Looking to become financially established? Money problems have become a common issue for many people. Also, it happens in every income bracket. Alternatively, you must understand what areas to focus on to build financial security and generational wealth. That is to say, personal finance is 80% behavior, and only 20% head knowledge. Meaning, it’s key to understand the principles, however, it’s more important to understand how to use the principles. Use the following 5 tips to finally find a breakthrough to gain financial security and live with financial freedom.
The following is a guest post by Neiko Johnson on the 5 ways to help you live with financial security. Neiko and his wife have an article on how they paid off $240,000 in 27 months. They share their finance knowledge and debt-free journey on their blog Secret to Finance. The primary focus of their blog talks about budgeting, paying off debt, money tips, building generational wealth, and increasing income with side hustles. Enjoy!
Create and stick to a budget
When it comes to managing money, creating a budget is one of the most important things you must do. Creating a budget is crucial, however, the next step is to actually stick to your budget. It’s very common for people to look at a budget as a restriction. But that’s not 100% true. Let me explain.
A monthly budget permits you to spend where you want and that’s having ultimate control over your money.
Here’s an easy way to make a budget in 5 steps:
- Calculate your after-tax income
- Calculate your monthly expenses
- Choose a budgeting plan
- Write it out and commit to it (your spouse too! if applicable)
- Reconcile and revise as needed
Your income is your most powerful wealth-building tool. Creating a budget takes time and effort, however, having a good one is well worth it. Tracking your spending may seem like a boring task. But, it’s important if you want to reach your financial goals.
Certainly, there are a lot of different budgeting methods. But, it’s important to choose one that works for you. We use and recommend the debt snowball method. As stated, personal finance is all about behavior and the debt snowball keeps you motivated to keep attacking debt.
Pay off all of your debt and have an emergency fund
First off, paying off debt is one topic we are constantly talking about when coaching people. Debt is anything owed to someone else, including student and car loans, medical bills, and credit cards.
Most importantly, having debt will only hold you back from reaching financial freedom. To put it a different way, if you take debt out of the equation, it would almost make it impossible to go broke.
However, that’s if you handle money correctly and have an emergency fund. The first thing to do before paying off all of your debt is to make sure you have an emergency fund. I suggest starting with a smaller emergency fund of 1-2 months of expenses until your debt is paid off. Once your debt is paid off, increase your emergency fund to 3-6 months of expenses.
An emergency fund is mandatory because it’s not if an emergency happens, it’s when. Life happens, so when it does, you’re prepared for it. Think of your emergency fund as a safety net.
Increase cash flow
Doing some extra work can help increase your cash flow. Having multiple streams of income is a great way to create financial security. Research has shown that on average, millionaires have 3 or more streams of income.
Every payday, you try to plan to save money but then bills come in or an unexpected emergency. Is this the story of your life? Well, you’re not alone.
Most people have one stream of income. But, you can find yourself potentially losing everything if you lose your job and don’t save and invest your money. Relying on one stream of income is risky. Here are some ways to create additional income:
- Save and invest 15% of your income
- Develop new skills that you can leverage to make additional money
- Start a side hustle or small business
Setting a goal to reach 3 streams of income is a great place to start. However, the more streams of income you have, the faster you will create financial security.
Reduce expenses
There are a lot of things we can spend our money on in today’s society. However, being smart about where we spend our money is crucial. Do you have that gym membership that you’re not using? What about a Netflix subscription that you only use once a month? These are examples of things that can help reduce your expenses.
Ultimately, your financial success is dependent on your income. If you pay out all of your money each month, then there’s none left to save and invest.
Ask yourself these questions to determine if you should get rid of a service or subscription:
- Does this product or service serve any value to my life?
- Can I live without this product or service for a little while?
- Is there a cheaper option available?
Finding ways to save money isn’t hard. It just takes a little thought and to delay gratification. Yes, we all like nice things. And, I’m not telling you not to want nice things. However, during certain situations, it requires a different mindset so you can create financial security.
As stated by Warren Buffett, “do not save what is left after spending; instead, spend what is left after saving.” This is a great mindset to have when approaching personal finance.
Term life insurance
Life insurance is a very important part of having financial security. Without life insurance, you’re leaving your family vulnerable for the future. Life insurance is something everyone knows is important, but don’t like to have the conversation.
Knowing what type of life insurance to shop for is critical. When it comes down to it, there are 2 main types of life insurance, term, and whole life. Always choose term life insurance!
Whole life insurance policies are a complete rip-off and I don’t recommend anyone purchase them. Your life insurance isn’t an investment, so there’s no need for the cash value part of the whole life policy.
When selecting your term life insurance make sure you get enough coverage. You should always buy 10-12 times your income in life insurance coverage. The coverage that you may have through your employer isn’t going to cut it.
Term life insurance will make sure your family is protected if something happens to you.
Final Words – how to create financial security
In conclusion, reaching financial freedom and living with financial security is the ultimate goal. It requires hard work but it’s not impossible. Set your goals and be intentional with reaching those goals. By removing debt and establishing an emergency fund, you create confidence, motivation, and a feeling of accomplishment. Above all, this demonstrates you can control your behavior and make great money decisions.
You’re now on your way to creating financial security and building generational wealth. I see so many people change their financial situation and family tree, and it’s awesome to see.
You got this!
