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Reaching a point of financial security is a process that takes time, effort and perhaps some sacrifices. However, the results are worth it. By starting early, you can put time on your side. By doing a few things right from the beginning, you can make that process easier and minimize the sacrifices you may be forced to make later.
Consider reaching financial security to be a project like building a house. You start with a foundation, you add the floors as time goes on, you put on a roof, you finish the inside and then you move in. Fortunately, you have a long time to build your financial future, you can learn the skills it takes and it is easier than building a house.
What is financial security?
Financial security consists of several things:
Why is a solid financial foundation important?
You, and you alone, are ultimately responsible for your financial well being. Your decisions will affect how you live on a day-to-day basis and in the long term. Handling the financial issues associated with starting out, establishing a household and assume more responsibilities can be stressful. A solid financial foundation can help you spend less time and effort worrying about your finances so you can devote your time and energy to other important matters like your job, your family and your future.
Building a solid financial foundation.
First identify a few very broad goals:
Components of a solid financial foundation.
Monitor and control your spending
While this task may sound ominous, it does not have to be. Consider breaking it into pieces. First, you need to know how much you have coming in each month. While you may be earning interest and dividends on savings accounts or investments, let's just focus on income from your job. Every pay period (weekly, semi-monthly or monthly), you earn a certain amount. However, the check you receive is reduced by taxes that are withheld, your share of employee benefits (primarily health insurance), amounts you contribute to your company's retirement plan and any other deductions you may have. The amount you have left is your monthly disposable income. That is how much you have to pay your bills and hopefully there will be some left over you can save.
Next, break your expenses into those that are fixed and those you can control. Fixed expenses include rent, parking, other insurance (probably renter's and auto insurance), utilities and recurring medical costs. You probably have some level of control over most of your other expenses.
Finally, subtract your fixed expenses from your disposable income. That is how much you have to cover your other living expenses and any other spending. To not overspend your income, just make sure you manage your other living expenses and other spending to have something left over each month.
Building some net worth
Accumulating net worth takes time and some discipline. Here are three ideas that can help:
Establishing a good credit record
Three large companies compile information on the borrowing history of almost everyone. They get their information from credit card companies, utilities, financial institutions and other companies. Every time you apply for credit, whether it is completing a credit card application, getting an auto loan or signing a lease for an apartment, the company you are working with will probably request a credit report on you.
Lenders will use those credit reports to make decisions on whether to grant you credit, make a loan and in many cases what interest rates to charge. Therefore, it is important to have a good credit report. While there are many factors that go into your credit report, the most important ones include timeliness of payments, how much do you owe in total and how many companies you owe money to.
Here are some guidelines to help you build and maintain a solid credit rating:
Establishing good financial habits
Here is a list of a dozen things that can put you on the road to financial security.