Your journey to building wealth must start with establishing true financial security. If you’re not financially stable, your progress toward building wealth is always potentially in jeopardy. Your accumulation of wealth and your retirement should never be on the line when you experience an unexpected (or foreseeable) major expense in life. True financial security doesn’t just mean you can regularly meet your existing expenses; it means you can readily meet other monetary demands that invariably arise.
Below are some key signs of financial stability that offer reassurance that you’re prepared to build wealth in a meaningful and lasting way. If you can’t check off these items yet, focus on reducing your expenses, increasing your income, and building your savings before looking to take more aggressive steps toward building wealth.
Signs of Financial Security
- You pay off all your credit card balances every month. Credit cards can be a useful tool for earning rewards, but paying interest on them is never beneficial. If you have to rely on credit cards to meet expenses, or if you’re carrying this type of debt, you have definitely not achieved financial stability. Your priorities should be to break your reliance on credit cards and then paying them off.
- You have savings that can cover at least 6 months’ expenses. There’s some disagreement among experts about exactly how much time you should be able to live without any income. And personal factors—like how stable and secure your income is, whether you have a single or two-person income household, and whether you have safety nets like credit cards and liquid assets—do matter in such calculations. But to generalize, it’s advisable that you have enough money on hand to get by for at least 6 months. And keep in mind that if you rent out investment properties, you should have separate cash reserves to handle any expenses that may come up in relation to those.
- You have at least a 15% savings rate. This is a minimum benchmark for financial stability. However, when you start talking about security through retirement and wealth building, you should be achieving a higher percentage. Of course, your age and other circumstances affect these sorts of calculations, so we’re again talking in generalizations. It’s important to consult a qualified financial adviser to figure out where your savings rate should be to hit your money goals and secure your retirement.
- You and your family have comprehensive healthcare coverage. In a country where healthcare costs are exorbitantly higher than just about anywhere else in the world and are the leading cause of bankruptcy, good health insurance for everyone in your household is an essential part of financial security. A single health emergency can mean insurmountable debt with inadequate or no coverage.
- You increase your passive income each year. Passive income is key to financial independence, the ability to stop working if and when you want to, and building wealth. There are many sources of passive income, such as real estate investments, stocks, bonds, peer-to-peer lending, royalties, and more. It’s best to have a diverse investment portfolio providing multiple different types of passive income, but it takes time to get there and to build up to substantial amounts. But one of your basic goals should be that your passive income grows year over year.
