What if you did not have to worry about money—even in an emergency? For most people, that sounds like a fantasy. But you do not have to be a millionaire to have financial security (and being a millionaire does not automatically mean you have it).
Financial security means you can be confident that you have enough to live on for the foreseeable future, even through a crisis such as losing your job. Financial security can also mean generating enough wealth to live on without a job, so you can retire early.
You have financial security when your income (passive or otherwise) exceeds your expenses and you have saved enough to live on for months without income. This comes from good stewardship of the resources you have and is not connected to how much you have. There is no magic number you need in your bank account: financial security looks different for every person.
It might be tempting to think that financial security is something to achieve when you retire, but the reality is—not all retirees have financial security. If you have a lot of debt or you are living paycheck to paycheck right now, imagine how much scarier it would be to live that way when you are older and potentially have less money coming in. If you hope to have financial security some day, you should start preparing for it today.
Thankfully, there are things you can start doing right now to get there. Here is some advice on how to achieve financial security.
If you hope to have financial security some day, you should start preparing for it today.
Examine your Income and Expense
The first thing you need to do on your journey to financial security is to find out where you are. You need to know what you are working with. What is your regular income each month? This is the money that you need to budget around.
When you look at your expenses, start with the regular bills and things you need to pay for every month. Food and gasoline obviously are not bills, but they are regular expenses. The further you can look back, the more helpful this process will be. If you can see your expenses for the last several months, or the last year, that will help you gauge what you spend in an average month, not just what you have spent recently.
As much as you can, try to lump your expenses into larger categories such as clothing, entertainment, etc. Do not just throw everything into a miscellaneous category, because that will make it harder to recognize what you are actually spending your money on.
Identify problem areas
Was there anything that surprised you when you organized your expenses? Are there any bills that are way too high? Are you spending a shocking amount of money on transportation, clothes, entertainment, or a hobby?
If you have any glaring expenses that stand out to you, this is probably a good place to think about cutting back or finding alternative solutions. Reaching financial security may require some lifestyle changes. They may be temporary until you build up savings or grow some investments, or they may be permanent, because you simply cannot afford to live the way you have grown used to.
This assessment phase is where you will have to start making decisions: do you need to change your lifestyle, or is your lifestyle important enough to you that you need to get a better job to sustain it? You do not necessarily have to give up things you enjoy, but you do need to consider how those things are currently impacting your financial security and what you can do about it.
Challenge your justifications
As you look through your expenses, take the time to think about why you spent money on the things you did. Did you spend more than you intended because of a special occasion? Did something catch your eye, so you bought it on a whim? How did you feel about those purchases the next day?
We all make excuses for spending too much on things we really want. But if you want to have financial security, you need to weigh spontaneous purchases against that goal. It does not mean that you need to worry about every purchase or that you cannot ever spend money on a whim. It just means that you need to be aware of how often you can do that without throwing off your ultimate goal of financial security. If you force yourself to provide better justifications for the purchases you make, you will spend less money and have an easier time becoming financially secure.
Ultimately, focusing on becoming financially secure requires a shift from short-term to long-term thinking about your finances. It may feel like you are restricting your financial freedom now, but it is with the intention of increasing your financial freedom later. Again, even temporarily cutting back for the purpose of saving and investing more can help you get there sooner.
Lower Your Cost of Living
There are two big levers you can pull to make it easier to become financially secure:
- Increase your income
- Lower your cost of living
If your income stays the same, but your costs go down, all of a sudden you can do more with what you have. That extra money can go straight into building an emergency fund (more on that later) or investment opportunities.
Cut your costs
This is where everything you do to save money helps. Maybe it is as simple as eating out less, since preparing your own meals is so much cheaper. Maybe it means scaling back on your subscription services. It might be time to sell your car and get a bike, find a used car with better gas mileage, or get a bus pass. Lowering your cost of living could also entail more drastic steps, such as downsizing your house or choosing a more affordable apartment.
The degree to which you need to cut costs depends on how much of your income you are currently spending on living expenses. We will look more at budgets in a moment, but if you are spending 50% or more of your income on rent or a mortgage payment, you will probably want to consider downsizing. If that is not an option, you may need to cut further into other bills and expenditures.
Trim the fat
Even little changes can create big ripples over time. If you can get better use out of the home and resources you already have, you may not need to make drastic lifestyle changes to free up enough income to work toward financial security.
- Energy-efficient light bulbs, heating and cooling, and appliances can significantly reduce what you spend each month on power. Saving $20 a month on your energy bill gives you an extra $240 a year to save or invest.
- Choosing to shop even just occasionally at a discount grocery store can greatly reduce what you spend on food.
- If you are spending a lot on your Internet, cable, or phone provider, see if there are plans or packages that still provide what you want but cost less money. (If there are not, see what other providers can do for you.)
Ultimately, the changes you need to make will come down to what you establish in your budget.
Set a Budget
Once you know how much money is currently coming in and going out each month, budgeting helps you control your cash flow. This is where you take what you have and map out what you can actually do with it.
There are lots of ways to set a budget, but however you do it, the important thing is to make sure you leave plenty of room for saving and investing. Right now you might not see much (if any) room to save or invest. But if you set aside your biggest fixed expenses (do not include anything that you do not need to live on), there should be a lot to work with.
The 50/30/20 rule
One of the most basic budgets is following the 50/30/20 rule:
- 50% of your income goes toward fixed costs such as housing, groceries, transportation, and other regular bills. These are things you need to pay every month. They are costs you may be able to reduce but not erase.
- 30% of your income goes toward discretionary spending: things like entertainment, clothing, or hobbies. These are the things you definitely do not need.
- 20% of your income goes toward financial goals like paying down debt, saving, and investing.
This budgeting principle is a good starting point, but many financial experts will tell you that 30% is probably more than you should allocate for discretionary spending. Really, if you have debt (other than a mortgage), taking that on should probably come from your discretionary spending, not the money you would otherwise be saving or investing.
The point is to define how your money is going to be used each month so that you have a framework for understanding where you are and a clearly designated amount for saving and investing. If you do not have anything left over to save right now, and your fixed costs are within that 50% margin, you are spending too much on things you want but do not need.
Within the discretionary spending portion of your budget, be sure to break down how much you would like to spend on each subcategory (such as entertainment). You might even want to give yourself sub-subcategories to prioritize the wants that are most important to you.
If giving and charitable donations are important to you, be sure to include plenty of room for that in your budget. You may not have had a specific percentage in mind for giving in the past, but this is the time to establish that.
You may want to flip the 30 and 20 to include giving in your financial goals budget, or you could simply take it out of your discretionary spending. Depending on how important it is to you, you could even build it into your fixed costs budget to discourage you from touching that money or moving it somewhere else. How exactly you allocate giving is up to you.
Once you have developed a budget, it is probably time to reevaluate what “trimming the fat” looks like and to see where you can make further cuts to your cost of living in order to get your budget on track.
Monitor your progress
In the months after you set your budget, pay careful attention to where your money is going. Spreadsheets can be intimidating, but they come in handy when you want to track where you are spending your money.
There are also plenty of apps that are designed to do this as well. They connect directly to your financial accounts so it is easy to record every transaction and put it in a category. Many apps will even send you alerts about unusual spending or purchases that exceed your established budget.
The point is to track which categories and subcategories you are sticking to and which ones you are not. You may not have noticed any problem areas before you had a budget in place, but now it is perfectly clear what you need to work on.
Keep yourself accountable
If nothing happens when you exceed your budget, your budget does not do you much good. You certainly do not need to beat yourself up about it, but you should prepare for what will happen when you go over.
- Do you need to reevaluate your priorities?
- Should you temporarily pull from another subcategory that matters to you in order to cover the overspending?
- Can your spouse, a parent, or trusted mentor help hold you accountable? Simply having someone to talk to about what you want to accomplish and what is holding you back can help reinforce your desire to stick to the budget.
Create Long-Term Goals
Financial security is a big goal that takes a long time to accomplish. But within that, there are lots of tangible goals that can motivate you to keep going. Maybe you want to save for a down payment on a house, pay for your kids’ education, or simply retire comfortably. The point is to identify something that is worth making sacrifices for.
When you buy something you want, it immediately makes you happy. Not buying something in order to achieve financial security one day does not have the same effect. It can even feel counterintuitive: “Why I am worrying about money now—just so that I do not have to worry about money later?”
That is why it is even more important that you have things you are working toward that fit within the larger ideal of being financially secure. Then, as you make those small sacrifices each month, you can stay focused on the purpose and not the struggle.
It is all too easy to make excuses for not saving. We all want to believe we will save more in the future, when we have more to save. But the bottom line is, if you want to be financially secure, you need to start giving yourself a financial cushion now.
It does not matter if your other obligations make you feel like there is nothing left over, and you think it will take a while to work toward your budget. Start saving whatever you can right now.
Paying down debt is important. Investing is important. But saving money ensures that you can cover unexpected expenses and that you are prepared for an emergency. Until you have the cushion of savings, you may want to focus on building that up.
This money needs to stay liquid, meaning that it is easy for you to access and use. That does not mean you should keep cash under your mattress or in a safe at home. It just means that this money should not be tied up in an investment where you would incur penalties for withdrawing your money or where you may need to wait to do so.
Hopefully you already have a savings account (even if it is empty). If you do not, explore the savings accounts available at your local banks. You may also want to explore online banks. Find out what incentives they offer for opening an account, learn about their fees and interest rates, and pick one you are comfortable with.
As you start saving, plan to create an emergency fund. You may want this to be separate from your primary savings account, but it is up to you.
An emergency fund is exactly what it sounds like: money you have saved for an emergency. It is up to you to decide how much you need and what it can be used for, but many financial advisors will recommend you save for at least six months of living expenses.
When we think of emergencies, we often imagine a plumbing disaster, car trouble, or some sort of accident. But one of the biggest emergencies that you need to prepare for if you want to be financially secure is a sudden loss of income. What would happen right now if you lost your job? How long would it take you to find a new one? These are the factors that should shape how big your emergency fund is.
Your employment is not always in your control, even if you are a great employee. What would happen to your family right now if your company went under or downsized or if your department dissolved? The point is not to develop paranoia about your job but to have a healthy perspective of what you can actually control.
Even a good, responsible boss can make costly financial mistakes or poor strategic decisions that require layoffs. You cannot guarantee that your organization will always do well or that you will always have a place there, but you can take steps to ensure that you are prepared if something bad happens.
Find Additional Sources of Income
Earlier we mentioned that you have two big levers to pull to reach financial security:
- Lower your cost of living
- Increase your income
If you are currently living the kind of lifestyle you want to live, and you are not comfortable making significant cuts, then your only other option is to find additional sources of income. We often think that if you want a better lifestyle, you need a better job, but that is not always the case, and it is not always possible without the right education or experience.
But that does not mean you do not still have options. If your family needed you to take a second job, you would probably do it, right? What if you started a second job to temporarily work toward financial security?
There are plenty of flexible jobs out there that can fit into your current schedule. Perhaps you could become an Uber or Lyft driver? Or maybe you have a hobby that you could turn into a part-time job? Is there something you make that you could sell on Etsy?
Better yet, what if you could make money without having to make a significant time sacrifice? If you have extra rooms at your house, you could consider using a service like Airbnb to rent them out.
Earning additional income does not necessarily mean you need to start a new career. There could be additional sources of income right in front of you that may not require significant changes to your life.
Invest What You Can, When You Can
When it comes to long-term financial stability, savings can only take you so far. A strong savings account gives you a healthy reserve you can fall back on, and it keeps your money accessible, but it does not grow very fast on its own.
Savings accounts can certainly accrue some interest, but not nearly as much as most investments. Part of being financially secure is getting to the point where you do not need a job to have enough to live on. Even if you are responsibly budgeting for savings, it is hard to grow your savings enough to sustain you in your later years.
That is where investments come in. By accruing higher interest rates, your investments can grow on their own a lot faster than your savings. The tradeoff is that this money is less accessible—less liquid—because it usually grows over a set period of time. If you choose to withdraw your investments early, they can incur penalties that may negate what you would have earned through interest.
That is why it is important to make sure that you do not need the money you invest until it “reaches maturity” (which means it is ready for you to withdraw). Different types of investments have different durations: a retirement account, for example, will not mature until you reach retirement age. At CDF Capital, our investors can choose from a variety of options that mature at different rates, so you get investments that fit your timeline.
Start with anything
Since investments grow over time, the sooner you start investing, the sooner your assets can grow. The longer you wait, the less time they have to grow. A small investment you make in your 20s has the potential to grow significantly larger than the same investment would in your 30s, 40s, or 50s.
So even if you do not have a lot of money to invest right now, whatever you can put toward your future is better than nothing. If you invest nothing, then in 10, 20, or 30 years, that $0 will still be $0. But even a small amount can grow a lot over time.
Explore your opportunities
Once you set aside money to invest, you will find that there is a seemingly endless number of types of investments. You can put it into a certificate of deposit (or CD). Or stocks. Or bonds. You can invest in loans too. (This is what we do at CDF.) Some of these investments are federally insured by the FDIC, meaning your money is protected if something goes wrong, and other investments rely on the integrity of the organization you invest with.
There are also different types of accounts to put your investments in, which provide different benefits. A traditional individual retirement account (IRA) lets you defer tax payments until after you withdraw the money from your account (meaning you do not pay income tax up front). A Roth IRA requires you to pay income taxes up front, but then when you withdraw your money, you do not need to pay taxes on any of it (including the money that generated through interest).
Choose investments based on what matters to you
Not all investments are the same. Your money is funding the work of real people at real companies. Some people prefer to simply focus on the interest rates and not worry about who they are doing business with. But an organization’s ethical standards, religious beliefs, or environmental impact could change whether or not you are comfortable investing in them.
Many financial advisors have a process in place to let you set parameters about what kinds of organizations your investments can be used for. You can also invest directly with specialized organizations that use your money for a specific purpose. CDF Capital, for example, uses our investors’ money to provide low-cost loans to Christian churches across the country. For people who want to see churches grow, this type of investment provides intrinsic as well as extrinsic value.
So in addition to thinking about how much to invest and how it will impact you financially, you should also think about how your dollars will be at work in the world.
Start Your Journey Toward Financial Security
It takes a lot of planning and discipline to become financially secure. But that work is worth it, because it ultimately provides you with the peace of mind that comes from not having to worry about money. Wherever you are in your journey toward financial security, we hope this has been helpful and that you feel encouraged to take the next step, whatever that looks like for you.