What is financial security?
It’s not quite retirement. The assumption of financial security is that you’re still making money somehow, whether in residual income from work you’ve already done or from small business opportunities you work to maintain. It does look very similar to traditional retirement, though.
According to Investopedia, financial security is having enough passive income to cover your expenses for the rest of your life. For example, if you have rental property, dividend income, savings account interest and a turnkey business that provide enough money to live on, you’ve achieved financial security. As you age, more of your income is provided by these opportunities, leaving you with more time to pursue your passions.
How do I get there?
Most of the advice that applies to retirement savings also applies to saving for financial security. Putting away 50% or more of your income into savings and investments is a good place to start. Avoiding debt for consumer purchases or lifestyle maintenance is another sound move.
The real difference comes in timing. With traditional retirement planning, you invest more as you get closer to retirement. The goal is to accumulate enough savings to live on for a decade or two when your expenses are at their highest, so you need to contribute more during your peak earning years. Typically, these come just before you retire. You’re an experienced veteran in your field and your salary is usually at its highest just before retirement.
When your goal is financial security, the timetable reverses. In the beginning, more of your wages need to go toward investments. As they start to bring in returns, more of your income becomes disposable. Because your savings aren’t locked up in a designated retirement account, you’re free to use them to pursue non-work money-making strategies.
What tools can I use?
There’s still space in a financial independence plan for traditional investment vehicles like IRAs and employer-matching 401(k) programs. These investments offer preferential tax treatment, which can be a valuable complement to other savings.
Rather than using these as principal retirement savings vehicles, more flexible options, like savings accounts, money markets, and certificates/CD’s allow for short-term savings. Money goes into these accounts until enough capital is accumulated to invest in another money-making project. Think of saving as a prerequisite for investment, not as a synonym.
Investing in stocks and mutual funds is also an important part of financial independence. Focus on trusts and companies that provide consistent dividends and steady growth. Avoid trying to “hit home runs” with stock picks that triple or quadruple in value overnight, and instead look for slow, steady growth. These investments are more about keeping your money safe from inflation than they are about making it grow in value.
Another resource you will need in the journey is knowledge. Much of financial security involves navigating a lot of unknown waters. That’s where Pen Air can help. Our Asset Management staff can walk you through the steps to being master of your own financial destiny.
If you’re interested in financial independence or just in improving your financial future, call, click, or stop by Pen Air FCU today.