Many of us have recently been thrust into unexpected financial instability—or the threat of it. Even if we thought we were financially secure, we might now be wondering if that will still be the case in a year. Financial security is not just about how much money you have in a savings account. It involves developing a detailed understanding of your spending, creating (and following) a budget, making use of so-called automagical payments or transfers, managing debt, planning for the future, and building your financial knowledge over time.
Create a Budget
If you don’t know how much money you need for necessary expenses, start here. First, write a list of fixed expenses (rent, food, car payment, utilities, etc.) and total them. Then make a list of discretionary expenses (entertainment, travel, etc.) and record how much you’re willing to budget for them based on your income. Track your spending for a month to learn more about where your money is already going, then adjust your budget accordingly. In the age of credit cards, it’s quite easy to spend more than you intend, since you don’t have the cue of physical dollars disappearing from your wallet. There are some additional tricks you can use to improve your budgeting and spending. If you find this too challenging to do on your own, consider a tool like Mint or You Need a Budget.
Use Automatic Options
Regular bills, such as utilities, internet service, car payments, and more, come with the option to set up automatic payments. Use this. Time the payments to immediately follow your paycheck direct-deposit, so you know the money will be there. When these payments are made automatically, you’ll never have to deal with late fees again. Take it a step further and set up automatic deposits to your savings account each pay period, so the money goes into savings before you start to think about spending it on fun. These steps both help you pay yourself (your own expenses) first, before looking at how much money you have for discretionary spending.
Plan for Unexpected Expenses
Being financially secure for now is one thing, but what you’re after is financial security over time. That means planning for future needs with various types of insurance, including life insurance, disability insurance, and end-of-life insurance. Seeing as the average cost of a funeral is more than $7,000, this can be a heavy burden on your family. Investing in life insurance can ensure funeral expenses are covered if something should happen to you or a family member. Besides getting life insurance for yourself, there are also options for life insurance for children. Many companies offer life insurance as part of a benefits package, and this may or may not be enough for you, depending on your personal situation. But either way, taking this step offers more financial security for both you and your family.
Pay Down Debt
The higher your debt, the harder it is to achieve financial stability. So a top priority when making your budget should be paying off loans as quickly as possible. Start with the ones with the highest interest rates. In an ideal situation, you’ll be able to take loan payments into account in your monthly budget and know when they will be paid off in full. But if your debt burden is high, you may need help. There are various debt relief options available (if you need help understanding what will work best for you, take the short quiz in that NerdWallet article). While saving for retirement is always a good idea, it may be more financially sound for you to focus on paying down your debt before turning your attention to retirement accounts.
Prepare for the Future
No conversation about financial security is complete without addressing retirement savings. Before that, start by preparing for the near future with an emergency fund. At the low end, this can protect you from the risks of living paycheck to paycheck. At the higher end, an emergency fund will prepare you for unexpected weeks or months without regular income in the event you’re laid off, disabled short term, or need to leave your job for some other reason. An emergency fund can also be used for, well, emergencies. While any amount set aside will get you started, your goal should be setting aside three to six months’ worth of living expenses. Once you have an emergency fund, turn your attention to your 401(k) or other retirement account. As you build up financial literacy, you may want to change your approach.
Live Below Your Means
Once you know what your budget is, where your money is going, and what you need to save for the future, you can start cutting out unnecessary expenses. Just because you can spend money doesn’t mean you should. Making certain lifestyle changes may seem daunting, but it will be worth it: after you adjust to the new normal, you’ll find you don’t miss a lot of what you’ve cut out. There are many ways, large and small, to cut your spending. For instance, shop around for new insurance to see if you can find a better deal, switch from buying new to buying used (which is also better for the planet!), change when you travel, and start building new DIY skills.
Develop Financial Literacy
It’s certainly possible to rely on professionals your whole life to manage your finances. But chances are, you’ll reap benefits if you learn about financial matters and have a say in what’s happening with your money. After all, not all asset managers are experts, and some are looking out for themselves as much as or more than they’re looking out for you. Start reading finance books (The One-Page Financial Plan and The Millionaire Next Door are good ones) and follow financial experts like Dave Ramsey, Suze Orman, and JL Collins. Once you’ve got a basic grasp, start learning about things like trading and various types of retirement investments. There are plenty of online courses—even some free ones—you can take if the structure will help you learn.
There’s a lot to think about in regard to financial security, but you don’t have to do it all at once. As with anything new, break it down into manageable steps. One month, set up auto-pay. The next month, evaluate your discretionary spending. And so on. You can certainly do it faster, but if you find navigating finances overwhelming, take the time you need to catch up psychologically. You’ll start seeing some benefits quickly, and they will only increase over time.