Why Feeling Financially Secure Depends on More Than Just Income
A high income can help you feel financially secure, but there are other factors that make a huge difference as well. Someone with a lower income could feel more secure than someone with a higher income, depending on whether they have debt, an emergency fund and a strong savings plan.
Optimizing your finances and lifestyle with strong money habits can help give you peace of mind. Here are three factors aside from income that can impact whether you feel financially secure.
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1. Debt
Even if you have a high income, high-interest debt — like credit card debt — can weigh significantly on your finances and financial security. Of course, you can and often should use debt in ways that can better your finances, like using a mortgage to buy a home and student loans to further your education and allow you to get a higher-earning job. But high-interest debt means that a significant portion of your income will go towards interest.
Someone with a lower income but no debt may feel more financially secure than someone with a higher income but high-interest debt. Not having to worry about interest payments can give your budget some room to breathe as you build wealth over time.
2. Emergency fund
Someone with a higher income but no emergency fund may feel less financially secure than someone with a lower income but cash reserves in case the the unexpected happen, like they lose their job, face a surprise medical bill or have to urgently pay for a car repair.
Financial advisors tend to recommend having enough money to cover your expenses for three to six months should you face an emergency. If your income is irregular, you may want to save a bit more. While it’s important to let your money grow in the financial markets, you also want to have this set amount of money 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 above your means so that you don’t risk running out of money. This is important during your working years, but it becomes especially important as you near retirement and lose out on your regular paycheck.
People with a lower income who budget and spend in a way that allows them to save and invest as well as enjoy their lives may feel more financial security than someone with a high income 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 on something that doesn’t fit into your budget.
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It can also help to specifically save for an “experience budget” that covers travel, hobbies and other fun activities that aren’t essentials. This can help you avoid feeling bad about spending your money while also not jeopardizing your long-term financial goals.