For many people, achieving financial security can be very challenging. It is, however, a worthwhile goal to strive for as early as possible. Achieving financial security means that all of your financial obligations and needs have or are being met, giving you the peace of mind that each of us seeks. Financial security is comprised of several components, which include your net worth, debt to income ratio, emergency funds, and future/retirement funds. Understanding how to best manage each can help you achieve financial security.
Assets Minus Liabilities Equal Net Worth
Knowing your net worth is important. It consists of your assets including home, car, savings, investments, and other income sources minus your liabilities; which include your monthly expenses (i.e., mortgage payment, utility bills, insurance premiums, credit card bills, taxes, grocery bills, etc.).
What’s Your Debt to Income Ratio?
Next you want a clear picture of how your debt compares to your income. If a high percentage of your income is going towards paying off debt, then you need to find ways to reduce your debt load. These can include reducing the number of credit cards you are using and paying them off one at a time with larger than the minimum payments; starting with the ones with the highest interest rates.
Are You Prepared for the Unexpected?
Attaining financial security also requires you to have an emergency fund to access when/if the unexpected happens. To be prepared, financial advisors suggest that you should have funds that can cover a minimum of six months of your usual expenses. The emergency fund should not be comingled with other monies such as your savings account or retirement plan. It should be funded separately and maintained in a separate account.
Planning for Retirement
As early as possible, every worker should start planning for his/her retirement. Many companies offer matches to employee contributions, but even if yours doesn’t, it is important to be disciplined by putting aside some money from each of your paychecks to the extent you are able to do so. For employers, offering robust retirement benefits helps attract and retain high caliber employees. For older workers, retirement benefits are especially valued, but workers of all ages, races and genders value the fact that retirement benefits are a way for lower-paid employees to gain an increase in their compensation in situations when their salaries cannot always increase. Depending on one’s age, income level and other variables, financial advisors have different recommendations for how much you should put aside for your retirement. Fidelity Investments recommends 10 times your income if you want to retire by age 67, and suggests adjusting that amount if you want to retire by 62 by saving more to compensate for an additional five years of expenses. For other ages, Fidelity recommends, for example:
- Savings by age 30 should equal your current annual salary
- Savings by age 40 should be three times your income
- Savings by age 50 should be six times your income
For those who want the peace of mind that financial security brings, following these basic tenets of financial preparedness can provide it.