What Is Financial Security?

Two people picnic in a park.
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DEFINITION
Most people think of financial security as having a large savings account, a healthy investment portfolio, and a comfortable retirement nest egg. However, financial security is about much more than just money. It's also about feeling in control of your life and having the freedom to make choices about how to live it, regardless of your current circumstances.

Most people think of financial security as having a large savings account, a healthy investment portfolio, and a comfortable retirement nest egg. However, financial security is about much more than just money—it's about feeling in control of your life and having the freedom to make choices about how to live it, regardless of your current circumstances.

Here’s a closer look at what it means to have financial security and how you can experience it for yourself.

Definition and Examples of Financial Security

Financial security involves having enough money to comfortably cover your monthly expenses, recover from financial setbacks, and save for your future. It’s also about having low financial stress and feeling in control of your money.

  • Alternate name: Financial well-being

Having financial security does not mean having a high income. You can have a large salary and still struggle to pay your bills.

For example, Michael has a six-month emergency fund, no credit card debt, and is currently saving up to start his own business next year. When he gets an unexpected bill in the mail, he doesn’t panic because he has enough to cover it. He feels calm and in charge of his finances, which is a good sign he’s reached financial security.

How Financial Security Works

Financial security is a major contributing factor to your quality of life. When you have enough money to cover your current living expenses and to save for the future, a whole new world opens up.

  • You no longer panic when a financial setback happens.
  • You have enough money to splurge on “wants” (like a vacation or fancy dinner) without digging yourself deeper in debt.
  • You’re able to take risks in your career and chase opportunities that make you happy (rather than doing what makes the most money).

But here’s the catch: Having financial security requires you to be future-oriented. You have to make a financial plan to live below your means now, so you can buy yourself freedom, flexibility, and options later on.

Most important, financial security is a state of well-being. It’s about feeling calm and in control of your money, rather than having a fancy job title or salary but still struggling with finances.

Example of Financial Security

Suppose Maria makes $50,000 a year. After monthly expenses, she still has 15% of her income left over. Financial security is important to her, so she uses this extra money to pay off debt, build an emergency fund, and save for future goals (like that two-week trip to Japan or a house by the beach).

Jack, on the other hand, makes $150,000 a year and can’t figure out why he feels like he can never afford anything. He’s constantly scraping by until his next paycheck, and his mounting pile of debt keeps him awake at night. He dreads the day his car gets a flat tire because that will be just one more thing he can’t pay for.

In this situation, Maria has more financial security than Jack, even though her salary is one-third the size. Unlike Jack, she feels confident and in control because she has enough money to meet her current obligations and save for future ones. She also has peace of mind knowing she can handle the financial setbacks that come her way.

Wondering if you have financial security? The Consumer Financial Protection Bureau (CFPB) has a free financial well-being questionnaire to help you assess your situation.

How To Get Financial Security

There are many factors that contribute to financial security, but these three are the most important:

Create a Monthly Savings Plan

The first step to financial security is creating a safety net that protects you from the unknown. Unexpected things are bound to happen, whether it’s something bad like a flat tire or something good like a destination wedding.

Having a built-in fund to cover these expenses helps ensure your long-term goals don’t get derailed when surprises happen.

If you’re not sure how to squeeze more savings out of your paychecks, start with a monthly savings plan.

Pay Down Debt

It’s difficult to build financial security when a huge chunk of your paycheck goes toward debt payments each month. So making a plan to pay off debt, especially the high-interest kind, can help set you up for success. Once you’ve paid off that debt, you use the extra money to build financial security.

Invest

Investing is a key part of building wealth, which makes it a critical component of financial security. Compound interest is a powerful force, and once it has time to get going, it can catapult you toward your financial goals.

However, many people shy away from investing because they think it’s a form of gambling or that they need a ton of money to get started. Neither of these is true. Anyone can learn how to invest. If you need help, consider hiring a financial advisor.

Financial Security vs. Financial Freedom

Financial Security Financial Freedom
You have enough money to cover all your expenses and save for your future. You have enough cash and investments on hand to fund your ideal lifestyle—no matter how much it costs.
You must reach this step before you can reach financial freedom. You can only reach this step after you’re financially secure.

What’s the difference between financial security and financial freedom? Put simply, you must reach financial security before you can reach financial freedom. They’re like stepping stones on your journey to financial autonomy.

Financial security means you have safety nets in place to recover from financial setbacks, you’re on track to reach your savings goals, and you feel more calm about your finances. 

Financial freedom, on the other hand, means you’re at a place where you can quit working for a salary and do whatever you want, whenever you want. You have enough cash and investments on hand to fund your ideal lifestyle and then some.

How Can You Tell if Someone Is Financially Secure?

Being financially secure has nothing to do with your education, salary, or credit score. Instead, it’s about how good you are at managing what you’ve got.

Generally, someone who is financially secure exhibits these four characteristics:

  1. They feel in control of their finances.
  2. They can quickly recover from financial setbacks.
  3. They’re on track to achieve their financial goals.
  4. They have the financial means to make their own choices and enjoy life.

Key Takeaways

  • Financial security is about having enough money to absorb financial shocks, reach your savings goals, and make choices that allow you to enjoy your life.
  • Financial security is important because it keeps financial stress to a minimum and helps you feel in control of your future.
  • Three common factors that contribute to financial security are being debt-free, having a savings plan, and investing.
  • Financial security is one of the first steps you must achieve on the path to financial freedom.

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Article Sources

  1. Consumer Financial Protection Bureau. “Financial Well-Being: The Goal of Financial Education,” Page 5.