By Kevin L. Matthews II | American Express Credit Intel Freelance Contributor
4 Min Read | October 1, 2021 in Money
Financial security can have vastly different meanings depending on who you ask.
But by several measures, many Americans could use a boost in financial security.
Here are four ways to boost your financial security to help you better weather a rainy day and get closer to your financial goals.
There is little doubt American families could use a boost in financial security. A 2019 analysis by the AARP Public Policy Institute found that 53% of American households have no emergency savings account.1 And the situation is not improving: In March 2021, the Pew Research Center found that nearly half of nonretired adults said the pandemic has made it harder for them to achieve their financial goals.2 All of this raises the key question: What really constitutes financial security and how can you improve yours?
Financial security can be sorted into two primary categories, day-to-day and long-term:
The key to managing your money properly is to balance both your long-term financial security needs with the day-to-day. Here are four ways to boost your financial security to help you better weather a rainy day and help you get closer to your financial goals.
One of the most common tools to create long-term financial stability is to contribute to a tax-advantaged retirement plan. One of the most powerful retirement accounts is the 401(k) due to the amount you can contribute each year (currently $19,500 in 2021) and the fact that, depending on the company you work for, you could be eligible for a matching contribution. How much should you contribute? Most experts suggest a range of 12% to 15% per year. But if you feel that’s too high, you may want to consider annual automatic increases (also known as automatic escalation) to hit that goal over time. An auto-increase can also help you balance paying off debts while investing. Thanks to retirement accounts, it was widely reported that there was a record number of “401(k) and IRA millionaires” in the first quarter of 2021.3
The golden rule of personal finance has always been to “spend less than you earn.” While this is a simple concept, it can be difficult to put into practice if you don’t know exactly how much money is coming in and how much money is going out. Tracking your spending might not seem like a groundbreaking financial tip, but it does have some important benefits that you might not be aware of. By tracking your spending, you become more cognizant about your purchasing and other important financial habits.
In some cases, this could result in spending less overall or becoming a more conscious consumer – one who seeks out the best deal versus the deal that is immediately available. If the thought of keeping track of every penny you spend feels intimidating, there are plenty of apps and programs that can help you accomplish this without the added pressure of checking your account balance frequently. In addition, some banks offer a budget-tracking feature that can send you an alert when you get close to your preset spending limits. You can also create your own monthly budget with these four simple steps. No matter what method you use to track your spending – app, spreadsheet, or pen and paper – it will put you ahead of the 65% of Americans who said they do not know how much they spent last month.4
Increasing your income is one of the most direct ways to improve your level of financial security. Another common method is to reduce your expenses, though that has a limit given essential items like food, housing, and utilities are usually consistent expenses. Once you’re at the bare minimum, there may not be another option to save money. On the opposite end of that spectrum is increasing your income, which is a limitless option. Other alternatives include:
Ask for a raise. If you have an established relationship and proven value at your current position, you may want to consider asking for an increase in salary. Before you do, it’s a good idea to do your research to make sure your accomplishments have been well-documented. If your request is granted, it’s a best practice to keep your spending the same and contribute that extra money to retirement savings or emergency savings to avoid what is called “lifestyle inflation” – an increase in spending after an increase in income.
Monetize a skill. Monetizing your skills is becoming much easier in today’s digital environment. For example, if you’re musically inclined, teaching music classes or lessons via video is more widely accepted than ever before. This could lead to a larger client base that isn’t limited to any physical location. There are a number of apps that allow people to hire you to complete a wide range of projects, from T-shirt design to bookkeeping. Take the time to reflect and inventory the skills you have to see how the market values your potential services.
Consider switching jobs. Changing jobs can significantly increase your income. Over the course of many years, the ADP Research Institute’s “Workforce Vitality Report” has consistently shown that the average annual wage growth for job switchers is notably higher than that of people who stay in the same job.5
A solid emergency fund is the cornerstone of financial security. This is because it’s the first line of defense against any financial hazard. The great thing about having an emergency fund is that, unlike pulling money from a retirement account, there are no tax implications for spending your emergency fund whenever a true emergency does occur.
How much should you have in an emergency fund and where should you put it? Most experts advise enough to cover three to six months of your household’s expenses, though many are considering changing that to six months to a year based on the pandemic. In terms of where to put your emergency savings, consider American Express’ High Yield Savings Account (HYSA), which has no minimum or fees.
1 Unlocking the Potential of Emergency Savings Accounts, AARP Public Policy Institute
2 “A Year Into the Pandemic, Long-Term Financial Impact Weighs Heavily on Many Americans,” Pew Research Center
4 “Survey: 65% of Americans Have No Idea How Much They Spent Last Month,” Intuit MintLife
5 “Workforce Vitality Report,” ADP Research Institute