How to Build a Secure Financial Future
Updated · Oct 07, 2022
Whether you just graduated or are approaching retirement age, it’s never too early or too late to plan your financial future.
But how do you get started?
We put together this actionable step-by-step guide to help you out.
Define Your Goals
First, you need a clear vision.
Financial health is not just your income, debt, and expenses. It’s how you perceive your wealth and prospects, too.
So, you need to ask yourself:
- What is financial security for you?
- What do you want to achieve in five, 10, or 20 years?
- Do you want to keep working as long as you can or retire at the age of 40?
The answers to these questions will give your future plan a general sense of direction. When life gets in the way, it’s easy to forget where you’re headed. This will help you stick to the plan when you start losing motivation.
To make it more manageable, try to put those goals in numbers. Make them concrete: how much do you need to save up to reach them, and when?
This will show you the path to your dream financial future. But before you embark on your journey, you need to take a long hard look at the present.
Evaluate Your Current Financial Situation
Every financial planning process starts with an evaluation of your current state.
Start by writing down all your expenses and earnings. Determine how much you can put aside each month.
Can you increase that amount if you cut down on certain expenses?
How long will it take you to secure financial freedom?
Are your goals realistic?
If not, you need to adjust your timeline and think of ways to increase your income. It’s easy to get discouraged at this step.
But remember—your goals will change, and so will the external circumstances.
No matter how small you start, as long as you’re going in the right direction, you’ll get there. This reality check isn’t meant to discourage you but to help you choose the best strategy for your needs.
And there are plenty of planning tips and budgeting methods out there.
Create a Plan
After you clearly understand your current and ideal financial situation, you can map out the steps to get there. Start with your short-term goals, then gradually move on to long-term savings.
The exact plan will depend on where you stand currently. Still, these are the main points you need to cover.
Pay Off Your Debt
If you ask any financial advisor how to be financially stable, they will tell you to start by paying off your debt. There are several ways to do that.
A popular, although controversial, approach is Dave Ramsey’s snowball method. It includes tackling the smallest debt first and working your way up to the biggest one.
That way, you’ll see results more quickly and keep your motivation high. On the flip side, it’s not the most financially sound approach, as you’ll end up paying more interest charges.
The debt avalanche method is a great alternative. It entails paying off your credit from the biggest to the smallest.
Whichever approach you choose, this will free up resources you can save and invest.
Build an Emergency Fund
Your financial plan's next step should be building an emergency fund. That way, you won’t have to dip into your retirement savings earlier than planned.
You might have more exciting goals in mind, like traveling the world or starting a business. That said, you can’t do any of them without a safety net to fall back on.
Some experts recommend having a 12-month emergency fund.
But that’s just a guideline. The amount, how to save it, and where to keep it will depend on your individual circumstances.
In fact, some people don’t need to break down their budget into tons of saving categories to feel financially stable. Having an emergency fund may give them all the security they need.
Choose a Retirement Plan
If you’re in your 20s or 30s, retirement may be the last thing on your mind. But that’s the best time to start saving.
The earlier you begin, the sooner you’ll become financially secure. So, take advantage of 401ks and open an IRA. You can put in small amounts initially and increase them gradually.
That way, your money will grow tax-free instead of slowly losing value to inflation and bank fees.
Here’s why saving for retirement early on makes all the difference. Below is a rough estimate of your earnings if you open a retirement account in your 20s vs. your 50s.
If you start investing $1,000 a month in your 20s, you’ll have $1.6 million by the time you’re 67. In comparison, if you start in your 50s, you’ll have a little under $300,000.
So, if you’re already approaching retirement age and have no savings, opening an IRA or 401k may not be enough. You’ll also need to find ways to increase your income.
Build a Passive Income Stream
Your income stream doesn’t have to cease when you stop working.
Here are a few passive income ideas:
- You can create a fixed-income investment portfolio and receive dividends.
- Join Airbnb and rent out your property or a room in your house or apartment.
- Find a way to make money from your hobbies.
All these activities don’t require much effort once you set them up. As such, they’re a great way to secure your financial future. They’ll help you supplement your main income without investing too much time.
Apart from earning more, you can learn how to spend less to increase your savings.
Think of ways to reduce your grocery shopping expenses, lower your rent and transportation costs, and so on.
And when your wealth increases, don’t be tempted to spend it recklessly. Keep investing for your future, development, and happiness.
Improve Your Financial Literacy
Financial literacy is probably the most important factor affecting your decisions and wealth. Yet, it is not something you learn in school.
That’s why you need to educate yourself.
There’s no one right way to manage your money, and you can’t possibly follow all financial tips. But the more you learn, the more confidence you’ll feel in making decisions based on your needs.
So, read books, listen to podcasts, and subscribe to financial magazines. Learning about personal finance is a continuous process and a great long-term investment.
Evaluate Your Plan Periodically
The plan you make for your financial future is bound to change.
You’ll gain more knowledge and experience, your priorities, income, and expenses will change, and global factors will come into play.
As such, you need to review it regularly and adjust it. That way, you’ll ensure you’re working toward the right goals and will stay motivated.
Financial security is not something you can achieve in a day. It’s a continuous, ever-changing process that requires effort and determination.
But don’t get discouraged.
Follow our tips and take the first steps to improve your financial future.
With an eye for research, Aleksandra is determined to always get to the bottom of things. If there’s a glitch in the system, she’ll find it and make sure you know about it.