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Financial Security

Updated on April 11, 2024
Article byPrakhar Gajendrakar
Edited byRashmi Kulkarni
Reviewed byDheeraj Vaidya, CFA, FRM

Financial Security Definition

Financial Security refers to the state in which an individual can effectively manage their financial obligations, maintain a good standard of living, and be able to set aside funds for the future. It is also characterized as a mindset, indicating a sense of tranquility and confidence in one’s current and future financial conditions. This is reflected in an individual’s overall financial well-being.

Financial Security

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Individuals who achieve financial security are able to comfortably meet their expenses through their income, eliminating the constant worry about financial emergencies. They have a clear financial vision and have proactively planned for future events, enabling them to weather any financial challenges with confidence.

Key Takeaways

  • Financial security is an individual’s ability to cover their day-to-day expenses and afford a financially independent lifestyle.
  • Its most important aspects are holding assets, building emergency funds, and reducing debt to the lowest possible extent.
  • The first financial security step individuals must take is to make themselves immune to financial setbacks by building a corpus that enables them to take care of sudden unfavorable changes in life.
  • The importance of being financially secure cannot be overstated or exaggerated. 
  • Financial stability eventually leads to security, which is crucial to lead a stress-free life.

Financial Security Explained

Financial security means enjoying a comfortable life where an individual has the financial capacity to afford a quality life. They do not need to engage in excessive borrowing or constantly worry about money and financial crunches. It also means one need not live in fear of financial setbacks that can adversely impact their day-to-day expenses. Every individual wants to attain and maintain financial security because it promotes a long-term vision and prepares people for unanticipated financial crises. It enables them to handle their funds and assets smartly.

Financial security meaning highlights how attaining and maintaining security is an ongoing process that requires unwavering commitment and discipline. It also demands smart financial decisions. It entails gathering in-depth knowledge of asset management, risk mitigation and management, financial planning, investment options, stock market products, and retirement planning. It empowers individuals to make sound financial choices, navigate market fluctuations, and plan for a comfortable future.

Being able to cover daily expenses is only one part of the process. The real effort lies in cultivating a finance-driven perspective, becoming financially literate, adopting a long-term view, and developing the capacity to tackle changes that affect one’s finances and, as a consequence, their lives. It fosters peace of mind and stability.

The first financial security measure is an emergency fund that serves as a financial safety net and provides a buffer against unexpected expenses that could disrupt one’s life. Without an emergency fund, people usually find themselves more vulnerable to financial strain, which may lead to taking on excessive debt.

The pursuit of financial security is a worthwhile endeavor that can bring peace of mind, reduce financial stress, and allow people to make sound decisions. By prioritizing an emergency fund and adopting suitable financial practices, individuals can take control of their finances and safeguard their financial well-being.

Examples

Below are two examples that help carry the discussion forward.

Example #1

Suppose Becky has just finished college and started her first job. She comes from a middle-class family and has seen her parents struggle financially. Hence, Becky wants to avoid financial stress. Although she earns well through her first job, she follows the principles of financial discipline and prefers saving and investing over spending. From the very first month, Becky tracks her expenses and postpones unnecessary expenses. After she repays her student loan, she starts to build an emergency fund.

Becky also reads books and blogs on finance, watches budget videos, and invests in the stock market and pension funds. In just nine months, she is way ahead of most of her classmates and colleagues.

She can pay off her monthly bills easily while she invests regularly in Systematic Investment Plans (SIPs) and mutual funds. In this way, Becky manages to improve her financial condition and makes the effort required to maintain it. All this will result in financial security in the long run.

Example #2

A May 2023 survey report suggests that the consistent high inflation levels witnessed across the US have impacted people’s sense of financial security and forced upon them a financial gloom in general. The survey noted that people admitted to dipping into their savings to meet their financial obligations. It said that they are also concerned about retirement and financial stability in the future.

The survey observed that the number of people who admitted to being at least financially okay declined by 5% compared to 2022. The report also states that people have been postponing certain purchases and opting for cheaper alternatives to reduce expenses. This highlights that feeling financially secure is crucial to people’s lifestyle and well-being.

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How To Achieve?

The methods to achieve financial security have been discussed below. These methods include the following:

  • Individuals must start becoming financially responsible early to avoid potential problems. Irrespective of how small they are, savings are crucial for every individual.
  • Tracking expenses and eliminating unnecessary spending is a key step to achieving financial security.
  • Building an emergency fund and adding money to it regularly is recommended. 
  • Investing in financial products and assets, particularly in tax-deferred accounts, is useful.
  • Clearing off debts and planning big-ticket purchases well to remain debt-free leads to financial stability, which leads to financial security in the long run.
  • Setting financial goals and following a plan with discipline and a long-term vision is highly recommended to achieve financial security.
  • Individuals may seek financial advice from investment advisors to improve their financial status and explore ways to boost their financial literacy levels.
  • Diversifying one’s portfolio typically helps individuals invest in multiple assets, helping them become resilient in the face of financial adversity while avoiding systematic risks.

Importance

The points enumerated in this section explain the importance of financial security in an individual’s life.

  • If an individual is financially secure, they need not worry about unanticipated expenses and financial setbacks.
  • It promotes long-term financial goals and budgeting discipline accompanied by peace of mind.
  • It allows an individual to take calculated risks and invest for the long term.
  • An individual who feels financially secure has enough money to pay for their wants over and above their needs. It means they have disposable income to fund vacations and accomplish other fancy or ambitious goals.
  • A financially secure person receives appreciation for planning their finances well, making sound financial choices, and securing their future with adequate insurance.
  • It empowers people to feel safe about their future.
  • Such individuals typically value financial literacy since it helps them make well-informed decisions. They assign great importance to saving and investing, which results in better financial outcomes. Hence, it is an activity that pays off in the long run.

Financial Security vs Financial Stability

The key distinguishing factors between financial security and financial stability are listed below:

  • Financial security is the ability to cover monthly expenses while keeping emergency funds safe and ensuring long-term financial growth. Financial stability, on the other hand, refers to an individual’s ability to meet short-term expenses and remain debt-free.
  • The former is based on a long-term vision and sound planning, while financial stability denotes an individual’s existing financial condition with limited relevance to how they may fare in the future.
  • While financial security is a comprehensive plan driven by financial literacy, good investment techniques, and sound retirement planning, financial stability leads to financial security, which means it is a prerequisite for attaining security eventually.

Frequently Asked Questions (FAQs)

1. How to maintain financial security?

Once an individual becomes financially secure, they must maintain it by learning more about saving, investing, and retirement planning. They must plan their expenditure, consider future needs, and begin saving early. Without long-term vision and financial literacy, a person may find it challenging to stay financially secure.

2. What is basic financial security?

Basic financial security refers to being able to cover one’s expenses without borrowing money from others. Such individuals can maintain their lifestyles without external financial assistance. Additionally, an emergency fund, irrespective of its size, is available to people with basic financial security.

3. What is the difference between financial security and financial independence?

The main difference between financial security and financial independence is that the former represents a safety net and assurance that an individual is financially stable and in a good position with respect to the future. The latter reflects a state where an individual is not dependent on anyone for their lifestyle or basic expenses.

This article has been a guide to Financial Security and its definition. We explain its examples, difference with financial stability, importance, & how to achieve it. You may also find some useful articles here –

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