8 Ways To Feel Financially Secure
Fee-for-service financial planner and founder of PlanEasy.ca
Feeling financially secure has nothing to do with how much money you have or how much money you earn. Feeling financially secure is all about how you feel about your finances, how you manage your finances, and your attitude towards money in general.
Financial insecurity is a very common feeling. It affects both low-income and high-income households, it affects both young and old. In fact, according to the most recent FP Canada survey, at least half of us are affected by financial stress in some way.
“Half (50%) of Canadians say that financial stress has impacted their life in at least one way, with health issues (18%), marriage/relationship problems (15%), distractions and reduced productivity at work (14%), and family disputes (13%) the most common ways stress affects them.” Source.
When talking about financial security, it’s important to differentiate between BEING financially secure and actually FEELING financially secure. It’s possible to BE financially secure but not FEEL that way. It’s possible to be in a great financial position but without the right knowledge, routines and plans, it may not actually feel that way.
In this post we’ve outlined eight things you can do to FEEL financially secure (even if you still have the exact same income, spending, and savings).
#1 Know Where Your Money Is Going (And Why)
Just knowing where your money is going can vastly improve your financial peace of mind and feeling of financial security. It’s easier to reprioritize spending to align with your values and goals when you have a good idea of where it’s currently going.
It could be a simple budget tracker like our free Google Sheets template or something more automated like Mint of YNAB (You Need A Budget).
Once you know where your money is going, you’re going to feel more financially secure. Even without making any changes to your spending, just the knowledge of where money goes can be very empowering.
#2 Manage Spending Using Digital Envelopes
Sometimes tracking every transaction is overkill, but you still want to ensure you’re meeting your goals each month. Using a simple digital envelope system provides the security of knowing you’re meeting your monthly budget but without the headache of tracking every transaction.
A simple system of 2-4 no-fee online accounts is all it takes to manage spending and savings in an easy and automated way.
It feels great knowing you’re on track to reach your financial goals without all the effort.
#3 Create An Emergency Fund
Creating an emergency fund is a personal finance best practice. Even a small emergency fund can provide an enormous amount of peace of mind. All it takes is as little as $500 or $1,000 and you can just feel the difference!
But don’t just stop at $1,000, a true emergency fund should be based on your situation and your spending. Some people will only need a small emergency fund of $7,500 while others may need a much larger emergency fund of $30,000+.
As your emergency fund grows to your target amount, you’ll start to enjoy more and more financial security. A healthy emergency fund can usually withstand even the worst life can throw at you. It’s one of the simplest yet most effective ways to feel financially secure.
#4 Plan For Infrequent Expenses
Do certain expenses keep eating into your emergency fund or savings account? It might be time to start planning for infrequent expenses. Depreciating assets like vehicles and homes require constant maintenance and upgrades. It’s important to plan for these in advance rather than use an emergency fund.
To plan for infrequent expenses, set a certain amount of money aside each month to cover these future expenses. Don’t consider this money savings, consider it future spending that just hasn’t quite happened yet.
#5 Create A Debt Payoff Plan
Debt can feel like an anchor, especially certain kinds of high interest debt like credit cards, unsecured lines of credit, high interest vehicle loans etc. The monthly interest can be difficult to overcome, and the end may never feel in sight.
This is when a detailed debt payoff plan can help provide a light at the end of the tunnel. With the right plan debt freedom is possible.
Plan extra monthly payments and/or extra lump sum payments and see just how quickly you can become debt free.
#6 Create An Investment Plan (And Prepare Mentally For A Drop)
When investing for future goals, it’s important to understand that these investments will go up and down. As a general rule, at some point you can expect your portfolio to experience a percentage decline that is equal to half your equity allocation. A 60/40 portfolio will almost certainly experience a 30%+ decline at some point in the future. A 80/20 portfolio a 40%+ decline. And a 100/0, full equity portfolio, should be prepared for a 50%+ decline.
For a highly diversified portfolio (like a passive index portfolio) these types of declines are normal!
It’s important to create a basic investment plan that includes your risk tolerance, asset allocation, level of diversification, rebalancing schedule and annual fees.
By creating a plan and preparing mentally for some ups and downs it’s possible to feel more secure about your investment decisions.
#7 Create A Financial Plan
The most detailed way to feel financially secure is to create a financial plan. A custom plan will include all the details above as well as additional information to help ensure you’re on the right track.
A financial plan is like a map that highlights the best way to get to your final destination. Like a GPS, it highlights the best route, possible obstacles (traffic/construction), how long it will take, the overall distance etc etc. A good GPS will also highlight interesting sights or points of interest along the way, something you may want to plan for even though it’s a slight detour and may take a bit longer.
Sure, it might be possible to drive somewhere you’ve never been before without a map. You probably know the general direction you need to go. But like a GPS, a financial plan provides the peace of mind and financial security of knowing you’re always on the right path towards your goal, and highlights both the obstacles and opportunities that might exist just out of sight.
#8 Reach Financial Independence
The last way to feel financially secure is to strive for financial independence. Many people do not reach financial independence until traditional retirement age but some aim for it much, much earlier.
With low spending and a high savings rate, a household can reach financial independence in as little as 10-15 years.
Financial independence (also known as FIRE or financial independence retire early) is when your financial assets (investments, rental properties etc) can support your spending indefinitely. This type of financial freedom is the ultimate in security and peace of mind.
There are also phases along the path to financial independence, or different types of FIRE, that provide the feeling of financial security without being completely financially independent. You may have heard of “FU money”, “barista FIRE”, “coast FIRE”, “entrepreneur FIRE” etc etc. These are all ways to feel more financial security in the future.
Financial planner, personal finance geek and founder of PlanEasy.