This is a guest-post by Michael Mihalik, author of Debt is Slavery (and 9 Other Things I Wish My Dad Had Taught Me About Money). Two commenters on this post will win free copies of his book. Read on for details!
Wouldn’t it be great to be financially secure — to never have to worry about money?
What would it take to get there? In fact, what exactly is financial security?
Ask ten people to define how much money it takes to attain financial security and you will probably get ten different answers. For some people, financial security is having $10 million in the bank. For others, it’s $50 million.
I doubt anybody would say $1 million. Being a uni-millionaire isn’t what it used to be. With the median home price in the United States around $220,000 (the median price in my hometown, Seattle, is pushing $425,000), there may not be much left after paying off the mortgage. Even having the full million in the bank earning 5% per year will only produce an income of $50,000 per year. That’s not bad, but not enough to jet around the world and party with Paris Hilton, Mick Jagger, and Diddy.
What about $10 million? At 5%, that will generate an annual income of $500,000 — without working. Now we’re talking some real money!
The problem with defining financial security in these terms is that having $10 million, $50 million or even $1 million is a pie-in-the-sky dream for most Americans. We’d all like to have millions of dollars, and it’s not bad to aspire to that goal. The problem is, if we define financial security by such large amounts of money, most of us will believe that it’s out of our grasp. Instead, we should use a realistic definition of financial security that can be achieved whether somebody makes $10,000 a year or $1,000,000.
First, let’s look at what financial security is not.
Financial security isn’t making or having a certain amount of money. There are many people who have made millions of dollars who are not financially secure. Stories about musicians, superstar athletes and multi-million-dollar lottery winners who end up in bankruptcy court are so common that they’ve become a cliché. If someone makes $500,000 a year, but spends $600,000, are they financially secure? Of course not.
Financial security also isn’t limited to being independently wealthy, having servants bring you martinis by the pool, and flying your private jet to Monaco to party with heiresses, super-models, and rock stars. If that’s what you want, then go for it, but this is a very narrow definition of financial security.
I prefer a broader definition, one that puts financial security within the reach of anybody with a desire to improve their financial situation, and a little bit of discipline.
To me, financial security consists of four things:
1) Being debt-free
Consider two women: Jill makes $35,000 a year. She has $250 in her savings account, and owes $10,000 on her credit cards. Joan makes $35,000 a year. She has $10,000 in her savings account, and owes $250 on her credit cards.
Which woman do you think feels financially secure? Which sleeps better at night?
Certain debt is understandable. Few people have the money to write a check for a car or a house. Borrowing money for an education or to start a business may also be acceptable, but borrowing money for other reasons is probably a mistake.
How many of you are still paying off the credit card debt for:
- The vacation you took last summer?
- The elegant, romantic Valentine’s Day dinner last February?
- The pair of expensive Italian shoes you just gave to Goodwill?
- Christmas presents your kids no longer play with?
- Electronic equipment that has since become obsolete?
When you owe somebody money, they have power over you. You go to work, even if you don’t want to, because you have to pay back your debt. If you don’t pay, you can be sued, your car can be repossessed, or your house can go into foreclosure. That doesn’t sound like security to me.
2) Being in control of your expenses
As I mentioned earlier, if you earn $500,000 a year, but you’re spending $600,000, you’re on your way to the poorhouse. If you control your expenses so that they are less than your income, you can save and invest the extra money, and you’re on your way to becoming financially secure.
3) Consistently increasing your savings/assets/net worth on a monthly basis
Most people have little to show for years or even decades of hard work. For whatever reason, they can’t or won’t save money and they’re one paycheck away from being destitute.
We should focus on saving money every month. It’s a great feeling to watch your savings grow, especially because the interest compounds without any extra effort from you. Instead of you working for money, your money can work for you.
4) Not being forced to work at a job you dislike just to pay the bills
Many people live paycheck-to-paycheck and are stuck at jobs they don’t enjoy because they have to pay their bills. If they quit their jobs or were laid off, it wouldn’t take long before they were in dire financial trouble
If you are debt-free, control your expenses, and focus on increasing your savings on a monthly basis, you can survive tough times, such as a layoff, for months, or even years, without a change in your lifestyle. You will also have the freedom to quit a job you don’t like and take your time finding a new job, preferably one that you will enjoy.
Financial security is an admirable goal for which we should all strive. However, it’s important to define financial security so that it is achievable for the average American. Being debt-free, controlling our expenses, increasing our savings every month, and doing what we love can lead to happy, fulfilling, and prosperous lives for us all.
Contest reminder: Michael was kind enough to pass along two copies of Debt is Slavery. Each person who leaves a substantive comment on today’s entries will be entered into a drawing to receive one of them. The two winners will be announced on Friday, October 19th. (Details.)
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I think financial security (not financial literacy mind you!) as you describe it here, is highly overrated. The real sense of security comes out of a tightly knit community that once provided protection corporations and insurance companies now sell it to us at extremely high prices (now that they destroyed the very community that gaves us those things). Rick over at Dry Creek Chronicles posted a great post on this topic a few weeks ago. You can read it here http://cumberlandbooks.com/blog/?p=991 if you’re interested.
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For all intents and purposes, my wife and I are “financially secure”.
1) We only have 3 areas of debt:
A) Mortgage
B) A car note and
C) student loans.
I’ve been earning more in a high yield savings account than I’m paying on B and C, so I’m not too concerned about paying them off.
2) We both also have stable jobs, and I can typically find another job relatively easily (my longest job search took ~1 month…and that was during the holidays).
3) We’re both only in our mid 20′s but our net-worth is just a little over $80K. I don’t say this to brag, but rather make a point (which I’ll outline in a minute)
4) We have 6 months worth of expenses in savings.
5) We could pay all of our bills on just my paycheck. It would be tight, but it could be done. While we couldn’t necessarily pay all the bills on my wife’s paycheck alone, she doesn’t make much less than I do, and while her income will rise (raises, etc), I don’t expect our expenses to…especially since our biggest is our house, which we just bought.
Even with all of that, I don’t feel financially secure. For me, I don’t think I’ll feel completely secure until the following criteria are met:
1) Owe nothing to anyone (this includes a mortgage)
2) My investments are generating enough cash flow to pay for all of our expenses, while still growing. I’ll probably still work, but not NEEDING the job will help w/the feeling of security.
However, even then I don’t know if I’ll feel completely secure. You see, my wife has a medical condition, and I know that without insurance, no matter how “secure” we are, our finances could be ruined in a short time. I hedge for it, and while it’s not likely, it is a definite possibility, and b/c of that I don’t think I (and probably many others) will ever truly feel financially secure.
Oh, and btw, friday is my birthday
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Great post. I particularly liked the comment about how common it is to see the ultra-rich self-detonate like the Lottery Winner Curse.
http://www.associatedcontent.com/article/70165/winning_the_lottery_curse_or_a_blessing.html
That type of thing happening is an excellent example of how a person who doesn’t have the sense to recognize that gambling is a tax on stupidity can be severely damaged by a windfall of cash.
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[...] What Is Financial Security? I don’t think there’s a single tried-and-true answer for this. For me, financial security means that I’m not scared about tomorrow and that if I lost my job, it really wouldn’t worry me too much. (@ get rich slowly) [...]
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I was in credit card debt of 2000 and house mortgage of 50,000 in debt about 5 years ago. I was drowning,especially when I left a job due to personal problems. It seemed the whole world choked up on me, chasing me for money. A series of bad decisions and bad influences led me to where I was at that time. I finally resorted to my father who helped me pay off all my debts. That day I vowed to return every penny I owe him. I am close to achieving that now. I did that by getting back into college, earning a degree and then getting into a proper job. Without my father, I would have been in alot of mess. This made me realise that tomorrow when my own children get into trouble,I must have something to help them out too.
My father saved money living all the frugal principles spoken in GRS. The only difference is he did not have a blog to remind him while I do. Thank you GRS for being that voice in my head that tells me to stay focus on my goals and strive higher.
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I think it’s incredibly useful to define financial security in broad terms – a definition everyone can strive for. I’m not sure about being debt free, though. Would you rather have no debt and $300000 or would you rather have a $300000 mortgage and $600000 in savings and investments? I am not saying that you should mortgage your house to invest, but there is an advantage to the increased liquidity that is worth considering. I might say you ‘have the ability to pay off your debt at any given time and still live comfortably.’
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I think I knew I had had a paradigm shift when instead of staying awake at night thinking of winning the lottery, I dreamed of a zero CC balance that I had paid down with diligence and good planning. I think the important lesson is, you need to learn how to stay finiancially secure while you are working to achieve that goal. Just my $.02.
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[...] Get Rich Slowly om vad det innebär att vara ekonomiskt oberoende. [...]
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I agree with most of what you say. But I comment that one thing this post doesn’t address is the inherent baselessness of notions of how much is enough. Jetting around the world is not financial security, it’s luxury.
I’m one of those people who would consider a million dollars to be financial security, because I think financial security means a minimum a person with both feet on the ground could live on. The meaning of financial security cannot reasonably change with one’s standard of living. That would be nothing more than redefining a necessity as a luxury one has become accustomed to. Cable TV, for example. And one of your examples– living in a place where the average home price is above that of the nation– is also luxury, disguised as a necessity.
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I tend to think of “financial security” and “financial freedom” as two separate things. Security would be having your financial affairs in order, whereas freedom would be having enough money to sustain your quality of life indefinitely.
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I think financial security is a state of mind based on something you believe you can totally trust.
The only time I ever remember feeling that way without reserve, was when I lived at home and my father was still alive. I think the trust was actually in him, because he was the kind of person you could literally trust with your life. In real dollars and cents, I don’t think there actually was that much logical basis for my confidence.
I have never gotten myself into any kind of financial straits in my entire life.
What debt I ever had, I paid it off on schedule and with no problems. Right now, even though I only have $218.75 in debt and my total net worth is over $500,000, I feel much less secure.
I think because I know how quickly anything can change, in a heartbeat.
To just let go and relax and say, “Oh, that [whatever catastrophe you imagine] will NEVER happen to me!”, is really the thinking of a fool. Nothing is assured in this world, not to anyone, not ever.
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Victory: I guess I can claim financial security…
…as long as I can accept this definition of financial security.
Sometimes I feel I am poor because I cannot afford a new car in cash and spend a week in Maui or Puerto Vallarta every winter. The truth is I have an emergency fund that is decent, an…
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I am starting to feel more secure since I’ve begun to pay my debts down. I have also saved nearly 1,000 in an er fund because even though I’m not getting the same return in interest as I’m paying in interest on my debt, having that much money available is important to me so that I don’t have to turn back to credit.
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I’m already frugal as it is, but I need help with 3. Increasing my savings. I’ve already made a good headway with most of the items. But how do I do three, prices for utilities have increased drastically, my husband & I have swapped our gax guzzling cars for economical ones, our AC is already set at 26, but everything is going up except our checks.
I am looking at doing little part-time jobs to make additional funds, but so far no luck.
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While I think this is a really good article, I still rail against the basic concept of “debt is slavery.”
Emphatically yes, credit card debt with an APR of 15+% is bad. This is not in dispute.
IF, however, you very consciously balance transfer your debt to a low (0-3%) card, and then either pay it off or re-balance transfer it, you in effect have more money.
I transferred my credit card balance to a 1% card several months ago. As far as I’m concerned, I’m actually making money off that debt, because instead of the larger amount of money I’d normally pay, I put part of that money in a high-interest savings accountm and earn almost 5%. (Note: Yes, of course, I still pay far more than the minimum amount due.)
So, this credit card is actually HELPING me get closer to buying my first home. If nothing else, when the rate expires and if I can’t (though I seriously doubt I won’t be able to) find another low rate, then I can put the compounded interest onto the card, and thereby pay down even more debt.
Know what a girlfriend of mine does? She pays an annual fee for an airline credit card, and uses it for most every payment she can (when she was in grad school, she used it to pay tuition). She also pays it in full each and every month. The upshot of her card, is that she earns enough points to generally get at least a couple free airline tickets each year (in addition to the automatic one I think they send her each year). SO, drumroll please, yet another way to make “debt” work for you.
What I’ve just described is not slavery. Yes, I do have to work — but not just for my debt — I’m not independently wealthy (yet) and I get restless if I have too much time on my hands (yes, I’ve done a “mini-retirement” where I took a year off — even travelling gets old after a while, and I LOVE to travel). I never have financial nightmares.
The other issue I have with articles like this (that just make debt sound like the antichrist), is that they often completely miss the idea that successful debt management has very positive aspects. Namely: how do you think you’re going to get a car loan or a mortgage if you’ve been living on cash for the last 10-15 years, and can’t prove that you can stick to a budget and *more importantly* pay your bills on time. Maybe you can get a higher interest loan, but then you’re paying far more money. This idea is really basic, and really important, and too often I see it overlooked in discussions about debt.
The real problem, as I see it, is that people don’t know how to use their money and use their debt, in order to become more financially stable. Credit cards are not evil — what is evil is not knowing how to manage them. It’s like saying guns kill. It takes someone to pull the trigger for a gun to kill — the guns themselves are not the problem. (Oh, and please don’t flame me for the last statement — it’s just an example.)
What someone else mentioned is what’s needed: people need to be taught how to manage their money. If you can’t control your spending, then the whatnot behind that behavior needs to be examined and altered. If that is the case, you can’t blame the actual credit card for your problem. It’s like working in a chocolate store — the chocolate doesn’t make you fat unless *you choose* to eat vast quantities of it. Just standing around chocolate will not make you fat. Just like having a credit card in your wallet will not lead to your financial destruction.
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Oh, and re item #4: this is really a whole other topic. Suffice it to say, if you don’t like what you’re doing, change it. It’s really that simple. Yes, there can be risks involved, but isn’t your emotional health and happiness far more important? It’s not healthy to hate your job just because you see the job as your way out of debt. Yeah, you gotta earn money to pay the debt, but don’t hate the job because of that. Would you really be financially free (e.g. able to not work and be able to do whatever you want) if you didn’t have debt? Didn’t think that was true for most people.
Personally, I decided I want to work for myself, about 1.5 years ago. I spent two months searching and searching for clients (and only landing two, maybe three interviews). Then, I landed my first client, and I’m still working for them today. Later, I took on other clients, too. I LOVE working for myself. It was hard when I was searching for clients, and I wondered if I’d make it, but I persevered and I made my goal a reality. I had a couple financially tight months, but that short term hardship is nothing compared to where I’m at now.
Life is far too short to not enjoy what you do. I think it’s laziness and fear that prevent most people from truly following what they want, and that’s what people need to conquer.
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I think I could live off a million dollars. Not only is $50,000 a year quite substantial for most people in Canada/US – you don’t need to party with Paris Hilton to be financially secure.
I don’t make much more than that working 5 days a week, yet I am able to save 13% of my salary into my RRSP (like a 401k) each year while still paying for my rent (soon to be mortgage), food, gym, restaurants, car payments and insurance. In fact, if it was guaranteed and if I didn’t have to save, I don’t think I could spend it fast enough.
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I used to spen about 114% of my income. It wasn’t until I met my fiancee and started to think of home ownership, fatherhood and so on that I realised just how damaging it is. In particular, I estimate that two free and easy years in my early twenties have set me back by at least 5 years.
These days I am working hard to pay off my debt and build a nest egg. People often deride compound interest, frugality and regular savings but I’ve come to see that they the fundamental keys to financial security.
To have a net worth of zero is my main goal right now. One of the best tools toward this goal is having and using a net worth calculator, and recording your progress. You can then see just how much difference a few dollars spent or saved will make, and (hopefully) visual proof of your progress will only add to your comittment.
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Wonderful advice. Debt is such a problem in this country, but the majority of people don’t think that much of it. But as the title of the book suggest, it really is a form of slavery.
Proverbs 22:7
“…the borrower becomes the lender’s slave.”
Thanks for illuminating how we can get locked into jobs and lifestyles because our debt.
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This something that I wish my father , or anyone would have taught me. After numerous attempts to pay off my credit card debt. The raise in minimum payments and a lesser income have forced me into settlement mode and cutting expenses to the bone.Economic reality should be taught in the schools , but I would bet that it would be mroe controversial than sex education.
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#4 is the most important one to me. My industry of choice will never pay me well, and I knew that going into it. I figure it’s better to learn to be good at being frugal in order to have a job I’m so crazy about, then do what my roommate is doing–working a job she hates while she gets an MBA she’s not really interested in so she can find a better-paying job that she still hates, all so she can travel once or twice a year. I’d rather have satisfying, content memories of every day at work and at home than one week of great memories from the beach and 51 weeks of stress and depressing Monday mornings.
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It’s unfortunate that so many these days see debt as being a part of every day life. It is not. You choose to have it this way. Some make the mistake of getting credit at a young age and not use it wiselly. They struggle through their years to pay it off. Such a burden on the soul.
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There are two types of debt – good debt and bad debt. Bad debt takes you away from finalncial security as it is used to fund a consumer lifestyle, for example to buy a holiday or a new car. Good debt is invested in assets and is generally used to increase your future income and asset base.
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One of the smartest things my husband and I did was to avoid making additional expenditures based on raises or bonuses. For instance, at one time several years ago he landed a more lucrative job with another company. If memory serves me correctly, the increase in his salary was about $8,000.00 per year. The only thing we changed at the time, was how the rate at which we were paying down our debt.
Instead of continuing to pay the minimums and accumulate extra debt for “special purchases,” we actually tightened the belt. We made a spreadsheet of each of our debts, the balance, the APR, and the minium payments. We decided we would pay an extra $1,000.00 each month on debt and that we would stop using credit cards. We were now on a “no new debt” plan.
Listing the accounts that we owed was a startling experience. First, the total debt amount was unbelievable. Had we kept track of that all along, I’d like to think it would never have gotten so far out of hand. Second, the accounts that we might have paid extra on monthly were not necessarily the best decision. Instead of paying off the lowest balance first, we realized we would get more “bang for our buck” paying off the highest interest rates first. We would start with the first, and once that one was paid off, we would move on to the next in line, keeping our total monthly debt payment steady. So the second highest APR debt was paid off at an even greater rate. It sure felt good to say goodbye to our monthly bills.
When we were 2 years out from reaching our goal, we had unexpected changes in our family situation. We made some decisions that were penny-poor but family-wise. We didn’t have a lot of cash on hand, but due to our debt reduction strategy, we had an incredibly high credit score! So yes, we again ended up being over our heads in debt. This is a far cry from being foreclosed upon and homeless which may very well have happened if it were not for our hard work.
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Educational loans are something I’ve been a bit back and forth with lately.
On one hand, the value of an education is extremely important and I don’t want to detract from that. On the the other, I want myself and others to be as debt free as possible. But, there are several people in my life right now where it *seems* like these loans hurt more than help them.
My brother-in-law didn’t get a degree in a field he wants to work in, and is now working a low paying job.
My brother is currently in school, and if he goes into the field he is studying, he will need to go to graduate school (more loans) before he will start making more serious money.
My coworker and his wife have more student debt between them than they owe on their house.
Perhaps I’m missing the long term view, but I worry about the cost of an education if it locks you in debt for years or decades.
It also reminds me that I don’t want my kids to have to face extremely large educational debt so I need to start saving for that expense now!
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It is so good to see information like this. If young folks could grasp these concepts early on in life it would save them so much heartache.
My husband and I have been married 42 years. We have raised 5 children to adulthood, all have married and given us 14 grandchildren. We have never had a lot of money, but over the years have learned so much about how to manage what we had.
I was able to be a stay-at-home mom while our children were growing up. It took a lot of choices, sacrifice, and very careful spending, but so worth it. I agree with #51, God takes care of us. If we do our part, make the right decisions, and are generous, He won’t let us down.
About ten years ago my husband began using MVelopes as our budget/bill paying resource. It has helped us truly become very close to debt free. We have two accounts that carry 0% interest that we have used to provide money to help out one of our daughters that is a single mom and going to college to better her income potential. We have another credit card that we zero out each month. We charge all our day to day expenses on this and it earns us approx. 4% in rebates that can be used for car repairs or a new car purchase. We pay for just about all of our car repair with the rebates on this account.
We bought a new/used car in February (a 2002 Impala for $8,000) with a 1.9% credit card balance transfer. This rate is for the balance of the transfer, until it is paid. We used this in place of a 7.5% loan the bank offered us.
We work hard at living within our means. We look for discounts, early bird specials, matinees, coupons, rebates, you name it. I have always shopped very carefully, which has saved us many thousands of dollars over the years.
We are both close to collecting social security. At this time we both still work at jobs we enjoy. We have about $100,000 in accumulated savings, IRA, CD’s. We don’t expect to be able to travel the world, but trust that God will enable us to continue to cover our expenses and have some extra to enjoy this time in our lives. We both feel financially secure and very happy and content with the life we have enjoyed so far.
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[...] lot of people have long term goals of being financially secure, but what does that really mean. It’s important to be clear what exactly you want from your [...]
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[...] from two books to five books. The ol’ random number generator picked the following winners: AzBearin, Donna, Sevi, Little Miss Moneybags, and John [...]
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I’m going to be showing how ignorant I am about saving money, but I’ll never know the answer if I don’t ask.
What do be do to save their money if they have more than $100K? The banks only insure up to $100K, so if someone can put $10 million in a bank, to get $500K per year in interest, wouldn’t that be a stupid risk if it’s only insured up to $100K?
So, where do you deposit that kind of money?
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I think a fifth trait of financial security is the ability to give generously to the needs and causes that you feel make the world better. Time, physics, and obligations will not allow me to do everything I want to do to promote the causes that I espouse; however, I can financially support those who do this work and share in their fruits. To fulfill some dreams by proxy and achieving other dreams personally while meeting my obligations is how I would define financial security.
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Mr. Mihalik’s argument is flawed at the outset when he says ‘Wouldn’t it be great…never to have to worry about money?’ My wife and I have the great good fortune to be about as financially secure as two people can be and still put one foot in front of the other on the face of this earth. Our public employee pensions give us $100K per year with an automatic 3% annual increase and full health and dental insurance for the rest of our lives. We own our house (worth $400K+) outright, and we have $270K+ in cash and equities, the latter all Roth IRAs. We regularly underspend our monthly income by $1-3K depending on circumstances.
So, can I stop worrying about money? Not for a minute, because it could all be gone very quickly if I ‘stopped worrying’ and threw caution to the winds. I pay attention to the cost of every item I buy at the supermarket. Major purchases are given lots of thought and scrutiny, and frequently I realize that the expenditure would be imprudent. When I do commit to a major purchase, my palms are sweaty before, during and after the transaction. I check my investments frequently and think about them regularly. I listen to others’ advice, but I keep my own counsel and make my own decisions.
Mr. M. is quite correct that avoiding the accumulation of debt–particulary consumer debt–and systematic saving are the key to achieving what passes for financial security, but that is emphatically not the same thing as ‘never having to worry about money’, and I hope that he and the rest of you reading his piece can see this. On the contrary, everyone should always worry about money because then you don’t have to worry too much.
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Financial security to me is where I am now: Not being in debt, including my mortgage! No charge card payments – no car payments – no home equity loan payments – no house payments. That’s freedom. That’s peace of mind. I’m in the black. No one gets a piece of my money anymore – no middle men to deal with, collecting fees and interest. My money is my own now, and so what used to be my mortgage payment and other debt payments now goes into my high interest earning savings account automatically every month. I have a nice emergency fund. I budget every month for my fixed expenses and for groceries, gas and entertainment. What got me into trouble in the past was not knowing how to budget for the non-monthly expenses. Now I do that. For example, I make a list of how much money I need each year for 1) Holiday spending; 2) Birthday gifts; 3) Insurance premiums 4) Vacations; 5)Property tax payments; (6) Car repairs (based on what I spent last year & add 10%) and (7) Home repairs – again based on what I spent last year and add 10% == and then I divide all of those estimates by 12 and that tells me how much I need to save per month for those items, and I do. I’m very happy to be on a budget because it ensures me that I won’t accumulate anymore debt, and money will be available to me every month and throughout the year. I don’t think that financial security is about how much income we earn — it’s about living within our means, paying off all our debts, and putting money into savings for the future. We have to come to grips with the fact that we have only a certain amount of money available to us and live within those limits.
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To Cobaeno:
If you manage money that well, YOU should be writing a blog. If I ever have money to manage, I would want someone like you to give me advice on how to invest and manage it.
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