Financial security does not mean you're so wealthy you don't need to work for a living. Financial security is just another way of describing good management of your personal finances. It means debts are under control, budgets are balanced, appropriate insurance is in place, and retirement investments are on track for a comfortable lifestyle in your golden years. Everyone dreams of being so rich they don't have to punch the time clock anymore, and though that's not possible for most of us, the contentment we can have from financial security is a very real prospect for us all. Being in control of our finances can give us great peace of mind, and that's what we're really after anyway. To get control of your finances in a way that leads to satisfying financial security you need a plan and put a few tools in place.
1. High-yield savings account
You'll need to park any extra cash you have after paying bills somewhere. It needs to be liquid (easily accessible) and safe from dropping in value, so an investment account is out of the question for this money. If your local bank doesn't offer some form of savings account with an interest rate greater than 1%, look online. There are several reputable online banking institutions with better rates available. This money is stored away and saved for a rainy-day fund in case an emergency need occurs.
2. Checking account
Why do I need a savings AND a checking account? It takes some financial maturity to refrain from dipping into a savings account to buy something you want when you don't have all the money you need in the checking account. Separating the two accounts helps you build some financial discipline. You'll need that to develop financial security.
They say everyone is one accident or medical emergency away from bankruptcy. Insurance is the best protection you can have to help you sleep well at night.
- Health insurance — If your employer offers insurance, take it. If not, there are several other options available.
- Auto insurance — This helps you replace car damages, but it also protects you from liabilities if another party is harmed in a wreck you've caused.
- Home or renter's insurance — This can help you replace stolen or damaged items, but it can also protect you from expensive liabilities if a guest at your home is injured.
- Life insurance — If you have a spouse or dependents, life insurance will provide a financial security net to replace your income if you should unexpectedly pass away. Many families don't like to talk about this unpleasant topic, but a few bucks a month can mean a lifetime of security or suffering for your survivors.
- Note: Many insurance companies can offer these coverages in the form of discounted bundles. Take advantage of that financial savings if possible.
4. Retirement fund
Starting a long-term retirement investment fund as early as possible will add up to a healthy retirement fund thanks to compounding interest. As you add small, incremental deposits over time, it will grow exponentially as you approach retirement age. If you do it well enough, retirement may come earlier than you expect!
5. Education fund
If you have family members with college ambitions, start saving for that as soon as possible. College tuition increases have outpaced inflation in recent years and it projected to continue climbing. Assisting with college is a first step toward financial security for your next generation, but it can help your current security too. Many parents co-sign student loans and then get left holding the bag, if the child does not complete college or fails to meet their financial obligations.