Are You in Control? What It Means to Be Financially Sound
Many people strive to obtain financial security. However, there isn’t a bell that rings or an email that pops up once you’ve become financially sound, so how are you supposed to know when you’ve reached that point? Moreover, everyone has a different dollar amount in mind when they’re trying to become financially secure. Some strive to have millions put away, while others aim bigger, hoping for billions. But placing an unrealistic number on becoming financially stable could be a mistake. Get Rich Slowly writes that by putting a number on it, many people begin to believe it’s unattainable.
Likewise, financial security isn’t based on making or having a certain amount of money, and it isn’t defined by the number of homes you have or the cars you drive. How can you tell if you aren’t even close to financial security? That one’s easy. According to Real Simple, if you’re putting your entire paycheck into your checking account, spending more money than you have, trying to mimic your parents’ saving/spending habits despite paycheck differences, don’t have any financial goals, and don’t know how to properly pay down your debts, there’s a good chance you’re not financially secure.
If you don’t fall under any of those categories and want to see how close you are to obtaining financial security, take a look at our list of five ways you can tell.
1. You’re debt free
Most likely you’ve got some sort of debt, whether it’s for your car, house, or even education. But debt for other things is a clear sign you are not financially secure, per Get Rich Slowly. For example, are you still paying off a vacation you took several months ago? What about the shopping spree you went on a while back?
Are there still remnants of a trip you took years ago left over on your credit card? If you owe money for items such as these, the people you owe money to have power over you. Think about it: You’re going to work each day to pay off debt. And if you don’t pay that debt, there are dire consequences, which could include lawsuits, repossession, and foreclosure. There’s nothing secure about any of that.
2. You have good credit
Good credit is key to financial security. Your credit score is important when it comes time to make big purchases, such as buying a home. How Stuff Works defines your credit score as a “compilation of your entire credit history, pretty much every purchase, payment, loan, past-due balance, default or bankruptcy in your adult life. The better your credit behavior — paying off credit card balances on time, having open credit appropriate to your income, making loan payments promptly — all of it counts.”
Scores vary, ranging anywhere from 300 to 850. 850 symbolizes perfect credit, and anything above 720 is considered excellent. However, if you have anything less than average credit, real problems can start to occur, particularly when you start to drop below 620. Once you’re in this range, it can be hard to qualify for a mortgage, get a loan, and obtain a credit card. Again, none of that implies financial security, right?
3. You have an emergency fund
This is the amount of money you have in cash savings to use if something goes wrong, such as car problems, home repairs, or injuries. If you don’t have an emergency fund and something goes wrong, how do you plan to get by? If you have no other option than to take on debt, it’s not a good sign.
LearnVest recommends having three to nine months of net income set aside should something go wrong. “Your emergency fund is your financial foundation, your safety net and your ticket to freedom,” Stephany Kirkpatrick, director of financial planning and a certified financial planner with LearnVest Planning Services, says.
4. You consistently increase your savings and assets
How often have you come to the end of a month, or even a year, with little to show for your hard work? You don’t have much in savings, your retirement account is lacking, and your stock portfolio — wait, what stock portfolio?
Get Rich Slowly writes that you should be focusing on saving money every month. As your savings and assets grow, you can see your wealth increasing before your eyes. Even better, it then begins to rack up interest, ensuring you’re making more money just by having some set aside.
5. You live simply for strategic reasons
Simply put, this means you’re spending within your means, or even below your means, which enables you to set money aside for your savings, investments, and upcoming expenses, per Kiplinger. How can you tell if you aren’t in control?
If you’re making $50,000 per year but have annual expenses and debt that total far more than that, you’re anything but secure. This is where frugal living comes in. Control your expenses so they’re less than what you make — it’ll give you the chance to save and invest, which equals financial security.