Actions That Promote Financial Security

  • Live below your means. Said another way, whatever your income is, you spend less. Never spend more than you make. This is so obvious that I can’t believe I have to state it.
  • Save the part of your income that you do not spend.
  • Pay yourself first. Pay into your savings first. Do it in some automatic way such as payroll deduction or just discipline yourself to deposit part of your income into savings when you have your paycheck deposited. Do these deposits with every income source. Pick a savings goal that maybe “hurts just a little.” Start at 10% and see how it goes.
  • Create a crisis fund. Most people call this an emergency fund but a crisis fund may be a better term because you might be less likely to raid a crisis fund. The crisis fund is for unexpected financial events such as health emergencies, auto transmission problems, broken water pipes or a fire in the garage. A crisis is not getting the latest cell phone, buying that new designer purse or putting money down on that car that you just have to have. Crisis funds should be where you can get them easily (liquid) when you need them but are used only for a crisis or an emergency. Depending on your unique situation, you will have to determine how much you should have in your crisis fund. Most people settle on several months of living expenses. This fund will test your willpower and your ability to delay gratification as it just sits there tempting you to use it.
  • If you have to buy something on credit, you cannot afford it. Save your money and buy when you have saved enough to purchase it. Save for a few years and buy an affordable used car that you have carefully researched and tested rather than buy a much more expensive car on credit. Cars depreciate every year. New cars depreciate the most and buying it on credit means you pay a lot more in interest. In fact, most things you purchase will depreciate every year. One exception might be a house that in normal times might appreciate to some extent. So the one exception to the nothing-on-credit principle might be a home mortgage. But be sure that you always take great care in calculating the costs and benefits of such large financial moves as buying a home.
  • Distinguish between needs and wants. What do you really need? Most people I ask say they need clean air, clean water, nutritious food, adequate sleep, companionship, moderate exercise, a safe place to call home and ways to make a living. What other things do you personally think you really need in your life? Beyond our needs the other things are just things we want. We don’t really need them but we think they will add to our life if we have them. Most of our wants are stuff that we get to make us happier. “If I just had (fill in the blank here_____________) I will be happy.” We think we will be happier but we often are not and even when we are happier with the new thing, our happiness doesn’t last very long because there always is some more stuff that can really make us happy if only we could get it.
  • You are responsible for gaining and maintaining your financial security. Whether you are financially secure or not, you need to take the responsibility for where you are and where you plan to be in your financial future. The decisions you make and the actions you take will determine your degree of financial security. Sometimes events beyond your control will influence your worth but you are ultimately responsible for how those events will be dealt with.
  • If your income is out of balance, it is usually easier to cut spending than it is to increase income. For example, it is easier for me to stay at home and cook my meal than it is to drive to a restaurant where I pay several times more for the food, drink, ambience and service. If I choose to increase my spending by going to restaurants several times a month, I might have to find more sources of income such as working overtime or getting another job. Wouldn’t it make more sense to just cut down on the spending?
  • Plan to live a long time. Nearly all people who retire take reductions in their lifestyle. It has been estimated that only about 5% of retirees live without financial difficulties. You need to set goals and get your savings started as early as possible if you are going to be in that upper 5%.
  • Don’t plan to get Social Security when you make your retirement plans. If the government decreases or eliminates Social Security you won’t have counted on it and won’t have to make up what you had counted on. If you do collect Social Security, you will have an unexpected bonus.
  • Don’t get greedy. Greed is what swindles and cons are built on.
  • You work for money and save some of it so it can work for you over time by compounding gains. Use the Rule of 72 to understand how compounding works. Simply divide the average reinvested gains you are expecting from an investment into 72 to see how many years it would take to double. For example, suppose you have an investment of $100,000.00 and are obtaining average gains of 10% per year and you reinvest all of the gains. About how long would it take your $100,000.00 to become $200,000.00? Divide the 10 into 72 and you see that your investment will double about every 7.2 years. Likewise, if your want to find out how much your yearly gains must be to double in a certain number of years, you just divide the number of years you need your investment to double into 72. Using the example above, suppose you need to double your investment in 5 years. What yearly rate gain would you need to get that doubling if you reinvested all your gains? Divide the 5 into 72 and you get a doubling of your investment if you get at least a 14.4% of annual gain. This clearly shows how saving as much as possible beginning as early as possible makes so much sense.
  • Most wealth is gained by money being wisely invested over time. Studies of wealthy people find that very few people get rich quickly. Even fewer get rich by winning the lottery or other forms of gambling. Wealthy people seem to rely mostly on factors such as knowledge, persistence, intensity and focus rather than chance, luck, hope or wishful thinking.
  • If you don’t yet have a clear goal in your life maybe your temporary goal should be financial wealth. This way you will have some wealth to help you pursue your loftier goals when you finally determine them. Just be careful that the pursuit of money does not become the foremost permanent goal in your life.
  • Take some time to put your finances into perspective. Wealth is not an end in itself. It is a means by which you can enrich your life and the life of others. It is a means to purchase goods and services. Having wealth gives you more choices. Having wealth can give you more opportunities. Having wealth can reduce the stress of dealing with unexpected crises. The wealthy person’s inconvenience is often the poorer person’s catastrophe.

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