What is financial security? The terms “financially secure” and “financially independent” are sometimes thought to mean the same thing. In reality, they’re actually very different. Financial security is easier to achieve than financial independence. Let’s look at what it means to be financially secure and some steps to take to achieve it.
Financial Independence vs. Financial Security
Many Canadians have the goal of financial independence. When you’re financially independent, your resources make enough income on an ongoing basis to cover all your living expenses. These resources may include investments like stocks, business interests and rental properties. You do not have to work to generate a paycheque.
You have financial freedom when you’re financially independent. People who want to achieve this as soon as possible may use extreme measures. Others consider this to be a retirement goal.
Financial security, on the other hand, means you have enough income and savings to live comfortably. You can cover emergencies and save. Debt-free living is often a goal, but you don’t have to be debt-free to be financially secure. It’s a more realistic goal for most people since it doesn’t mean you stop working for a paycheque.
If you carry debt when you’re financially secure, it’s usually to accomplish a goal to improve your life, like a mortgage to pay off a home or a car loan so you can get to work. Any high-interest debt, like credit cards, is usually paid off monthly to avoid interest charges.
Having your finances under control is a comfortable place to be. Achieving financial security may take time, but it’s a goal worth pursuing. It provides a sense of control over your life and financial decisions.
Five Canadian Financial Security Tips
Effective money management is key to financial stability. Here are five steps to set yourself up for success.
Create a budget or spending plan.
Before you plan any journey, you need to know where you are. A budget will show you if you have enough money to cover your expenses, pay your debts and save. There are budget tools you can use to help create a budget. If you find the term “budget” too restrictive, you can refer to it as a spending plan. Your budget will show you:
- How much money you have coming in.
- How much debt you’re paying.
- What your monthly expenses are.
- If you have a surplus or shortfall.
You’ll need to make more money or spend less if you have a shortfall. You can decide how to save or invest if you have a surplus.
Review your expenses
It’s crucial to review your expenses and identify areas where you can cut back if needed. Are there items you’re paying for that you don’t use, don’t want, or don’t need? Unused gym memberships, subscriptions, and food delivery services are common culprits. By reducing any unnecessary expenses, you can free up money to build an emergency fund, which is a key component of financial security.
Another part of expenses is to maximize any benefits you have. Don’t ignore free money! Take advantage of your work benefits, such as health and dental plans or employer contributions to your RRSP.
Set up an emergency fund
An emergency fund provides the cash you need for a sudden, unexpected expense. Emergency expenses can be car repairs, repairing or replacing an appliance, vet bills, health & dental emergencies, home repairs, etc. Having money set aside for emergencies removes the need to use credit cards to cover costs.
Financial experts recommend having at least three to six months of living expenses in your emergency fund. To calculate this, add up all your monthly expenses. Include rent or your mortgage, utilities, groceries, and other necessities. Multiply that by the number of months you want to cover.
The amount you set aside for emergencies will depend on your comfort level and circumstances. A person who rents, doesn’t own a car and has no pets may need a smaller emergency fund than a homeowner with two vehicles and a dog.
Reduce your taxes
Federal, provincial, and local taxes are the biggest expense for the average Canadian household. For many income earners, taxes cost more than food, shelter and transportation combined. Reducing your taxes can leave extra money in your pocket.
Some ways to reduce taxes are:
- Use tax-sheltered investment strategies like the Tax-Free Savings Account and Registered Retirement Savings Account (RRSP).
- Reduce your income by contributing to an RRSP.
- Claim all deductions at tax time.
- Buy less to reduce sales taxes.
Develop a financial plan
Financial planning is a key to financial success. Choose short-term, medium-term, and long-term goals to meet immediate and future needs. Some examples are an emergency fund (short-term), a downpayment on a home (medium-term), and retirement (long-term). Working towards your goals will keep you focused and give you a sense of accomplishment.
Once you decide on an amount, set it aside monthly. If, for example, you want $1500 in an emergency fund in 10 months and $60,000 for a downpayment for a home in 6 years, you’ll need to set aside $150 and $833.33 every month.
Long-term financial goals, like retirement savings, may require working with a financial planner. They can help you develop a financial plan to secure your future.
What if financial security is an impossible dream?
Achieving financial security will take time, patience and the resources to do so. While you’re establishing yourself, it’s helpful to be aware of programs that can help you if you run into difficulty. Some examples of Canadian government programs that can help are:
- The Canadian Workers Benefit.
- The Child Tax Credit.
- The Canada Education Savings Grant to save for post-secondary education.
- Employment Insurance.
What you qualify for will depend on your situation.
Your finances might show you that you cannot reach your goals. This situation can be very stressful, but remember, there’s hope! The first step is to get to the root of the problem. One problem many Canadians face is too much debt. Identifying and addressing these challenges can pave the way for a more optimistic financial future.
Spending a large portion of your income on debt and interest costs can be very stressful. However, paying off debts like credit cards, payday loans, and lines of credit will free up money for you to put elsewhere. Reducing your debt will provide financial relief and allow you to focus on other aspects of your financial journey.
Get Help With Your Debt
If too much debt prevents you from achieving financial security, we can help. Our team of Licensed Insolvency Trustees at Allan Marshall and Associates will prepare a plan to eliminate your debt. We have over 30 years of experience providing debt relief through credit counselling, consumer proposals, and bankruptcy. Call us at 1-888-371-8900 or contact us online to book a free consultation. We’ll help you put your debt behind you so you can move forward.
