Security
Maybe your ultimate financial goal is to pay off your mortgage and live debt-free. Or, perhaps your dream is to retire early and relocate to a remote tropical island.
Whether you’re dreaming big, small, or somewhere in between, achieving financial security can help make your vision of the future a reality.
But what exactly is financial security? Broadly speaking, financial security or wellness refers to a condition in which you are able to meet your current and ongoing financial obligations, have the capacity to absorb a financial shock, feel secure in your financial future, and are able to make choices that allow you to enjoy life.
While that may sound like a far-off concept, achieving financial stability often isn’t as far off as many people think. The key to getting there is to think about your short- and long-term financial goals, and then devise a savings plan that can help you reach them.
Here are five steps that could help you achieve financial security.
1. Setting Goals
Financial goal-setting can be like jumping ahead to the last chapter of a book.
Financial goal-setting can be like jumping ahead to the last chapter of a book. It starts with the endgame, such as paying for kids’ college, traveling, buying or renovating a home, or getting a new car.
From there, “reading” goes backward by breaking those goals into bite-size steps until the arrival at Chapter 1—an overview of the current situation and a plan to meet those long-term goals.
Short-term financial goals could include things like paying off credit card debt, student loans or car loans, saving for a downpayment on a home or a car, or growing an emergency fund (more on that below).
Once those are achieved, money you were setting aside each month for those goals could be shifted into longer-term planning, such as retirement, buying or upgrading a home, paying off a mortgage, or investing.
No matter how long it takes, checking something off a goals list can be a huge feeling of accomplishment, as well as motivation to start the next chapter.
2. Creating a Budget
One of the most important things you can do to achieve financial security is to live on less than you earn, since this enables you to siphon some of your income into saving towards your financial goals each month.
A great first step is to set up, or fine-tune, a monthly budget. To do this, you’ll want to grab the last few months of financial statements and pay stubs, then use them to determine what your average monthly take-home (after tax) income is, and what your average monthly spending looks like.
If you find that your spending is equal to, or exceeding, your income, you may then want to drill down into exactly where your money is going each month. You can start by making a list of essential expenses (rent/mortgage, utilities, insurance, car payments, groceries) and nonessential expenses (clothing, dining out, entertainment).
It’s often easiest to cut back spending in the nonessentials category. You might decide to cook more meals at home instead of eating out, for example. Or, you might cancel a streaming service or quit the gym and work out at home.
The money you free up can then be put into savings every month for your future goals.
3. Attacking Debt
If those monthly high-interest credit card payments didn’t exist, where would that money go instead? Paying off debt could free up a potentially big chunk of money to put toward those big dreams. Creating a debt-payoff strategy can be an essential part of a financial wellness plan.
One popular method for getting out of debt is the debt snowball. This calls for listing debts from smallest to largest amounts owed, then paying any extra money you have each month towards the smallest debt (while paying the minimum on the others). When that debt is paid off, you move on to the next smallest debt, and so on.
Another option is the debt avalanche method. This involves making a list of all your debts in order of interest rate (regardless of balance). You then put extra money towards the debt with the highest interest rate, while paying the minimum on the others.
When that debt is paid off, you start tackling the debt with the next-highest interest rate, and so on. As you continue paying off bills, you will be saving in interest payments and should have more and more money to put toward each debt as you go.
4. Building an Emergency Fund
An emergency fund is money tucked away that you can use in times of financial distress. Having this contingency fund can significantly improve financial security by creating a safety net that can be used to meet unanticipated expenses, such as an illness, job loss, or major home repair.
A good rule of thumb is to keep enough money in an emergency fund to cover three- to six-months worth of living expenses, but some people may need a larger emergency fund. You may want to keep this money in an account that earns more interest than a standard savings account, but is still easily accessible. Good options include a high-yield savings account, online savings account, or a checking and savings account.
Having this money available when you need it can reduce the need to tap high-interest debt options, such as credit cards or unsecured loans, or undermine your future security by dipping into retirement funds.
5. Saving for Retirement
Once you are free of high interest debt and have a solid emergency fund, you may want to focus on investing more of your income into a retirement fund.
The earlier you start saving for retirement, the easier it will be to meet your goal, thanks to the benefit of compounding interest (when the money you invest earns interest, that interest then gets reinvested and earns interest of its own).
One of the simplest ways to save for retirement is through a 401(k) program at work, since you can set up automatic pre-tax deductions from your paycheck (and may not even miss the money). If your employer is matching up to a certain percent of your contributions, you’re essentially getting free extra cash to save.
Another option is to open an Individual Retirement Account (IRA). Like a 401(k), an IRA allows you to put away money (before taxes are taken out) for your retirement. However, there are annual contribution limits you’ll need to keep in mind.
The Takeaway
Reaching a state of financial stability means you feel confident and don’t feel stressed about money. You are able to pay your bills each month, have money set aside for any unexpected bills or emergencies, you are saving money each month, and you are also debt-free.
One of the easiest and most important ways to achieve financial security is to spend less than you earn and to put money aside each month towards your goals.
If you’re looking for a good place to start–or build–your savings, you may want to consider opening a SoFi Checking and Savings®️ checking and savings account.
With SoFi’s special “vaults” features, you can separate your savings from your spending while earning competitive interest on all your money. You can also set up recurring deposits to help you reach your financial goals faster.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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