Finances

Financial advice 101: first stability, then aim for security

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This guide outlines the fundamental financial advice strategy: after stability aim for  security.

You’re in a good place financially. You can always afford to pay your bills on time. Your debts are small and manageable. You have enough room in your budget for non-essentials like hobbies and entertainment. This is great!

Financial advice 101: aim for security

You’ve achieved financial stability — you can handle your day-to-day expenses easily. Your next goal, the best financial advice says, should be to gain financial security — this means that you can maintain your stability, even when times are tough. How can you do that?

Rainy Day Fund

The first thing that sound financial advice suggests you should do is put together a rainy day fund. A rainy day fund is a collection of savings that you reserve for small emergencies, like when your call stalls in the middle of your morning commute and you need to bring it to a mechanic, or when your refrigerator breaks down and you need to get a replacement right away.

With the help of a rainy day fund, you can handle these unplanned expenses without disrupting your entire budget. You won’t have to worry about whether you can cover the costs of groceries or bills for the rest of your month. These essentials will be completely unaffected.

Emergency Fund

An emergency fund is like a rainy day fund for bigger emergencies, like when you suddenly lose your job or you need to take care of a sick family member. It can keep you afloat during times of major instability. How much should you have in your fund? Ideally, you should save three to six months’ worth of your income in it, according to expert financial advice (see our later section on the clear signs of financial security). This amount should help you cover your usual expenses when your regular source of income shrinks or disappears.

Emergency Credit

It’s always wise to have backup plans for your backup plans. So, in addition to having a rainy day fund and an emergency fund in your financial portfolio, you should make sure that you have some credit tools, according to the best financial advice. When you don’t have enough savings in your funds, you can use your credit tools to handle these emergency expenses right away and then manage the repayments later on.

What types of credit tools? You can use your credit card to cover emergency expenses, as long as the transaction won’t put your card too close to the credit limit. This is a good reason to maintain a low balance or pay your card down every month.

Another credit tool that you can use is a personal line of credit. Click here to find out what is a line of credit and what qualifications are essential to apply for one. You just might be eligible to apply.

Insurance

Insurance can sometimes feel like an unnecessary expense to add to your budget, but you’ll be thankful that you paid for the coverage when you need it most. The right type of insurance can help you manage steep expenses that would otherwise dismantle your financial stability.

What kinds of insurance should you have?

Homeowners insurance or renters insurance
Auto insurance
Travel insurance
Pet health insurance
Disability insurance

And, of course, a fundamental piece of financial advice is that you should have health insurance. The costs of essential healthcare in the United States can be overwhelming — especially when patients are seeking treatment with no insurance whatsoever. In 2020, a Gallup poll found that 50% of U.S. adults were worried about going bankrupt because of a major health event and not being able to pay their medical bills.

Don’t take this risk. Get as much healthcare coverage as you possibly can so that you’re financially prepared for medical emergencies.

Financial advice 101: what are the clear signs of financial security?

The decisive idea for answering this question is this:

Suppose your sources of income suddenly dry up and no one who owes you money pays more; your company goes bankrupt, you are dismissed or you get sick. How long could you pay your bills and live? This is exactly what financial security is about. That if unexpected circumstances occur, you are still able to live on well because you have created reserves.

In order to determine exactly the individual amount required to achieve financial security, you should be aware of your security need. This also depends, among other things, on your fundamental optimism. Suppose you get sick and lose your job. How many months will it take you to find a new job?
This number is then multiplied by your monthly income and you will receive the amount you need to achieve your financial security.

Your goal of financial security has many advantages: you can get through a crisis well, you feel protected, you are prepared for everything unpredictable. But financial protection has a decisive disadvantage: If an emergency occurs, you have to use up your money. You then bridged a crisis situation financially well, but your capital is gone. On the other hand, you are only really sure when you have accumulated enough capital that you can make a living from investments and interest rates.

You may only want to achieve financial security as your highest goal. But you may want more, namely real financial freedom. Before calculating, we have to clarify an important principle of financial advice: Your capital is your ‘golden goose’ that will continue to lay golden eggs for you. You never want to slaughter your golden goose — and you don’t want to cut small pieces of it. You never deduct from your capital again, in other words. This means that your ‘golden eggs’ must be large enough to pay for your dreams.

For example, if you want to buy a house, you could certainly pay for it well from your capital or assets if you have achieved your financial freedom. But then you would reduce your assets, and the best financial advice is that you don’t want to do that. You therefore buy all major purchases by payments — whether in whole or instalments — which you can make comfortably from your monthly income from your capital.

Conclusion

With this fundamental financial advice showing how to set up safety nets, your finances can recover from any emergency expense. You’ll have complete financial security.

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