The 10 Building Blocks for Achieving Financial Security

I am often asked how I've managed to achieve financial security for myself and family. Well, there's no big secret; it doesn't require a post-graduate degree or a rocket scientist's IQ. It does, however, require a plan, some level of confidence and good, old-fashioned common sense.

It seems as though many people suffer from a money inferiority syndrome. They see a neighbor with a luxury sports car and think he or she must be doing great financially. Or, they see another family putting an addition onto their home. Fact of the matter is, financial security isn't measured by the horsepower in your driveway or rooms in your house. In either of the above cases, these people might look like they're rolling in the dough on the outside, but are up to "here" in debt. Their net worth could easily be zilch.

It's so easy to become overwhelmed with finances. There's plenty to be worried about, whether it's the state of the economy, your job, your spouse's job. But you should know that financial security, not to be confused with financial independence, is within reach for everyone of every age.

By doing a few basic things, by focusing on the right financial issues at the right times, money can fall off your list of worries. Financial security is very much psychologically driven. If something is bugging you about your money situation and it's making you feel insecure, you need to focus the time and make the effort to turn it around.

I've found that there are specific building blocks to financial security. The first five are mandatory steps that each and every one of you need to take. The second five are elective; you choose which of these apply to you, and make the appropriate moves or changes. Financial security can allow you to live a happier life. After all, money issues are the biggest causes of divorce in this country. So, here are the five Mandatory Building Blocks:

1. Steady Income

The lifeblood of your financial existence is your income' having a steady income. One reason many people feel insecure in this area is an uncertain job market. The days of staying at one company for 50 years are long gone. Employees have become disposable, and virtually everyone on the payroll is replaceable. Research shows that in our 40 or 50 working years, we may have as many as eight or more job changes. If you aren't happy with your career or where it's going, if you think you deserve more money' it's up to you to make it happen. It's not as though we live in Communist China. No one is denying you the opportunity to change your career. You have the right and responsibility to do what's best for you and your family. I do understand the apprehension about changing jobs or careers when you have children. You may to leave well enough alone and not rock the boat. But if the job you're in right now isn't cutting it, if you're barely making ends meet, then you must begin transitioning to a better place. For those of you in retirement, you still need to replace your income by generating streams from your assets. My High Monthly Income service can help you with this.

2. Your Credit

Credit can be either a great asset or huge liability. It all depends on how you manage credit and whether you can make it work for you. It's crucial to establish creditworthiness now in case you need a large sum to start a business or to secure a mortgage down the road.

You certainly don't want to become a slave to consumer credit. Don't ever get to the point where you're paying monthly bills with credit or throwing it away on miscellaneous stuff. If you have a $12,000 balance on a card and don't know what you bought with it, you're spending money you don't have.

Unfortunately, that's the American way, but you don't have to fall prey to it. Credit is the lynch pin. If you screw it up or abuse it, it can be your worst enemy. Use it smartly, and it can open up many doors of opportunity.

Smart families learn to live with credit, not live by credit. Think about it: If you're spending more money than you make, how will you ever be able to save?

3. Insurance

Insurance is one of the most important aspects of financial security. It's there to make sure that a catastrophe doesn't wipe out your finances. I'm talking about health, life, liability, long-term care...whichever is appropriate at any point in your life.

To young people, health and liability insurance are most important. Yet, you may not need expensive coverage. You might be able to get away with an individual policy with a $1,000 deduction that covers emergency- room expenses. It's worth comparing the amount being deducted from your paycheck each week vs. what you might pay if you secured insurance on your own.

On the other hand, as we get older, health insurance is crucial, and we don't have the luxury of cutting back on it. As far as life insurance goes, if you're single with no one else who depends on your income, you don't need life insurance. If you've accumulated enough assets, you don't need life insurance. However, if you have children or a spouse who depend on your income, or you depend on the income of a spouse, life insurance is mandatory. Right now, the average family needs $450,000 in insurance but only has $126,000. This isn't an area of financial security that you can afford to cut corners. Many people tend to hate insurance companies and writing premium checks to them. They feel ripped off. But let me tell you: We need insurance companies, and we want insurance companies to be profitable so that when we have a claim, they can pay it.

4. Emergency Money

You should have a small nest egg tucked away in a guaranteed interest-bearing account, be it a savings account, CD or money market that adds up to a minimum of one month's living expenses.

Three months would be ideal. If you need $3,000 to pay your bills, then $9,000 in a savings account would suffice. Think about what a burden this would take off your shoulders if you're nervous about your job, or if you lost your job, or became disabled (disability won't pay all of your bills). That's the precise purpose of this account. This isn't money you're going to use as a down payment on your home, or to invest with. This is built-in security that assures that you won't have to put living expenses on credit. When you lose a job and get in a financial bind, you can make mistakes that can set you back for years, such as borrowing from your 401k or running up credit cards. If you can save 10% or more of everything you make, you'll build up an emergency fund in no time. Once you establish that, you can begin saving even more for the longer-term goals in your life such as retirement and college tuition for the kids.

Believe me, if you can save 10% of everything you make, you can take so much pressure and stress off your back that you'll be able to enjoy life to its fullest. Saving for the unknowns helps keep worry from the unknowns under wraps.

5. Taxes

The largest single expense of your lifetime is taxes, especially as you move up the career ladder. You may start off with a $35,000/year job, which puts you in the lowest tax bracket. As you begin to further your career, you'll jump tax brackets and find that making more money doesn't always mean that much more in your pocket.

That's where my three favorite tax shelters come in: retirement savings accounts, real estate, and a side or small business (these fall into the following five electives).When you start to earn serious money, you simply cannot use the standard deduction and expect not to get hit hard with taxes. Did you know that 2.2 million people overpay taxes by failing to itemize deductions?

There are many tools available without even using a CPA, such as Turbo Tax (a part of Quicken) that will tell you what items are deductible as well as provide you with the fair market value for all those bags of goodies you've dropped off at the nearest charity stop. Sometimes the easy way can be the costly way. Taking time to itemize your deductions can save you hundreds of dollars in taxes. Once you comply with these five building blocks, you will then be in a position to work toward financial independence. Some or all of the following discretionary building blocks may apply to you. While you pretty much need to take the bull by the horns with the previous five, Successful Investing is here to help you with the following:

6. Retirement accounts.

If you don't put money away, nobody will, and there's nothing better than a 401k or 403b for saving for retirement. It's the most important wealth-building tool you have because you use pretax dollars and grow it tax-deferred. Add to that a company match, and this is hard to beat. Try to put away 10% a month.

7. A home and mortgage.

I'm talking about the home you live in here, not a second home. When you get married, it's usually right up there on the top of the list of 'wants, ' making the ability to pay a mortgage a part of your financial security. Be sure to use an honest lender who sets you up with a good loan at a competitive fixed rate. Make sure you can afford the home you choose and don't get roped in by the interest-only variable loans that make it more affordable than it appears. Homes can be assets or liabilities; make yours an asset.

8. College.

If you've got kids, you'll want a plan to pay for at least part of their college education. There are a lot of different ways to do this, and SI is here to help you grow the assets you've targeted for this purpose.

9. Side business.

There's really nothing as exciting nor as good as a side business for managing taxes. You can deduct your home office, business meals, entertainment and travel. It can ultimately lower your tax base and increase your overall take-home pay.

10. Accumulation of assets.

Last but certainly not least...be it in stocks, mutual funds, bonds or rental real estate, you should be accumulating assets as investments for your future.

5 Mandatory Building Blocks

1. Earning or generating a steady income.

2. Establishing and managing credit smartly.

3. Owning the right type of insurance and right amount of insurance. 4. Tucking away at least one month of living expenses in an emergency account.

5. Managing taxes so Uncle Sam isn't getting more than his fair share.