This is the second part of a two-part series about establishing financial security. Part one discussed what financial security is, why it’s important and establishing financial goals. You can read part one here.
We have established what financial security is and why it’s important. Now we need to dive into the nuts and bolts to actually achieving that security.
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.
Build net worth
Accumulating net worth takes time and discipline. Here are three ideas that can help:
- Contribute to your employer’s retirement plan. If you are eligible for a 401(k) plan, be sure to participate and contribute something. Most plans have some type of employer matching provision where the company contributes money equal to all or some portion of what you contribute. Be sure to understand how your plan works and, if you can, contribute enough so you get the maximum contribution from your employer.
- Set up an automatic savings plan. Many employers will automatically deduct a certain amount and send it directly into a savings account at your financial institution. Choose an amount you are comfortable with and let it happen automatically each pay period. If your employer does not offer this, set up a plan with your financial institution so they move that amount from your checking account to your savings account each month.
- Save what you do not spend. After you have paid your bills each month, move what is left over to your savings account. You will probably want to keep some funds in your checking account to cover unexpected expenses, but by moving excess funds to your savings account, you will be accumulating assets and probably earning more interest than if you left your excess funds in your checking account.
Establish good financial habits
Here is a list of 13 things to help put you on the road to financial security.
- Make sure your financial information and records are organized. For information on what records to toss and when check out this article.
- Use direct deposit for your paycheck.
- Participate in your employer’s retirement plan and contribute as much as you can.
- Set up an automatic savings program.
- Prepare a household spending worksheet.
- Periodically prepare a personal balance sheet.
- Use as few credit cards as possible.
- Reconcile your checking account monthly.
- Review all your bills and statements as soon as you receive them.
- Make credit card payments promptly and pay more than the minimum.
- Be sensitive to fees and interest rates.
- Build a good credit record. Read about how to do so here.
- Learn more about handling your finances by reading personal finance columns in newspapers and personal finance magazines.
The views of this article are for general information use only. Please contact and speak with a subject expert when specific advice is needed.