What would it be like if you didn’t have to worry about money—even in an emergency? For most people, that sounds like a fantasy. But you don’t 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. It can also include generating enough to live on without a job so you can retire.
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.
If you hope to achieve financial security someday, here’s how you can start preparing for it today.
Create long-term savings goals.
As we discussed in part one and part two of this series, the first steps to take are to understand where you are at financially by identifying your income, categorizing your expenses, and considering your goals. Then you get to use that information to create a plan—a budget. If your income doesn’t match your expenses, we covered some tips to evaluate how you might lower your expenses or increase your income.
The next steps are all about thinking long-term: saving and investing.
Achieving financial security is a big goal, and it can take a long time to accomplish. But along the way, there are many tangible goals that can help 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. Then, as you make small sacrifices each month, you can stay focused on the purpose and not the struggle.
Saving for future you.
Being able escape paycheck-to-paycheck living is a significant marker of financial security. As you allocate your income each month toward your individual spending categories, you’ll be clear on what’s available to spend in each of those areas. Any extra income you have you can send ahead toward the next month.
This may seem simple, but it’s a game-changing approach.
Covering future expenses is one of those big goals that can feel out of reach when you get started. But every dollar you can put forward toward the next month will add up, and eventually, you’ll wake up on the first of the month and find that all of the month’s bills are already covered.
General savings first.
Unexpected expenses have a terrible habit of popping up and trying to derail you from your financial goals. As you are getting started on your journey toward financial security, it’s prudent to set aside an amount—at least $1,000—to cover those surprise expenses. Note: Annual and semi-annual bills are not unexpected expenses—those are bills that you should plan for and allocate money toward each month.
Specific savings later.
As you progress in your journey toward financial security, you can start to develop savings buckets for different types of expenses. Rather than maintaining one general emergency fund, you can allocate savings that are reserved for car repairs, home improvements, and the next computer you want to purchase.
Eventually, you can convert that general “emergency fund” into a “job loss fund” meant to cover your expenses for a short period of time in the event you choose to quit your job or are let go. Your employment is not always in your control, even if you are a great employee. Many financial advisers will recommend you save for at least six months of living expenses to cover the loss of a job.
Differentiating your savings is another big marker of financial security. You’ll no longer need a catchall category for emergencies. And this means you can confidently spend what you’ve allocated in each savings category—putting money toward those home repairs or that new vehicle—without worrying you are taking from something else that might pop up.
Invest what 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. Even if you are responsibly saving each month, 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, because it usually grows over a set period of time. If you choose to withdraw your investments early, you can incur penalties that may negate what you would have earned through interest.
That is why you want to plan to not access the money you invest until it “reaches maturity” (which means it is ready for you to withdraw). Different types of investments have different durations until they reach maturity. A retirement account, for example, will not mature until you reach retirement age. You can choose from a variety of options that mature at different rates, so aim to choose 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 twenties has the potential to grow significantly larger than the same investment would in your thirties, forties, or fifties.
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 ten, twenty, or thirty years, that $0 will still be $0. But even a small amount can grow 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. 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 advisers 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, take time to consider 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 affords you the opportunity to live in freedom and generosity, using money as a tool instead of feeling trapped by your financial situation. Wherever you are in your journey toward financial security, the important thing is to take the next step.
