In a previous post I highlighted why looking after your overall financial security is more important than looking after your income.
Just looking after your income just doesn’t cut it any more.
Here I go into a few basic principles which go into creating financial security.
Step 1. Get clear about how you use money.
You need to keep track of it. Be honest. You need to know all your monthly income and expenses.
Keep a note of them, use a spreadsheet — I am sure there are great apps out there. Know it by month, by quarter, by year.
I go by my total money in and money out which is displayed on my main account — that is a nice clear number which I can’t hide from.
Data is gold. You can work with data. You just need to know your baseline.
If there is anything leftover each month, you have a positive cash flow — you spend less than you earn. You will then able to use the difference to put towards your savings or pay extra towards your debt.
If you have negative cash flow and are spending more than you earn, you are living beyond your means.
Top tip: Find ways to reduce your expenses.
Step 2. Live within your means.
Do I need to explain this? Don’t spend more than you earn — even if it means adopting a more frugal approach to maintaining your standards of living.
There are so many blogs out there on this, so many resources for this nailing step. Go wild on Pinterest — we live in such incredible times.
I am truly inspired by stories of entrepreneurs who lived on sandwiches for an indefinite amount of time until they made it — and so aware of the ones who stayed broke trying to maintain some kind of illusion of a high flying lifestyle and having to keep up with the Jones’.
That stuff is toxic.
There is no dignity quite so impressive, and no one independence quite so important, as living within your means.” — Calvin Coolidge
Step 3. Use debt wisely.
Prioritise paying down existing debt. Ideally you want to save at the same time.
Avoid taking on new, unnecessary debt.
Where you do take on debt, leverage it.
Financial leverage is using debt to acquire assets — investing in land is often used as an example. Investing in yourself may be another.
When assets increase in value, or start to generate revenue for you, the leverage is working. Leverage works against you when the asset declines in value. Cars are examples of assets that decline in value. Cars are also example of status symbols that people buy when they leave beyond their means. This would directly flout the guidance in Step 2, so avoid this pitfall.
The idea of leverage is to take on assets that will generate wealth.
I would count investing in yourself, your education or skills, as this. The more knowledge and expertise you have, and the more you can diversify your income and spread the risk, the more insurance you have against financial insecurity.
“Work hard at your job and you can make a living. Work hard on yourself and you can make a fortune.” ― Jim Rohn.
Step 4. Automate your finances
Rather than juggle your money each month, automate as much as you can.
Set up a transfer for your when your pay arrives which will automatically put money into savings or an emergency fund, leaving you enough for your personal expenses each month.
Knowing how you use money (step 1) will help you calculate the right amounts.
We like to take 10% of our earnings and put it into savings — this is commonly cited as a typical way to save for retirement.
Conventional advice is that at least 20% of your income should go towards savings. 50% (maximum) should go towards necessities, while 30% goes towards discretionary items. This is called the 50/30/20 rule of thumb.
Decide on an amount, based on your understanding of how you use money, and set up an automatic bank transfer so that you don’t even have to think about it.
5. Create an emergency fund
A buffer, or emergency fund, is a sensible thing to have aside to cover unexpected expenses.
A study by Willis Towers Watson, showed that 41% of respondents could not meet a short-term expense of £1,600 if the need arose within the next month.
An emergency fund should be enough to pay all your most important bills for several months, and provides a personal insurance policy should you lose your income.
Three to six months of your usual wages or income is a typical amount to aim for, although the exact amount you require will depend on your circumstances.
It may be more if you have dependents. This is why it’s essential to know how you use money (Step 1).
Save it for rainy day — although technically it isn’t a savings pot. It’s your much needed Emergency Fund to help you weather any storms, and create more financial security.
6. Add an extra income stream
While I maintain that creating more money isn’t the answer, it is obvious that having additional income also provides a bit of added financial security.
Having a side hustle is a great way diversify and add income streams.
According to a White Paper published by Henley Business School, 1 in 4 people in the UK currently have a side hustle, and this is predicted to rise to 1 in 2 by 2030.
Side hustles are valuable for employees and self employed people alike — they develop important business skills — often where no formal training exists, they facilitate innovation, increase confidence, and they hone networking skills. Plus, they generate income — at least for the side hustle, if not also for the main hustle too.
There are other ways to generate additional income. There are ways to do it actively, passively, residually, and recurring — it might be an investment decision that keeps reaping rewards.
I’ll caveat with this piece of important advice — always seek advice before taking financial decisions.
My greatest decision in my path to creating financial security came from leveraging my time better in order to set up a recurring residual stream of income, and from fine tuning small actions and leveraging it so that it continues to grow. Taking on a side hustle was an extremely lucrative and wise decision for my business and my brand.
In essence, financial security is created when you can separate our your dependence on your day to day income, and protect yourself from exigent external circumstances.
Achieving financial security requires that you first know and understand how you use money, and then take steps to leverage it — or your time.
The more you can leverage your assets and their income earning potential, including yourself, the more financial security you can create.