on the Road to Financial Security
Reaching a point of
financial security is a process that takes time, effort and perhaps some
sacrifices. However, the results are worth it. By starting early, you
can put time on your side. By doing a few things right from the beginning,
you can make that process easier and minimize the sacrifices you may be
forced to make later.
financial security to be a project like building a house. You start with
a foundation, you add the floors as time goes on, you put on a roof, you
finish the inside and then you move in. Fortunately, you have a long time
to build your financial future, you can learn the skills it takes and
it is easier than building a house.
What is financial
Financial security consists of several things:
- Being able to afford
your current needs.
- Having confidence
you will be able to afford what you may need in the future.
- Being able to enjoy
some things you want now, but may not truly need.
- Being able to provide
the type of financial lifestyle for your family you want.
- Having a peace
of mind knowing you are taking the right steps to reach financial security.
Why is a solid
financial foundation important?
You, and you alone, are ultimately responsible for your financial well
being. Your decisions will affect how you live on a day-to-day basis and
in the long term. Handling the financial issues associated with starting
out, establishing a household and assume more responsibilities 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.
Building a solid
First identify a few very broad goals:
- I want handling
my finances to be easy.
- I want to be able
to enjoy my current financial lifestyle.
- I want to know
that I am making progress toward achieving financial security.
- I want to be confident
that I am doing the right things and not doing the wrong things.
Components of a
solid financial foundation.
- Not spending beyond
- Building some financial
- Establishing a
good credit record.
- Establishing some
good financial habits.
Monitor and control
While this task may sound ominous, it does not have to be. Consider breaking
it into pieces. First, you need to know how much you have coming in each
month. While you may be earning interest and dividends on savings accounts
or investments, let's just focus on income from your job. Every pay period
(weekly, semi-monthly or monthly), you earn a certain amount. However,
the check you receive is reduced by taxes that are withheld, your share
of employee benefits (primarily health insurance), amounts you contribute
to your company's retirement plan and any other deductions you may have.
The amount you have left is your monthly disposable income. That is how
much you have to pay your bills and hopefully there will be some left
over you can save.
Next, break your expenses
into those that are fixed and those you can control. Fixed expenses include
rent, parking, other insurance (probably renter's and auto insurance),
utilities and recurring medical costs. You probably have some level of
control over most of your other expenses.
your fixed expenses from your disposable income. That is how much you
have to cover your other living expenses and any other spending. To not
overspend your income, just make sure you manage your other living expenses
and other spending to have something left over each month.
Building some net
Accumulating net worth takes time and some discipline. Here are three
ideas that can help:
- Contribute to
your employer's retirement plan. If you are eligible for a 401(k) plan,
be sure to participate and contribute something. Most plans have some
type of employer matching provision where the company contributes money
equal to all or some portion of what you contribute. Be sure to understand
how your plan works and, if you can, contribute enough so you get the
maximum contribution from your employer.
- Set up an automatic
savings plan. Many employers will automatically deduct a certain amount
and send it directly into a savings account at your financial institution.
Choose an amount you are comfortable with and let it happen automatically
each pay period. If your employer does not offer this, set up a plan
with your financial institution so they move that amount from your checking
account to your savings account each month.
- Save what you
do not spend. After you have paid your bills each month, move what is
left over to your savings account. You will probably want to keep some
funds in your checking account to cover unexpected expenses, but by
moving excess funds to your savings account, you will be accumulating
assets and probably earning more that what you would have earned if
you left your excess funds in your checking account.
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 on you.
Lenders will use those
credit reports to make decisions on whether to grant you credit, make
a loan and in many cases what interest rates to charge. Therefore, it
is important to have a good credit report. While there are many factors
that go into your credit report, the most important ones include timeliness
of payments, how much do you owe in total and how many companies you owe
Here are some guidelines
to help you build and 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 more than the
minimum on all credit card accounts if you can.
- Do not have too
many credit cards. Every time you apply, it is noted in your credit
- At least once a
year, order a credit report on yourself. That way you can see what lenders
see. If you notice an error in your report, be sure to contact the credit
agency and have it corrected.
Here is a list of a dozen things that can put you on the road to financial
- Make sure your
financial information and records are organized.
- Use direct deposit
for your paycheck.
- Participate in
your employer's retirement plan and contribute as much as you can.
- Set up an automatic
- Prepare a household
- Periodically prepare
a personal balance sheet.
- Use as few credit
cards as possible.
- Reconcile your
checking account monthly.
- Review all your
bills and statements as soon as you receive them.
- Make credit card
payments promptly and pay more than the minimum.
- Be sensitive to
fees and interest rates.
- Learn more about
handling your finances by reading personal finance columns in newspapers
and personal finance magazines.