3 Steps to Financial Security

By Alicia Rose Hudnett Markets Fool.com

What it means to be financially secure may mean something different for everyone. But it should include being able to meet your current and future needs, while also protecting yourself against a major financial disaster. And as such, there are three main areas that you can focus on if you want a secure financial future.

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1. Short-term savings and debt level

It makes sense to start with where you are today. So you can begin by making a list of all your assets and liabilities, then calculate your net worth. This should be your starting point and a good indicator of where you currently stand.

During this exercise, ask yourself if you would be able to cover an emergency expense if something unexpectedly came up tomorrow -- like a large one-time bill or even a job loss. If the answer is no, then work on saving at least six months' worth of living expenses in a liquid savings account.

You also want to assess your debt, especially credit card debt. In fact, if you are spending more than 20% of your monthly take-home pay on paying off credit card debt, you may be at risk of not having enough money to meet your other financial obligations. Try paying more than the minimum balance due each month until you either get below that 20% threshold or until you pay your debt off completely. Then redirect what you were spending on debt repayments to your savings.

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Having an emergency fund in place and your debt under control are strong indicators that you will be able to meet you current financial obligations.

2. Long-term investments

While everyone may have different long-term goals, like purchasing a second home or paying for your children's college education, everyone should make retirement planning a priority. Because even if you plan to never stop working, eventually the choice may not be yours, due to health reasons or something else out of your control.

Strive to save 15% of your gross income each year. Savings can include money you set aside in a workplace retirement plan, including any employer match, and any contributions you might make to an IRA. Wherever and however you save, make sure to earmark this money for the long term.

As our life expectancies increase, so too does the time we may spend in retirement. In turn the amount of money needed to fund our retirement years goes up as well. But thanks to the power of compounding, the earlier you begin saving for the future, the less you have to save over time.

3. Risk management portfolio

When putting together a financial plan, you may not think of insurance coverage as being part of the process. But insurance can protect you and your money from financial ruin.

From health insurance to life and disability insurance to home and car insurance to personal liability umbrella insurance -- in each case, an accident can cause direct personal financial liability. Therefore, paying for these insurance coverages should be part of your non-discretionary budget.

Financial peace of mind comes with knowing that you have the resources to meet your current financial obligations and are saving to meet your future goals, as well as knowing that you have proper insurance coverage in place to protect the financial assets that you have worked so hard for.

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