Why Feeling Financially Secure Depends on More than Income
A high income can help you feel financially secure, but there are other factors that make a big difference. A low-income person can feel more secure than a high-income person, provided they have credit, an emergency fund and a solid savings plan.
Improving your finances and your lifestyle with strong money habits can help give you peace of mind. Here are three things outside of your income that can affect whether you feel financially secure.
1. Debt
Even if you have a high income, high-interest debt – such as credit card debt – can weigh heavily on your finances and financial security. Of course, you can and often should use debt in ways that can improve your finances, such as using home equity loans and student loans to further your education and allow you to find a higher-paying job. But high-interest debt means that a large portion of your income will go to interest.
A person with a low income but no debt may feel more financially secure than someone with a high income but high interest debt. Not having to worry about interest payments can give your budget some breathing room as you build wealth over time.
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2. Emergency fund
Someone with a high income but no emergency fund may feel less financially secure than someone with a low income but with some money saved up in case the unexpected happens, such as losing a job, facing an unexpected medical bill or having to pay for an emergency car repair.
Financial advisors often recommend having enough cash to cover your expenses for three to six months in the event of an emergency. If your income is irregular, you may want to save a little. While it’s important to let your money grow in the financial markets, you also want to have this money set aside in a liquid account like a high-yield savings account.
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3. Budgeting and spending habits
A key part of financial security is not living beyond your means so that you don’t run out of money. This is important during your working years, but becomes even more important as you approach retirement and lose your regular income.
Low-income people who budget and spend in a way that allows them to save and invest and enjoy their lives may feel more financially secure than a high-income person who overspends and doesn’t save. A budgeting app like YNAB can help you keep your finances in check, and encourage you to think twice every time you’re tempted to swipe your credit card for something that doesn’t fit into your budget.
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It can also help to keep an “experience budget” that includes travel, hobbies and other non-essential fun activities. This can help you avoid feeling bad about spending your money while not jeopardizing your long-term financial goals.
