What is Financial Security?

Getting all of our consumer debt payed off really helped my wife feel secure in our finances and it allowed me to work at a job I like instead of just for a paycheck. We are now able to start attacking the debt on our house. This will take us a little longer but I think seven years is not unreasonable.

Re #4.

I’ve had friends and an ex, who were always unhappy at their jobs. Most of them had much higher paying jobs than I did. I had a much lower paying job and a verbally abusive boss. Yet I was happy, while they were unhappy. It seems to me that happiness comes from within yourself. You can decide to be happy or unhappy. The effort is about the same. The results are not.

After finally owning up to my problem and realizing this isn’t going away I started the journey of getting my debt under control a few months ago! I am realizing that this is not going to be easy and while I understand that I am the “cause” of the problem “small steps” are helping also. The small steps I have taken are keeping track of my expenses and setting up an emergency fund. I have been using “You Need a Budget” as my tracker and now have a few months under my belt to drill down and see where its going. Also started a savings account with ING and am having automatic withdrawals done 2 times a month. The amounts are not big but its a start! What I would like to do is get another job to use that towards debt pare down BUT I am kinda picky about this. I really would like to do some type of work from home BUT not sure what to do about this. I really do not want to have to GO to a second job as I have a job I like a lot BUT it wears me down so by the end of the day I am pretty beat! I am brain storming on this and this is my next goal in my goal.

The funny thing is that we go so willingly into that slavery. I have been debt free only once (excluding the mortgage) since getting married 18 years ago. It felt great! I did go back into debt in order to finish my bachelor’s degree and then my MBA. Right now, my biggest non-mortgage expense is my 3 kids private school tuition. Education IS expensive, but ignorance is so much more so. The old saying “The borrower is servant to the lender” rings true across the ages, but in my opinion, debt isn’t slavery to the lender, but slavery to a lack of self control.
I’ve said for years that schools waste our children’s lives and brain power by teaching irrelevant information. The most relevant things we should be teaching today are:
1. Personal financial management
2. How to peacefully co-exist with a spouse
3. How to successfully raise children
4. Entrepreneurship
5. How to develop a good work ethic.
Can you imagine the state our country would be in if we taught and practiced those five items?
I know, I know. I’m living in nirvana, but I still think it could be done.

Although I know I won’t ever make a high salary, I still feel like I’m well on my way to financial security thanks to following these steps. However I struggle with fears in the back of my mind relating to health issues – my own and my family’s. None exist yet, but I worry myself about what would happen if (and when) they did. Not only could it ruin financial security, it could ruin dreams and lives. I would love to hear more stories of people who have done everything right financially and found themselves facing huge health obstacles – how did they handle them?

So, by Michael’s criteria, how are we doing? Let’s see:

1) Debt free: We’ve been working on this one. We’re down from 7 credit cards to 2! And while we still have some medical debt to deal with, those debts too a much less now. I’d give us 75/100

2) Controling expenses: I feel we are in control from that aspect that we now rarely spend more than we take in. I’d give us 98/100

3) Savings: Yeah…could be better at this. While we have “left over” from each paycheck (and this after a set amount transfers to savings), it is eaten up by kids, cars, and care (as in medical). And we’ve not been sending as much to our mutual funds or 401k. I’d say 72/100

4) Job satisfaction: Now here’s where things get tricky. I am the SAHM, writing when I’m not homeschooling. My husband works in the computer industry. I’d say my job satisfaction is about 90/100; his averages about 80/100 – so together we’re about 85/100.

So that’s 75/100, 98/100, 72/100, 85/100 which leaves us with an average grade of: 83/100 or a lower B.

I’d be interested in seeing what advice Michael might have for helping those of us who are -almost- there.

There are most certainly as many definitions of financial security as there are individuals striving to obtain it. However, I think Michael has come very close to defining its essence.

Financial security means more than being able to buy the latest model car every year, living in the best suburbs or jetting off to the Bahamas regularly. To me, financial security by its very definition means a position in which I can be secure in the knowledge that the needs of my family and myself have been taken care of regardless of the possible curve balls life may throw at me. For this to be the case, I would need to ensure that:
a)My expenses never exceed my income
b)I save 10% of all income in an interest-bearing investment instrument with the goal to accumulate 12 months of living expenses
c)I use 5% of my income to invest in slightly higher risk equities (shares) to maximize investment income
d)I focus on increasing the percentage of my income derived from passive sources (interest, dividends, rental and business income) as much as possible until retirement. The ultimate goal is to have 75% of my income from passive sources when I reach retirement age, a percentage which coincidentally should meet my cost of living needs at retirement and will nicely complement my income from retirement planning investments.

If I stick to my action plan above, it will of course mean that I may have to forgo the pleasure of buying that brand new Porsche or living in the most sought-after suburb in my city. What it will also mean however, is that I will never have to experience the absolute terror of having spent beyond my means and being unable to meet my debt repayments. Remember that often people who look rich are really only poor people with a massive amount of debt.

Middle class millionaires don’t look like millionaires because of the fact that they use their funds to generate more assets which in turn generate more income instead of splurging on toys or the latest status symbol. They are quite content to live in middle class suburbs driving 10 year old cars while their personal net worth increases exponentially.

Living according to commonsense principles like the ones that Michael has outlined in his article, means that your financial future will be secure enough to allow you to concentrate on living and enjoying life to the fullest.

My financial goal was summed up quite nicely by Charles Dickens:

“Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.”
(From David Copperfield, 1849)

Financial life is a balancing act. Trying to keep up with the Joneses is a sure way to tip life into misery.

The process we have set up is this:

I divide our household income into three streams, and three accounts.

The first account pays the regular monthly bills … mortgage, car payment, utilities (levelized, of course), phones, internet, etc. We put enough into that account each month to cover those bills, plus a little more for rate increases.

The second account is savings, and we’re working to increase the amount going there.

The third account is what’s left over, and it’s enough to cover gas and groceries and entertainment and whatever else might come up during the month. When that account gets low, we slow down or stop spending.

This method lets us see better how much we actually have in available cash flow each month. We don’t put stuff on the card (or else we allocate an amount from the third account to cover it … and do so immediately).

The only monkey wrench comes from unexpected big bills, such as car repairs and medical bills. We’re working on how best to handle that, but for now it comes out of the emergency fund, which will be replenished from the amount going into savings.

This system seems to be working for us, because we have stopped the slow bleeding of funds, and we know everything is covered.

Now if we could just convince our kids to start doing the same thing!

I doubt I am alone in thinking that the problem some of us face is not just cutting back on expenses (we recently cut out our water delivery and TV service), but in not compulsively spending when we do start to become more comfortable.

Not only are my husband and I cutting back on frivolous spending, but we were recently able to pay off almost all our credit cards and start a savings account. We then were able to sell my car (that I owned outright) so that was extra money to put towards paying off HIS car. Soon we’ll get our Christmas bonuses – and the urge to spend on frivolous things is strong because we’re not having to struggle to afford those things for once. However it’s so important to keep our goals in mind – saving for a vacation and for a baby and house fund! The absolute joy of being able to put that money away, or put it towards our vacation goal, is much greater than being able to buy an extra piece of clothing or trinket. Not to mention the pride we’re having for ourselves and our newfound fiscal maturity!

The things I’d stress most about saving are: A little bit can go a long way as long as you keep adding those bits. If you’re used to seeing nothing in your savings account and learn to put $50 a month into it, before you know it, you’re going to have a few hundred dollars in there (when you were used to having none).

As your savings grows, don’t spend it. Let it work for you. Bad things happen in life and someone has to pay for them. My family has been surviving on a single income for a long time, but when I was laid off several years ago, we had to eat through our savings. I was off for 15 months, but never missed a house payment. We’re still recovering from that, but we still have our house and our cars.

Don’t let people talk you into parting with your savings. Have a plan and stick to it. You don’t have to go out to an expensive restaurant to enjoy a meal with friends. You don’t need to spend thousands of dollars on vacations to make them memorable. Like the saying goes, “People to plan to fail, they just fail to plan”.

Sound alot like of the same advice/teaching that Dave Ramsey advocates.

I think hating your job can actually be caused by the feeling of entrapment. My wife said that while she was working to help put me through school, she hated every minute of her job. Now that I’m working, she wants to go back to work and is considering the same position! Circumstances can engender all sorts of feelings. I would add (as I’m sure many people have before) that having an extra source or two of income -especially passive income- takes the edge off that feeling significantly.

We are working hard to get rid of our debts so we can be financially secure. To us, just knowing that we don’t actually own a lot of our things, is an uneasy feeling. And heaven forbid something happens to our income, we would be in a world of hurt.

Once our debts are paid off, then we will start saving so we could live off of just interest. That is a wonderful freedom indeed, not to have to work unless you actually want to!

Financial security is a subject my husband and I have been talking a lot about lately. We’re doing well with our savings, and should both be able to quit next year to switch career streams. I think the biggest challenge has been to deal with the outlooks of our friends and family. It’s so difficult to remember that you’re content with a 21″ CRT for the 3 shows a week you like to watch when your friends are buying 56″ DLP High-Def sets! I really love the PF blogs like this one that help put debt/consumerism into perspective. One trick we used was to put everything in terms of time. It was a lot easier to say “NO!” to the television when we realized we could trim 5-6 months off the mortgage and save double the interest by using that money to prepay instead. (If we were more into television, our priorities might have changed). Keep up the great articles and comments (I often get at least as much from the comments) everyone, the impact is felt!

To me, financial security is all about #4 above. I want to be free to work whatever job I want without having to worry about making ends meet.

I agree with others – it’s sad that our children aren’t being taught these things in school. As soon as a young person hits age 18, they are bombarded with credit card offers.

I still remember getting my first card and how free it made me feel. Of course I didn’t know at the time that a few days spending could lead to years of debt.

Echoing Rico a bit, I think a fundamental part of financial security is having the confidence to recognise when you are secure. Last night I was idly thinking about things I regret not doing (going along to either of my graduations, taking a day off work to help my friend try wedding dresses, that sort of thing), and it’s incredibly annoying to know that I *could* have done these things, I just thought I needed to save/earn the money to do so. Fair enough, debt is a big issue, but the ‘how much is enough’ factor isn’t just about a figure for a particular lifestyle, and I’m a bit concerned that the emphasis, even for people who are secure is still on “reduce expenses, save more”.

re: why wouldn’t 50k be enough:

It all depends what you want to do in your retirement. Do you want to travel the world, see those wonderful sights? Then it might not be enough very soon. Do you want to live in a city like San Fransisco, for it’s culture? Good luck trying to do that on only 50k a year, and &c.

However, in many places that would be more then enough: I know it’s more then I make right now!

Debt is slavery is a gross understatement.

Dad got a rude awakening early in his career. He was a doctor. The doctor who owned the clinic where he worked (and, for that matter, the town where we lived) referred a patient to him. Dad sent back the diagnosis. The other doctor did a surgical procedure that Dad explicitly said the patient didn’t need, and the patient died. Knowing he was in trouble the minute a malpractice lawyer saw Dad’s paperwork, the doctor came to Dad and told him to change the paperwork. Dad refused. The doctor made more threats, but Dad held his ground. Among the threats he made was that Dad could quit, and he could move, but this doctor would see to it that the house we lived in never sold, and he would have to declare bankruptcy.

Dad held his ground, we moved, and it took five years for that house to sell. We never had to file bankruptcy, but we flirted with it for for most of his professional career. He died at age 51.

I told myself I wouldn’t let myself get into Dad’s situation. In 1998 I got stuck in a bad job in computers. I always told myself it would get better if I rode it out, and for a time, it did. But in 2002, I bought a house. I was at a party, and my boss’ boss’ boss (I had five bosses, just like Office Space) was there. I mentioned I’d just bought a house. You should have seen the look on his face. The look said everything: “Great. Now I own you, and I can do absolutely anything I want to you.”

And wouldn’t you know it? Within months, I was on call 24/7. I was getting phone calls all hours of the night because people wouldn’t read error messages and do what the computer said to do. One night I got called every hour until 5 am, when I got smart and took the phone off the hook. Of course I was still expected to be at work at 9 and work a full 8 hours even though they hadn’t allowed me to get any sleep. Any time I complained, my bosses just came back with an answer like, “Well, this should be your motivation to get the systems working right.”

The problem was, two people before me had tried to fix the problem and neither of them could either. That’s what happens when you use products for purposes other than what they were designed to do.

In 2004, my then-girlfriend’s dad mentioned to me that he and his wife had paid off all their debt in seven years. He even told me how they’d done it. I liked the idea but didn’t see how it would work in our situation.

A few months later, a speaker at church presented a method of paying off debt using a rolling system. In my case, I had a car payment of $330 a month and a mortgage of about $1,000. The idea was to take whatever extra I could afford to pay on the car, and then when that was paid off, apply that entire total to the mortgage. I started doing that, and less than six months later, I owned my car outright and started putting a serious dent in that mortgage.

Not long after that, I lost my job. It was a combination of factors. But it didn’t matter much. I was getting married in a couple of months, she was in between jobs too, and any way I looked at it, we were in serious trouble.

Of course my vindictive employer didn’t care about any of that.

It took a while for me to find a steady job again, but I found one that was a lot more reasonable. My wife went the self-employment route and ended up a lot happier. After we got married, we rolled her debt into the system. It wasn’t long before we owned her car outright too.

We have a credit card, but we pay the balance off every month. At this point, we have no debt aside from what people would call “good debt”–our mortgage and her student loans. Assuming nothing drastic happens, we should have both the mortgage and her student loans paid off sometime next year.

My wife is happy working for herself. I’m much happier at my job knowing that in a year we’ll have no debt. That change happened almost overnight when a mortgage statement came in the mail and I realized the amount of money we owed was less than I expected to pay next year. It was like magic. I never said a word to anybody but people’s attitudes changed. Maybe I started giving off different pheremones, or maybe it was divine intervention. I don’t care. All I care about is that we’re almost free and I’m happier.

I know some people look down on us because we drive five-year-old Honda Civics and we aren’t undertaking dramatic home improvement projects. But all of them are going to be in debt for at least another 10 years, and probably a lot longer. They can talk all they want when we’re getting 20% more for our money because we aren’t paying any interest, and we can work any job we want as long as we make enough to pay for utilities and groceries and contribute the legal annual limit into a Roth IRA.

My opinion is 50k would be plenty, if everything else is paid off. Anyways, I always heard that once you net the first million, the rest come in like fish.

Also- I think that financial security isn’t just being completely out of debt, many people are in debt with mortgages and such, and as long as the income and emergency funds are there I don’t see any reason that you can’t feel financially secure whilst being in debt.

Another aspect of being in debt that leaves you deeper in slavery is the need for medical insurance. Our family has had a very rough year and I don’t know how we are going to get the medical expenses paid anytime soon and these are the expenses after deductibles, copayments and the 80% paid. I don’t know how anyone could manage without insurance. If not for the medical we would have had several things paid off. I would feel good about a million dollars (extra after debts are gone, of course) for security because I could find ways to make it work for me and I’ve learned what is really important to actually have a life BUT I would still need to work (or my husband) in some capacity to ensure that we would have health insurance.

My dad led my example on this issue. He bought every car for cash and paid off his house after about 15 years (on a 30-year mortgage). He to this day still doesn’t have a credit card! Interestingly enough, I still got a bit sucked in to the ‘normal’ way of doing things when my income started rising. I bought a car with a loan (although it was a Honda Civic, so not extravagant), and bought a big house. But I am now back to 0 debts other than mortgage and am working to pay that off. I don’t intend to add any more.

Michael Mihalik listed 4 attributes of financial security. They are explicit and simple goals. Each corresponds to what the average American does poorly. Many people are in debt, not in control of expenses, do not save consistently and, whether they are aware of it or not, do not have much freedom regarding how, when, and where they earn their money. For this reason, and because most people find it easiest to learn simple and concrete steps, I think his list of goals is quite well chosen.

On the other hand, I believe that the list is a bit decpetive. Why? Because each of these goals are actually aspects of a single underlying principle. One of the things we all share as individuals is that we will one day die. Our time is limited. We do not know how much time we have, but we each have a limited amount. Financial security is about control over our own time. It is our most important scarce resource. Thus, it is the one that matters most.

When in debt, we are beholden to others. How many hours per week must you work to pay off your creditors? Changes in your expenses may dictate your behavior. Can external events influence how you spend your time? If you are unaware of the consequences of your own actions, will that control what you do? Though steadily increasing savings is not sufficient to attain financial security, it is nearly certain that those who do not do so will only be secure through luck. Finally, not being forced to work at a job you dislike is a corollary of freely choosing how you spend your time.
In the end, security is about time and happiness. How free are you to devote your time to what you enjoy? I agree with Mr. Mihalik that each of the goals he listed will increase ones level of financial security, and result in greater control of one’s own time. However, none of these individual goals is an end in itself. None is fundamental. It is important to understand this.

Since each person has a different set of goals and desires, each will define financial security in different ways. This can lead to confusion if we compare ourselves to others. We also are creatures of habit. It is easy to get trapped on a treadmill of consumption, debt, and work. As a result, we can step onto a financial security treadmill, allowing our time to be controlled by our devotion to saving and building for the future. That happened to me.

I started working early in life but started saving quite late. In my mid 30s I drastically changed my daily habits in order to get out of debt, start planning for retirement, and beginning to save and invest. It took the deaths of several family members and colleagues, and the loss of my job to make me realize that I had lost balance. I was a workaholic, focused on increasing or maintaining my income, remaining out of debt, minimizing my expenses, and maximizing my savings. I had hobbies that I enjoyed, and people that I cared about. However, in terms of freedom over how I spent my time, I was little better off than I was when I spent what I earned and carried debt.
I had worked 50-60 hour weeks since I was a teenager, and was tied to beepers and cell-phones even when I was not working. I had taken no long vacations since I was in high school. I loved my job, but was still not free to choose the way I spent my time. I had traded one treadmill for another. Surely, the path I was now on had a far more satisfying outcome. However the journey to that destination was indistinguishable from than the one I was on before.

It was not until my father died, 9/11 killed many of my colleagues and customers, and the company I worked for went out of business, that I realized how little my daily life had changed. I had savings now. I also had debt, but it was through a conscious choice (a zero interest loan for a purchase I had planned to pay for in cash). It took the loss of people I valued, and the loss of my job, to make me realize what I had been working toward. I chose to not look for a new job right away. Instead, I decided to take a couple of years off to study, travel, and carefully choose my next job. In the end, I got tremendous pleasure from my time off. I also decided to try my hand at a completely different career path, one which had far more risk, and less security, but in which I was self-employed.

The moral of the story is that I was able to gain a measure of freedom by following the same steps that Mr. Mihalik recommends. It gave me the freedom to take risks and to stop working for a significant length of time. However, it took a series of sad and painful events to make me realize that I had lost sight of the whole purpose of financial security. I had escaped being a wage slave only to find that I had become just as enslaved to the savings treadmill. I had gained a great measure of freedom, but like a long-caged bird had never noticed that the door was open.

Don’t get me wrong, I still have no debt. I control my expenses. I save an even larger percentage of my income. I have choice in work – but still work hard at what I have chosen. The difference is that I have not lost sight of my underlying goal. I continue to do these things to increase my future security and freedom. What has changed, is that I no longer lose sight of my present freedom and happiness along the way. I live more in the present, and as a result have found a better balance. In finance as in the rest of life, self-knowledge and balance are necessary to living well.

Do understand yourself and your goals. Do take steps to ensure you can reach your chosen destination. However, don’t lose sight of the fact that, in the ends, the journey itself matters more.

It would seem many people confuse “financial security” with “fuck you” money. “Fuck you” money is enough that you never have to work again.

“Financial security” just means you don’t have to work a job you hate.

There seems to be an implicit understand in the U.S. that you are supposed to hate your job. And many, many people do.

They therefore think that they would only be happy if they had no job at all. Which is most likely wrong. People, IME, are happiest when they have the *right* job, not *no* job.

I’m not so sure I completely agree with these ideals. By these standards I am financially secure at age 24. I can tell you right now that I still have to work somewhere five days a week, or my lifestyle would change considerably.

Separate thought: I really am not so sure I agree with the idea that my money is working for me. I have a tendency of looking at my savings as a loan that I’ve given my bank. Even in fluid money market accounts, they are using my money to make money, and then giving me part of the cut. Better than leaving under my mattress, I suppose. My current dream is to live within the system of banks until I can have enough to work for myself. At that point, I’ll be my own investment.

We are working on all of these points. We’ve made a big dent in our debt this year, though we still have a ways to go.

My husband got let go from his very good paying job in May, and we’ve been struggling to get our expenses under our now lower income. We’re getting there though.

Up until my husband lost his job, we were doing pretty well with saving money every month. We’ve cut back quite a bit with the lower income.

We’re working toward number 4. That’s our goal. My husband doesn’t want to take another job that he hates, yet he knows he probably has to in order for us to make ends meet until he can get his business off the ground. Having a goal of being self-employed in a field he loves is giving him the motivation to work just a couple more years in a not-so-great job, so we can get points 1, 2, & 3 taken care of before he takes the plunge on point 4.