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You can have financial security on any income — over time

Start saving, and you'll move to build your

Start saving, and you'll move to build your financial security. Credit:

Financial security isn’t a number or a threshold. It has to do with what you spend, and save, relative to your income.

As soon as you spend less than you earn, and save the surplus, you’ve made a start. You’re inching away from the financial edge.

Over time, you keep building that cushion while insuring yourself against catastrophic expenses that could wipe out what you’ve saved. Eventually, you can achieve financial independence, where your income in retirement is sufficient to cover your expenses and some extras.

Here’s how you do it:

  • Start with a small emergency fund. You don’t need much to begin — $500 is enough to cover many unwelcome expenses, such as a medical deductible or a small car repair. If an expense drains your fund, build it up again.
  • Pay off toxic debt. Credit card debt is expensive. Payday and auto title loans are much worse. If you can’t see how to pay off your high-rate debt within five years, consult a credit counselor and a bankruptcy attorney about your options.
  • Limit your overhead. Keep your must-have expenses — shelter, utilities, food, transportation, insurance, minimum loan payments — to 50 percent or less of your after-tax income. A smaller “nut” also makes it easier to pay your bills should you lose your job or be unable to work.
  • Invest in your future, year in and year out. Take full advantage of any company match you’re offered in a workplace retirement plan — and do so even if you’re paying off toxic debt, because matches are free money. No workplace plan? Fund an IRA.
  • Insure against catastrophe. Health insurance can prevent bankrupting medical bills. Disability insurance can replace your income if you can’t work. Life insurance protects your dependents. Liability insurance can cover lawsuits that might otherwise wipe you out.
  • Build your emergency fund. Once you’ve paid off bad debt and gotten on track with retirement, focus on boosting your emergency fund.
  • Create guaranteed streams of income. In retirement, your basic expenses should be covered by income you can count on. If Social Security isn’t enough to cover your basics, consider buying an immediate annuity, where you give an insurance company a chunk of money in return for a lifetime stream of monthly checks.

Financial security is all about peace of mind. You can begin to build it on almost any income, and you can start today.

Save more: Pay off your mortgage

Retire your mortgage. Having a paid-for home by the time you retire won’t just help you sleep better at night. It also means you don’t have to withdraw as much from your retirement funds, since you’re not making mortgage payments. A lower withdrawal rate can make your savings last longer.


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