You Don't Need a $200K Salary To Build Financial Security: 4 Steps To Take Now
Money worries are a top stressor for many households, so getting to a place where you can stop fretting about bills is nice. However, financial security looks different to everyone.
According to a Cashback Loans study, 51% of Americans need an annual household income of $150,000 to $200,000 to feel secure, while 35% of the 3,000 surveyed said an annual household income of $100,000 or less would be enough.
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Robert R. Johnson, PhD, CFA, CAIA, Professor of Finance, Heider College of Business, Creighton University, said people may be focusing too much on income and not enough on wealth.
“One can have a relatively high income but be financially insecure,” Johnson said. “People should focus more on building wealth and less on building income.”
D’Andre Clayton, cofounder of Clayton Financial Solutions in Greensboro, North Carolina, agreed that income alone doesn’t determine financial security. Instead, he said, people should pay attention to the amount of money left after the bills are paid.
“Income only tells me how much money comes through your household, whereas financial security tells me how well your household can withstand disruption,” Clayton said.
Here are four steps experts say you can start now to build greater financial security, regardless of your salary.
Know Where Your Money Is Going
Understanding how much it costs to run your household each month is vital, and a budget that shows where your money comes from and where it goes each month is a good place to start.
“Know how much you spend monthly and what you spend it on,” said Gerry Keene, financial service certified professional and a financial advisor with more than 20 years of experience. “If you spend more than you earn, reduce spending until you spend less than you earn.”
A realistic budget should have room for necessities, discretionary spending and savings. To free up room in your budget, review subscription services, gym memberships and recurring bills — if you don’t use them, cut them.
Build an Emergency Fund
An emergency fund can help keep an unexpected expense from becoming a financial crisis and from going into debt.
Matt Twiford, managing director of Pegacorn Group LLC, recommends starting small rather than waiting until you can save several months of expenses.
“Something is better than nothing should an emergency happen,” Twiford said. “Having that cash buffer is key because it helps you avoid borrowing at high interest rates and large fees.” Once your emergency fund grows to three to six months of expenses, Keene suggests working with a financial advisor.
“Establish a medium-term account because this account enables you to make larger purchases and take vacations in the midterm (five-plus years),” he said.
Attack High-Interest Debt
Having high-interest debt like credit cards or personal loans makes it more challenging to save and build wealth, because interest takes a portion of your income. But there’s a way to attack it.
“If you have several credit cards carrying a balance, make the minimum payments on the lower-interest cards and focus on the highest-interest one first,” Twiford said.
Reducing expensive debt should be done before investing, as it eventually frees up much more future money that can be put toward savings and investments, said Clayton. “A majority of the time all of those returns become the sacrificial lamb to liquidity needs in the worst times,” he said. “Prioritize high-interest debt first and perform an audit on your obligations and the things you don't need.”
Build Wealth Consistently
Once finances are under control, it’s time for the final step of building wealth. While a higher income can make financial security easier to achieve, it doesn't guarantee it. What matters is how much of that income you keep, how much debt you carry and whether you're building assets over time.
Johnson recommends developing a financial plan that budgets for savings and investing rather than simply letting money sit in cash. The goal is to gradually increase your net worth through savings, investments and other assets.
That means you don't have to wait until you're earning $200,000 to start building financial security. Creating a budget, establishing an emergency cushion, paying down high-interest debt and consistently building assets can put you in a stronger financial position at almost any income level.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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