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What Is Financial Security?

Financial Security Explained

Definition and Examples of Financial Security

How financial security works, how to get financial security, financial security vs. financial freedom, how can you tell if someone is financially secure.

Evgeniia Siiankovskaia / Getty Images

Most people think of financial security as having a large savings account, a healthy investment portfolio, and a comfortable retirement nest egg. However, financial security is about much more than just money—it's about feeling in control of your life and having the freedom to make choices about how to live it, regardless of your current circumstances.

Here’s a closer look at what it means to have financial security and how you can experience it for yourself.

Financial security involves having enough money to comfortably cover your monthly expenses, recover from financial setbacks, and save for your future. It’s also about having low financial stress and feeling in control of your money.

• Alternate name : Financial well-being

Having financial security does not mean having a high income. You can have a large salary and still struggle to pay your bills .

For example, Michael has a six-month emergency fund, no credit card debt , and is currently saving up to start his own business next year. When he gets an unexpected bill in the mail, he doesn’t panic because he has enough to cover it. He feels calm and in charge of his finances, which is a good sign he’s reached financial security.

Financial security is a major contributing factor to your quality of life . When you have enough money to cover your current living expenses and to save for the future, a whole new world opens up.

• You no longer panic when a financial setback happens.
• You have enough money to splurge on “wants” (like a vacation or fancy dinner) without digging yourself deeper in debt.
• You’re able to take risks in your career and chase opportunities that make you happy (rather than doing what makes the most money).

But here’s the catch: Having financial security requires you to be future-oriented. You have to make a financial plan to live below your means now, so you can buy yourself freedom, flexibility, and options later on.

Most important, financial security is a state of well-being. It’s about feeling calm and in control of your money, rather than having a fancy job title or salary but still struggling with finances.

Example of Financial Security

Suppose Maria makes $50,000 a year. After monthly expenses, she still has 15% of her income left over. Financial security is important to her, so she uses this extra money to pay off debt, build an emergency fund, and save for future goals (like that two-week trip to Japan or a house by the beach).

Jack, on the other hand, makes $150,000 a year and can’t figure out why he feels like he can never afford anything. He’s constantly scraping by until his next paycheck, and his mounting pile of debt keeps him awake at night. He dreads the day his car gets a flat tire because that will be just one more thing he can’t pay for.

In this situation, Maria has more financial security than Jack, even though her salary is one-third the size. Unlike Jack, she feels confident and in control because she has enough money to meet her current obligations and save for future ones. She also has peace of mind knowing she can handle the financial setbacks that come her way.

Wondering if you have financial security? The Consumer Financial Protection Bureau (CFPB) has a free financial well-being questionnaire to help you assess your situation.

There are many factors that contribute to financial security, but these three are the most important:

Create a Monthly Savings Plan

The first step to financial security is creating a safety net that protects you from the unknown. Unexpected things are bound to happen, whether it’s something bad like a flat tire or something good like a destination wedding.

Having a built-in fund to cover these expenses helps ensure your long-term goals don’t get derailed when surprises happen.

If you’re not sure how to squeeze more savings out of your paychecks, start with a monthly savings plan .

Pay Down Debt

It’s difficult to build financial security when a huge chunk of your paycheck goes toward debt payments each month. So making a plan to pay off debt, especially the high-interest kind, can help set you up for success. Once you’ve paid off that debt, you use the extra money to build financial security.

Investing is a key part of building wealth, which makes it a critical component of financial security. Compound interest is a powerful force, and once it has time to get going, it can catapult you toward your financial goals.

However, many people shy away from investing because they think it’s a form of gambling or that they need a ton of money to get started. Neither of these is true. Anyone can learn how to invest . If you need help, consider hiring a financial advisor .

What’s the difference between financial security and financial freedom? Put simply, you must reach financial security before you can reach financial freedom . They’re like stepping stones on your journey to financial autonomy.

Financial security means you have safety nets in place to recover from financial setbacks, you’re on track to reach your savings goals, and you feel more calm about your finances. 

Financial freedom, on the other hand, means you’re at a place where you can quit working for a salary and do whatever you want, whenever you want. You have enough cash and investments on hand to fund your ideal lifestyle and then some.

Being financially secure has nothing to do with your education, salary, or credit score. Instead, it’s about how good you are at managing what you’ve got.

Generally, someone who is financially secure exhibits these four characteristics:

• They feel in control of their finances.
• They can quickly recover from financial setbacks.
• They’re on track to achieve their financial goals.
• They have the financial means to make their own choices and enjoy life.

Key Takeaways

• Financial security is about having enough money to absorb financial shocks, reach your savings goals, and make choices that allow you to enjoy your life.
• Financial security is important because it keeps financial stress to a minimum and helps you feel in control of your future.
• Three common factors that contribute to financial security are being debt-free, having a savings plan, and investing.
• Financial security is one of the first steps you must achieve on the path to financial freedom.

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Consumer Financial Protection Bureau. “ Financial Well-Being: The Goal of Financial Education ,” Page 5.

Financial Security: Everything You Need to Know (and Do)

For many, financial security can feel like an unattainable dream. To put it in perspective, a whopping 29 percent of Americans don’t have any savings at all.

However, financial security is a relative term, which means it’s possible for anyone to become financially secure. 

In this guide, we share everything you need to know about financial security and how to become financially secure.

Let’s dive in.

Post Contents

What is Financial Security?

1. being debt-free, 2. controlling your money, 3. being prepared for emergencies, 4. increasing your financial security, financial security vs. financial freedom, the importance of financial security, 1. evaluate your situation, 2. live below your means, 3. create financial goals, 4. make a financial security plan, 5. reduce your expenses, 6. pay off your debt, 7. save, save, and save some more, 8. earn more money, 9. invest in a diversified portfolio, 10. be consistent, summary: how to achieve financial security, want to learn more.

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Financial security refers to the peace of mind felt when we aren’t worried about money. Often, this means having enough income to comfortably cover expenses, being debt-free, and having savings to cover emergencies.

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What does financial security mean.

Some people believe you need to be a millionaire or even multi-millionaire to be financially secure. However, there have been countless entrepreneurs, athletes, and film stars who’ve made a fortune and then lost it all.

The truth is, you don’t need a mansion, sports car, or private jet to be financially secure – you don’t even need to have paid off your mortgage.

Ultimately, financial security just means that you’re in control of your money, and you’re not worried about paying the bills or covering an emergency.

Still, financial security means different things for different people. So, here are four types of financial security to help you define what this term means for you.

It’s hard to feel financially secure when carrying significant debt.

Now, some types of debt are necessary. For example, very few people have the capital to pay for a house or a higher education in cash.

But spending on credit for everyday items, clothes, tech gadgets, or vacations isn’t likely to help you achieve financial security – especially if this debt is on credit cards. 

Credit cards demand monthly payments and are known to have very high-interest rates – some even have interest rates up to 29.99% APR , making it very easy to spiral further into debt.

Bottom line, if you don’t pay back the money you’ve borrowed on time, you can be sued, your house can go into foreclosure, and your car could be repossessed. The threat of these scenarios isn’t likely to make you feel financially secure.

On the other hand, being debt-free can help provide a deep sense of financial security.

If someone makes $100,000 per year but spends $110,000, are they financially secure? Nope. This person is digging themselves into debt and will struggle to pay the bills.

So, if we want to learn how to become financially secure, we must first learn to budget.

Budgeting is the process used to control money – to tell it where to go, instead of wondering where it went. When you’re in control of your money, you’re far more likely to feel financially secure. 

When you consistently have money left over at the end of every month, you’re well on your way to achieving financial security.

As the Irish statesman and philosopher Edmund Burke once said, “If we command our wealth, we shall be rich and free. If our wealth commands us, we are poor indeed.”

There are many people who don’t have enough money to pay for health, home, or renters insurance. And according to a Bankrate survey , nearly 4 in 10 Americans (41%) would borrow money to cover a $1,000 emergency.

Living pay-check to pay-check without savings or suitable insurance is guaranteed to affect your sense of financial security and mental health.

To feel financially secure, you need to have suitable insurance and a buffer in the bank for when things go wrong.

If you’re not becoming more financially secure, there’s a good chance you’re becoming less financially secure.

As a result, financial security also means steady, reliable progress. Perhaps this means paying the mortgage down every month, adding to a savings account, or investing for retirement.

Watching your savings and net worth grow is very likely to make you feel more financially secure.

Feeling financially secure and financially free are two different things.

A financial security plan focuses on generating feelings of safety by paying bills on time, increasing savings, budgeting, investing, and purchasing insurance. 

On the other hand, financial freedom is about living life on your own terms. As the philosopher Marcus Tullius Cicero once said: “What then is freedom? The power to live as one wishes.”

For some, this could mean early retirement , long-term travel, luxury purchases, or the ability to quit a disliked job to find another without fear.

Financial security must be achieved before financial freedom becomes possible.

Why is financial security important? Any type of insecurity, whether emotional, financial, or professional is bound to cause stress.

Plus, financial security and happiness are clearly intertwined. Dan Buettner , author of The Blue Zones of Happiness: Lessons From the World’s Happiest People, said:

“Financial security is also, obviously, huge. It really does deliver more happiness over time than most anything that money can be spent on.”

There are many benefits of financial security – it removes stress, fear, and anxiety, and replaces them with feelings of ease and safety.

How to Become Financially Secure in 10 Steps

The steps to becoming financially secure aren’t complicated. However, they do require persistence, hard work, and dedication. 

If you want to master your finances , here are 10 tips to help you learn how to achieve financial security.

Before you can become financially secure, you need to gain some clarity. 

To do this, start by taking inventory. How much money do you make, and how much do you have in savings and investments? How much debt do you carry, and what are the interest rates? Finally, how much are your expenses each month?

Write everything down.

Doing this can take some time, so take it slow, and if you need to, break up the task into smaller ones. Once you’ve got a clear picture of your financial situation, you’ll be able to improve it.

A crucial part of financial security management is living below your means. This means that you always spend less than you make.

Even the famous investor, Warren Buffett, lives modestly despite a net worth of roughly $78.9 billion . In fact, Buffet still lives in a house in Omaha that he bought in 1958 for $31,500 .

This means that Buffet didn’t fall into the trap of “lifestyle creep” – this is when your income increases and your spending increases as well, leaving you with no savings.

So, create a budget, and make sure that you always live below your means.

Have a think about your financial goals – what do you need to feel financially secure? Perhaps you’d like to pay off credit card debt, build an emergency fund, or save some money each month for retirement.

Whatever it is, write it down. Then, work out how much money you need to achieve each of your goals.

When you’ve defined all your goals, put them in order of priority – which ones are most important? Why? Perhaps getting an emergency fund is your top priority, or maybe you want to save up a deposit to buy a house. Try using a budget app to keep track of all incoming and outgoing money to ensure you are sticking to your budget.

Antoine de Saint-Exupéry, the French writer and pioneering aviator, said, “A goal without a plan is just a wish.” So, once you’ve written down all of your goals, you need to create a financial security plan.

Dig deeper into the details. 

For example, if you want to save up a $1,000 emergency fund, how long will it take you to save it, and how much money do you need to save each month? What would prevent you from reaching this goal, and how can you avoid it?

Create a plan for each of your top-priority goals.

Once you’ve created a financial security plan, it’s likely you’ll need to reduce your expenses to free up some money.

Depending on how much you need to save to reach your goals, you may need to cut back on small luxury items or large expenses. 

When trying to save money , focus on consistent wins over time. For example, saving $100 by purchasing a cheaper sofa is great, but also look for ways to save an extra $100 every month.

Whether it’s student loans or credit cards, roughly three out of four millennials in the U.S. are in debt, with an average balance of $36,000 .

If you have debts that you want to pay off to achieve financial security, there are two main methods that you can use.

The snowball method suggests that you pay off the smallest debt first, and then work your way up, paying the largest debt last – regardless of interest rates. Personal finance expert Dave Ramsey said :

“When you clear that first bill and move on to the next, you’ll see that you are in charge of your money. And that’s so motivating!”

The avalanche method suggests that you pay off the debt with the largest interest rate first, then work your way down to the debt with the lowest interest rate. 

This avalanche method allows you to pay the least amount of money in interest overall. However, the snowball method can help you to feel empowered, and so you may pay off your debts quicker.

Saving consistently is a vital part of achieving financial security.

If you’re not sure where to start when it comes to saving, consider using Senator Elizabeth Warren’s 50/30/20 rule . Here how the rule suggests you spend your money:

• 50% on needs, such as housing, utilities, and groceries.
• 40% on wants, such as shopping and hobbies.
• 20% on savings, such as retirement plans and emergency funds.

Whatever you do, start saving!

Another way to increase your financial security is to find ways to earn more money . For example, you could negotiate your salary, look for a higher paid job, or start a side hustle.

Common side hustle ideas include starting a dropshipping business , becoming an affiliate marketer , and starting a blog .

If investing is a part of your financial security plan, make sure you don’t put all your eggs in one basket.

Instead, spread your money across multiple investments to create a diversified portfolio. This way, if an investment should fail, you won’t lose all of your money.

Finally, remember that financial security management never stops – consistency is the name of the game. 

To create long-term financial security, you need to focus on building sustainable habits .

Jim Rohn, the entrepreneur and motivational speaker, said, “Success is neither magical nor mysterious. Success is the natural consequence of consistently applying basic fundamentals.”

Financial security refers to the peace of mind experienced when you have relatively few worries about money. For many people, this often entails:

• Being debt-free
• Being in control of personal finances
• Feeling prepared for financial emergencies
• Steadily increasing financial security over time

Remember, there’s a difference between feeling financially secure and financially free – the latter refers to living in a way that’s not constricted by money.

If you want to learn how to become financially secure, here’s a 10-step plan to help:

• Evaluate your situation
• Live below your means
• Create financial goals
• Make a financial security plan
• Reduce your expenses
• Pay off your debt
• Save for things like emergencies and retirement
• Find ways to increase your income
• Diversify your investments to mitigate risk
• Be consistent in your financial security management

If you’re wondering whether or not you can achieve financial security, listen to the entrepreneur Henry Ford: “Whether you think you can or think you can’t, you’re right.”

Have we missed any great financial security tips? Let us know your thoughts in the comments below!

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Social Emergency Medicine pp 199–215 Cite as

Financial Insecurity

• Stephen B. Brown 5 &
• Karen D’Angelo 6  
• First Online: 07 September 2021

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Financial insecurity is a challenge that a growing number of Americans face. As many as 70% of adults living in the US are experiencing or are at risk of financial insecurity. It is a broad term used to describe people who are living paycheck to paycheck and/or who have concerns about making ends meet. People experiencing financial insecurity are not prepared for unanticipated medical expenses. Financial insecurity directly affects health and is a critical factor in making healthcare decisions. By contextualizing the problem of financial insecurity, we can understand its relationship with other social determinants of health and its impact on healthcare access and utilization, especially in the emergency department (ED) population.

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Brown, S.B., D’Angelo, K. (2021). Financial Insecurity. In: Alter, H.J., Dalawari, P., Doran, K.M., Raven, M.C. (eds) Social Emergency Medicine. Springer, Cham. https://doi.org/10.1007/978-3-030-65672-0_12

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Building Financial Security Begins with Your Mindset

Financial security begins with a decision to take control over your actions..

Posted September 2, 2021 | Reviewed by Gary Drevitch

In a society where blatant wealth is displayed on every media and social media platform, discovering what financial security means is a challenge for many. You need only look at Facebook, Instagram, TikTok, Twitter, or any TV show for that matter, to see displays of wealth beyond reach.

It’s no wonder that for too many there are feelings of being "less than" or of being too far away from ever being “successful."

Feelings of stress , helplessness, and depression are common for those who measure themselves against others, including colleagues, neighbors, friends, and relatives. It’s a formula for misery and despair. What is better than being able to put your head on the pillow at night knowing that you’re on the right path, for the right reasons?

A rational definition of financial security must be grounded in reality and not someone else’s ideas, experiences, or circumstances. Here are a few ideas that might help you devise a working definition and building the framework for getting there:

• The first and most important step is to decide what is most important to you. Your values, if properly engaged, will guide your spending, saving, and investing decisions.
• Determine what ‘enough’ means to you. Accumulating enough wealth that allows you to live your values provides peace of mind and a great starting point.
• Alongside that definition are the actions necessary to actually understand your current financial reality — for example, what’s coming in (income), where your dollars are being spent, and how much of your income is being saved and invested. Spending on goods that you don’t value is a giant sinkhole that too many people drive into.
• Knowing what not to do is key. For example, buying lottery tickets or gambling is not a path to wealth. The odds are simply stacked against you and a mindset of “someone is going to win, why not me?” is a poor rationale to dump hard-earned dollars into such endeavors.
• Being patient is a positive attribute in building financial security. A wall is constructed one brick at a time. The magic of compound interest and time will get you closer to your goal.
• Gaining mastery or control over bad habits or a destructive mindset is vitally important to building a financially secure life.
• Understanding your money history is also of utmost importance. For example, if you grew up feeling denied, you might have a tendency to spend on those things you were once denied. If you grew up in a family where money was not respected, you might need to delve into a deeper understanding to rewire your thinking about what money means to you.

Remember, being financially secure begins with a decision to take control over your actions, mindset, and beliefs about money. You will need to create the right goal matched with positive actions, a properly aligned mindset, and the patience to stay on the path to financial security.

Michael F. Kay is a Certified Financial Planner, practitioner and CPA. He is the president of the firm Financial Life Focus.

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How the Road to Financial Security is Paved with Financial Capability

At CFED (the Corporation for Enterprise Development), we often joke that our parents don’t understand what it is we do for a living. “Expanding economic opportunity” — okay, sounds nice, but what does that mean ?

The truth is, it’s complicated. Poverty is complicated. Inequality is complicated. And if we have learned anything over the years, it’s that there is no silver bullet, and we have a long way to go to find effective solutions.

And yet we believe that we are on the right track. During the past few decades, the community of people and organizations who care about these issues has grown exponentially. We have learned from experience, and we have not been afraid to try new ideas, even if they have not all worked quite as we imagined. Today, we stand together on the verge of a new era — an era of financial capability  — that represents a more holistic, sophisticated, cross-sector, and data-driven set of approaches to help people and their families achieve lasting financial well-being. This opening chapter of What It’s Worth traces the path that has brought CFED and the field to this point, envisions the road ahead, and sets the stage for the thoughtful and provocative ideas, evidence, and opinions voiced by our fellow authors in the chapters that follow.

The Problem: Growing Financial Insecurity in America

Decades ago, few would have anticipated the dramatic increase in the complexity of the American economy, financial systems, and social safety nets, or how that complexity would transform the economic lives of individuals and families. Today, nearly every aspect of American life, from employment to housing to the generational transfer of wealth (and poverty) is tied to financial systems and other institutional structures, such as the workplace. Although these systems and structures provide valuable benefits, including the democratization of credit and technology-driven cost savings in the delivery of products and services, they bring new risks to consumers as well.

The fact is, it’s hard to be a consumer of financial services these days. Anyone who visits the website of a major financial institution or drives through a busy street filled with billboards advertising check-cashers and payday lenders can appreciate the pace and extent of change in the financial services marketplace in recent decades. This increasingly complex marketplace demands corresponding savvy to navigate successfully.

Consider that 50 years ago, our parents or grandparents:

• Weren’t bombarded by tempting credit offers in the mail. Credit cards weren’t born until the 1950s, and not widespread until deregulation in the 1980s. Today, more than 70 percent of Americans have at least one credit card, and the typical borrower carries nearly $10,000 in revolving debt (including debt from credit cards, private label cards and lines of credit).
• Had never heard of an adjustable-rate mortgage. Homeownership rates expanded significantly during the last 100 years (from 46 percent in 1910 to 64 percent in 2013), thanks largely to the post-Depression launch of the 30-year mortgage. The 2000s brought experimentation with the mortgage market — and in some cases, overtly predatory actions — that stripped the wealth of millions, especially households of color and those of lower income. Former FDIC chair Sheila Bair, writing in 2012, observed that as a result of “reckless” mortgage lending practices, “five million families have already lost their homes, an even greater number are still at great risk of foreclosure, and nearly a fifth of mortgage holders owe more than their homes are worth.”
• Did not fear that a single unpaid bill might torpedo their credit score. The use of credit scores as a “screen” has a profound effect on financial security in light of the fact that more than one-half of all consumers currently have subprime scores; tens of millions more are outside the credit mainstream because of “thin” or nonexistent credit files; and millions of consumers do not regularly check their credit scores. Without a good credit score, obtaining access to capital is difficult, expensive, or impossible.
• Likely had greater access to a mainstream or lower-cost financial institution. Between 1984 and 2011, more than 15,000 banks exited the industry; of these, about one-half merged with another bank, and one-third consolidated with other charters within their existing bank holding company. Bank branches have been steadily closing. The FDIC reports nearly 5,000 closures between 2009 and 2014. At the same time, high-cost “fringe banking” services have proliferated, particularly in poor communities and communities of color. Although usury is certainly nothing new, its scope and scale (and the devastation left in its wake) have reached new heights in the last few decades. In 2014, the Federal Reserve Bank of St. Louis reported, “Today, there are approximately 20,000 storefront lenders… By comparison, in 2012, there were 14,157 McDonald’s restaurants in the United States.”

Of course, all of this was happening while two other developments were making people even more dependent on this complex financial system: skyrocketing student loan debt, and the demise of the defined benefit plan/pension and subsequent reliance on individual retirement accounts, such as the 401(k).

The steady rise in the cost of public and private higher education, coupled with growth of for-profit educational institutions, has created unprecedented levels of student debt. The Brookings Institution found that in 2000, the average student borrowed only 38 percent of net tuition costs (or about $3,600) to finance his or her tuition. Ten years later, that figure had risen to nearly 50 percent (or $5,500).

With the decline of the defined benefit pension, retirement income became much less a benefit of one’s job and much more a personal responsibility. In 1978, Congress passed legislation that enabled Americans to save through tax-sheltered work contributions. The major role of employers was to establish these programs, advertise them to employees, and at times offer a match. Yet many companies failed to set up these programs, and too many employees with the option to save did not sign up. Today, numerous studies estimate that more than one-half of employees, and perhaps as many as two-thirds, have inadequate savings to support themselves in retirement. One analysis suggests that one-third of current workers aged 55 to 64 will have incomes below 200 percent of the federal poverty line once they retire. In his book The Great Risk Shift , Yale professor Jacob Hacker documents this trend of public and private institutions passing economic risk to consumers under what he describes as the guise of “personal responsibility.”

Mainstream sources of financial stability — long-term job security, the defined-benefit pension, the neighborhood bank — are fast disappearing. These factors have been accelerated by the reality that achieving the American dream has become more elusive for the majority of the nation. A high school education is insufficient to achieve a sound middle-class existence. Our financial relationships and access to financial products increasingly occur online or through an unfamiliar agent on a customer service phone line. Personal integrity is no longer sufficient collateral to secure a loan or get a job.

In addition, inequities by race, class, and gender are becoming even more apparent in the widening income and wealth gaps between the haves and have-nots (see the essays in this volume by Dedrick Asante-Muhammad , José Quiñonez , Lisa Hasegawa and Jane Duong , Elsie Meeks , and Heidi Hartmann ). We witness how the economic frameworks that create opportunity for some systematically deny it to others. Not only is the playing field not level, but the goalposts keep moving farther away. The lack of transparency in many financial products and the extent of predatory practices mean that financial decisions can have an outsized impact on consumers’ lives, especially when things go wrong, as they did so dramatically during the Great Recession.

The Solution: Create Economic Health at the Household Level for even the Poorest Americans

These increasingly risky financial and economic realities have shaped CFED’s work over more than three decades. We have sought to expand economic opportunity, reduce financial insecurity, and create wealth. We began in the early 1980s with a focus on promoting self-employment as a route out of poverty for low-income people. Virtually no one believed this was possible until we spent five years tracking American women on welfare who started their own businesses through the Self-Employment Investment Demonstration (SEID). We discovered that:

• Of the 1,316 welfare recipients who participated in SEID, 408 started businesses — a percentage roughly equal to the percentage of business owners in the U.S. economy overall;
• 79 percent of SEID businesses were still operating 2.6 years after starting;
• Six times the number of SEID business owners derived their primary income from their business after participation than before; and
• Reliance on Aid to Families with Dependent Children (cash assistance) and food stamps declined 65 percent and 62 percent, respectively, among business owners participating in SEID.

This experience taught us that low-income people have more capacity than opportunity, and that it was our responsibility to create on-ramps into the economy that provided the structure and incentives that all Americans need and deserve to succeed.

When we launched the American Dream Demonstration in the late 1990s to test the power of Individual Development Accounts (IDAs), which are savings accounts that receive additional dollars from government or philanthropy as a match, few policymakers or practitioners believed that low-income people could save at all. Even more disturbing was the critique that it was “unfair” to ask people who have too little money to begin with to save. What did we discover from this experiment? Not only did low-income people clearly demonstrate that they could save, but in fact, the poorest 20 percent of accountholders — with incomes less than 50 percent of the poverty line — saved at a rate more than three times that of the highest-income accountholders. They told us, essentially, that it was the price of hope. Otis, a saver at Capital Area Asset Builders in Washington, DC, summed it up: “When you first get your money, it is easy to spend it on dinner. But once you realize the money is for your future, you start to really save.”

This demonstration taught us many new things that influence our work today. Incentives, such as savings matches, matter — but not as much as we thought. Institutional arrangements, from direct deposits to peer counseling, mattered as much or more in helping the savers reach their goals of education, homeownership, or entrepreneurship. When financial education was paired with an account and savings goal, outcomes improved. Each hour of financial education, up to 10 hours, increased average monthly net savings by $1.16, or $139 per year, a substantial sum for families living near or below the poverty line.

Yet while IDA programs were clearly transformative for many, these programs also revealed that not all low-income households were ready to save for a long-term asset. How could we help them get there? After all, if households, particularly those of low and moderate income and households of color, lack access to the information and skills to make sound financial decisions in an increasingly complex environment, they are likely to find achieving economic security elusive at best, and impossible at worst.

Knowledge Is Power: The Faith in Financial Education

By the 1990s, Americans had latched onto the idea of financial education as a response to these new financial realities. Educators, employers, bankers, and policymakers alike supported financial education programs as a seemingly simple solution to the financial challenges faced by low-income consumers. If people just had more information, the thinking went, they would be able to make wiser financial decisions.

In the 1990s and 2000s, there was enormous growth in financial education programs and initiatives in every sector. Federal financial education commissions and advisory councils sprang up. Hundreds of curricula were developed, including the widely used FDIC Money Smart materials, as well as a multitude of teaching and learning materials created by nonprofits and for-profits alike. Foundations invested millions in supporting financial education programming in every corner of the nation. States began to require it in schools. Financial education was, in short, a hot topic.

Banks furthered this trend for several reasons. Many saw it as a good business development tool, a way to get new customers in the door. In addition, banks offering financial education could receive Community Reinvestment Act (CRA) credit by providing services in low- and moderate-income neighborhoods. And financial education also represented a new tool in the arsenal for managing credit risk among borrowers who were increasingly taking on additional debt.

Finally, financial counseling was integrated into federal programs that involved use of credit or other financial products, especially homeownership programs. In addition, IDA programs mandated general financial education and offered additional asset-specific training as incentives to promote homeownership, entrepreneurship, or postsecondary education.

Enhancing Financial Education with Wealth Creation Strategies

At the same time, another significant influence was at play: the growing emphasis on helping low-income households build not just income, but wealth. Beginning with Michael Sherraden’s seminal 1990 book Assets and the Poor , asset building emerged as a strategy for helping families escape poverty. Whereas traditional approaches to poverty alleviation emphasized increasing income, this newer research recognized that income is necessary but insufficient. Assets — a home, savings, an education, or a business — must accompany income to help families move up the economic ladder. Assets create a financial buffer to weather emergencies, promote success in the labor market, inspire long-term thinking and planning, and enhance the economic and psychological well-being of individuals and their families. An entire field of practice, policy, research, product innovation, and philanthropy has developed in the asset-building space over the past 35 years.

At the heart of the asset-building field is a simple premise: Given the right frameworks and incentives, people will save, regardless of income, and move toward asset ownership. From the start, practitioners experimented with and adopted as a best practice the integration of asset-specific and general financial education into their programs, with the added element that the education was tied directly and continually to the promotion of specific behaviors and actions.

One powerful measure of how much the asset-building field has grown in just the last decade is captured by the growth in partners for CFED’s Assets & Opportunity Scorecard , the nation’s most comprehensive benchmarking tool in how well state governments build and protect assets for their residents. When CFED released the first edition of the Scorecard in 2003, we partnered with just five organizations — which was the number of state organizations with a mission of building assets for low-income Americans. The number of partners grew and by 2012, CFED organized a group of advocates, practitioners, policymakers and others — the Assets & Opportunity Network — to connect the growing number of state, regional, and local organizations dedicated to expanding financial capability and opportunity. Today, this Network represents 1,840 members, whose work has connected financial education with building financial security and assets, and redefined how these two efforts worked together.

Yet in the early years of the new century, as the recession loomed and student debt and foreclosures continued to mount, it became clear that neither financial education nor asset building were enough to improve economic stability and well-being for large numbers of families. Michael Sherraden, whose voice carries great weight in the field, acknowledged with Ray Boshara in 2008 that financial education does not necessarily translate to a direct path toward savings and asset accumulation. By that time, others in the field had also begun to question the impact of financial education programs. Many programs included no evaluation of their efforts at all, and for those that did, the evidence of effectiveness was spotty. The Consumer Financial Protection Bureau (CFPB) noted in 2013 that “while some of these programs … show promising results, overall there is limited systematic evidence to tell us about the most effective ways to improve consumer knowledge and decision making about personal finances.”

At the same time, many stakeholders who had long identified as asset-builders were recognizing that for some households, the goal could not be to buy a house, or start a business, or save for retirement — not yet. What these households needed first was a broader array of services: credit repair, a simple bank account, access to public benefits, plus the knowledge and know-how to navigate financial systems.

More Than Faith: The Rise of Financial Capability

Experience has taught CFED and the field that we must help people not just learn, but act. We must not only make sure that doors of opportunity are open, but that people walk through them. This understanding was the impetus for the birth of the field we now know as “financial capability.” The term itself first gained traction internationally and quickly took root in the United States. The Center for Financial Services Innovation succinctly describes the difference in both nomenclature and impact in its aptly titled 2009 report, From Financial Education to Financial Capability: Opportunities for Innovation , noting: “The shift in language is more than semantics. Financial education is a set of provider outputs; financial capability is a set of consumer outcomes” that make a difference in peoples’ lives — for instance, being able to meet monthly expenses, planning for the future, and choosing quality financial products.

As the notion of financial capability began to take hold, many in the emerging field were coming to another critical realization: that despite good products, good services, and the very best of intentions, many low-income households were not using the financial opportunities being offered. With apologies to Field of Dreams , we were building it, but they weren’t coming.

Practitioners and policymakers began to realize that part of the problem was that we were not listening to the customer. To use an entirely unrelated example: If we were McDonald’s and considering creating a new sandwich, there would be an enormous amount of thought put into how to develop, refine, and market that product to the consumer. Focus groups and pilot tests would ensue, and the new product would be designed and polished to within an inch of its life before it ever came close to hitting the streets. In addition, McDonald’s would use all the information it had about its customers’ behaviors to inform its decisions — their preferences, patterns, and psychologies, and what made them choose to buy (or not buy) one product over another. Yet the financial services field was charging ahead with little more than a notion that the approach should work.

That has begun to change in the past few years, with exciting applications of traditionally for-profit product development tools to financial capability products and services. The notion of human-centered design, which examines the needs, dreams, and behaviors of people who will be affected by a given product or program, is beginning to make a real change in how organizations design financial products and services for low-income individuals and families. Human-centered design has also prepared the field for the next leap — integrating behavioral science and economics into our work. The field now has a deeper understanding of what promotes or impedes “good” consumer behavior.

After all, at the end of the day, our goal is behavior change, to ensure that people make use of opportunities for financial security to better their financial position. To continue the Field of Dreams metaphor, the question becomes: If we build it, how do we make it as easy as possible for them to come and stay? In financial capability terms, this translates to strategies such as opt-out and automatic savings programs; thoughtfully designed incentives and rewards for desirable financial behaviors; and fewer barriers to achieving financial goals. For instance, where a financial education class might have simply offered information on where a person could open a bank account, financial capability programs would bring a banker to the class to open accounts on the spot and help participants set up direct deposit. This makes savings automatic and easy, in addition to providing direct access to a mainstream financial account with lower fees and interest costs than found with alternative financial services providers such as payday lenders or check cashers.

Tax time is when these innovations have been most rigorously tested. Tax season is the moment when low-income families often have the largest amount of cash, thanks to refunds from the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC). Using core principles such as easy account opening, powerful incentives, and well-timed “prompts” or messaging, the SaveUSA program (sponsored by the New York City Department of Consumer Affairs Office of Financial Empowerment) tested treatment and control groups to see if these factors could encourage more savings at tax time. The results are convincing. Between 9 percent and 23 percent of the control group deposited some or all of their tax refunds. In contrast, 90 percent of the treatment group with access to a well-designed product saved.

Outcomes of similar magnitude have resulted from decisions by companies to switch from an opt-in to opt-out retirement savings program in which an employee must actively say no to an automatic deduction. Between 2003 and 2011, the percentage of companies offering opt-out 401(k) programs skyrocketed from 14 percent to 56 percent. An analysis from the National Bureau of Economic Research examined one medium-sized U.S. chemicals company that implemented automatic 401(k) enrollment for new hires and found that the plan participation rate was 35 percentage points higher after three months on the job than for “standard” enrollees, and remained 25 points higher after two years.

How Financial Capability Changed CFED’s Strategy to Build Wealth for Low-Income Americans

In many ways, CFED’s own experience in grasping the importance of the financial capability concept reflects the evolution of the larger field. In 2010, we realized that we needed a better way to capture the entirety of families’ financial needs, not just financial education and asset building. Our Household Financial Security Framework (see Figure 1) was an attempt to build household financial security over time. We began to think about reducing poverty and achieving financial security and empowerment as a dynamic process. Households gain financial management skills, build human capital, increase income, begin to save, leverage saving into assets, and protect gains made along the way. Households can engage this cycle at many places along the continuum; they also iterate and evolve their strategy over time.

The Framework describes the cycle of financial capability from the household perspective. Households need enough income to finance basic consumption and pay down debt with enough left over to save for the future. Once savings have accumulated, they can be invested in assets, which can then help households boost their incomes through increased earning capacity or income-generating dividends or profits. Throughout the cycle, access to insurance and consumer protections helps households protect their gains. This is an ongoing process in which each component contributes to the next, and to the household’s overall ability to become financially stable.

Figure 1: Household Financial Security Framework

The development of the Framework was a turning point in the way we thought about our work. It gave us a way to weave a powerful, cohesive narrative about the many different and interconnected ways that could support the burgeoning asset-building field. It also allowed us to bring new, unexpected partners into our orbit, players who might touch only one part of the financial capability “cycle” but who represented important constituencies or vantage points. Suddenly, we had a tool that allowed a wide range of organizations — health, affordable housing, public safety, community development finance, education, employers — to see the specific ways their work contributed to the financial betterment of families.

We began to see more sectors concluding that financial capability was essential to achieving their own larger goals. For example, at a recent convening hosted by Stewards of Affordable Housing for the Future (SAHF) — an organization composed of many of the most productive affordable housing organizations in the nation — Patricia Belden, President of POAH Communities, said: “If we want to improve the lives of our residents, we need to go beyond traditional property management and work with partners who can help our residents build credit, save for a home or college, or start a business. We want to give our residents the financial tools to help them to make their dreams for the future a reality.”

Financial Capability Gains Momentum

The Great Recession accelerated the adoption of financial capability as a concept by leaders in government, the social services sector, academia and the private sector, especially as financial insecurity spread to formerly middle class households. In 2010, President Obama created the first President’s Advisory Council on Financial Capability, followed in 2013 by a similar council focused on youth. Also in 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. Intended as widespread reform in response to the Great Recession, it established what would later become the Consumer Financial Protection Bureau (CFPB). The CFPB seeks to “make markets for consumer financial products and services work for Americans” — a mission accompanied by greater emphasis on building financial capability coupled with enforcement powers when necessary. For the first time, we have a government agency charged with, among other things, ensuring that all Americans become more financially capable.

In less than five years, the design and delivery of financial capability services have been championed and incorporated into core lines of business in the public, nonprofit, and private sectors. With a growing body of research on the subject making the theoretical case for financial capability, and the successful experiences of “early adopters,” this new field began to flourish. Yet the job of building financial security for individuals, households, and communities is just beginning.

Four words or phrases describe the trends and practices that are expanding the field’s scale and impact today: integration, coaching, credit scores, and product innovation.

Integration

Growing numbers of government agencies, nonprofits, and for-profit businesses (especially employers) are embedding financial capability into their core programs and services. At the federal level, the departments of Treasury, Health and Human Services, Education, and Housing and Urban Development have each launched or begun to explore initiatives to integrate a range of financial capability strategies into their agencies’ service delivery programs.

Integration is even farther ahead at the state level. Delaware’s Stand By Me partnership, led by the state and the United Way of Delaware, locates financial empowerment centers within public agencies, nonprofits, employers, and educational institutions (see Rita Landgraf ’s essay in this volume). In Colorado, the Department of Human Services and the Department of Education are planning a two-generation initiative that will embed financial capability services for parents into the state’s early childhood programming (see Reggie Bicha and Keri Batchelder ’s essay in this book).

Cities have gotten into the game as well. In 2006, New York City launched the nation’s first municipal Office of Financial Empowerment to build financial capability among low-income families. Today, 14 major cities compose the Cities for Financial Empowerment Coalition, providing financial capability services to millions of people through innovative one-stop centers and community partnerships. As Greg Fischer , mayor of Louisville, KY (one of the Cities for Financial Empowerment) writes in his essay in this book, “We are developing an integrated, community-wide system… Leaders across multiple departments have embraced the goal of improving the financial stability of the residents we serve by promoting financial access, capability, and asset-building strategies.”

The nonprofit sector also began to blend financial capability into other services: offering assistance with workforce training and education; helping clients gain access to public benefits, tax credits, and financial aid; and offering financial education, counseling, or coaching, along with access to financial products and services. The Working Families Success Network is an example of this integrated approach and has more than 100 sites across the country. Section 2 of this book highlights examples of integration from multiple sectors, such as Skyline College’s on-campus SparkPoint Center, which provides services and resources to help students and community members achieve financial self-sufficiency (see Regina Stanback Stroud ’s essay). The private sector is also beginning to incorporate financial capability strategies into employee benefits, such as Staples’ efforts to leverage financial games and new financial products like “myRA” to increase employee engagement with retirement savings (see Regis Mulot ’s essay in this volume).

Financial coaching

One-on-one financial coaching is growing rapidly, with powerful results (see the essays in this book by Michael Collins , Michael Rubinger , and Rita Landgraf for more information). Such coaching helps consumers set goals, establish a plan of action, and change behaviors. Meeting people where they are, the main idea behind modern financial coaching, empowers participants and allows them to have ownership over their financial choices and behaviors. Unlike a quick class or workshop, coaching is a long-term relationship, helping people to organize and prioritize their financial needs, supporting them, holding them accountable to their self-determined goals, and monitoring those behaviors over time.

For instance, Destiny, a client with The Financial Clinic in New York City, wanted to pay down her substantial debt, and in the longer term, buy a car to help her more easily commute to her job. Through the coaching relationship, Destiny set a realistic budget, identified opportunities to save, and established an income-based repayment plan for her student loan. By the end of her first year in coaching, Destiny had already paid off a quarter of her debt, increased her credit score by 30 points, and saved $3,000, all while sticking to her budget.

Credit scores

A credit score plays a powerful role in determining everything from accessing credit to renting an apartment to securing a job. Not only must the methods of credit scoring today be made transparent, but we should also leverage the power of “big data” to develop alternative methods of creating meaningful scores. Such alternatives could bring tens of millions of “credit invisibles” — consumers without scores — into the credit system. The Credit Builders Alliance (CBA), for example, is helping nonprofit lenders report loan data to credit reporting agencies. In 2014, CBA released a study with Experian that analyzed outcomes for consumers, including credit invisibles, who opened credit products offered by CBA members. Over two years, 58 percent of these borrowers saw their credit score increase, and more than 20 percent moved to a lower risk category (i.e. from subprime to nonprime credit).

Product innovation

The design and distribution of safe, affordable, high-quality financial products and services, ranging from prepaid cards to new methods of credit scoring, are enabling consumers to match products not only to their specific financial needs, but to their desired financial behaviors as well. The FDIC Model Safe Accounts, which bring the underserved consumer into the financial mainstream with safeguards such as the elimination of overdrafts, is one of the most promising trends. In addition, the expansion of employer-based financial education or financial wellness programs and savings products — especially opt-out retirement programs — creates opportunities to reach millions with financial capability products and services. Finally, applying innovations from other sectors — such as leveraging the concept of lottery winnings into prize-linked savings awards as championed by Doorways to Dreams — combine the best in consumer marketing with proven wealth-building approaches.

How Financial Capability Promotes Financial Well-Being

As important as financial capability may be, it is not the end goal. Ultimately, we are aiming to improve the financial situation for families, narrow the gap between rich and poor, and increase the opportunity for all households to be financially well . This notion of “financial well-being” is the most recent advance in understanding how to build financial security and opportunity. It builds on what has been learned while offering a new framework that more accurately and effectively assesses the financial condition of a household.

In early 2015, the CFPB released four criteria to describe financial well-being. The list was developed through an extensive research effort with consumers themselves.

To be financially well, a person:

• Feels in control of his or her day-to-day finances;
• Has the capacity to absorb a financial shock;
• Is on track to meet financial goals, whatever those might be; and
• Has the financial freedom to make choices to enjoy life.

For the first time, we have criteria and a set of metrics to use in charting the road ahead (see Jennifer Tescher and Rachel Schneider ’s essay in this volume for further discussion). Yet we also have the data that show us how far we still have to go. A dwindling set of American households can claim to meet the CFPB’s financial well-being criteria today. More than one-third of households have no emergency savings, and 44 percent do not have sufficient liquid assets to survive for three months in a fiscal emergency.

Additional CFPB research has identified key factors of financial well-being, including social and economic environments; available opportunities; and individual personality, attitudes, knowledge, and skills. All of these can affect consumers’ behavior in the financial realm, and their ultimate satisfaction (or lack thereof) with their financial situations. Some, particularly individual factors, are within a consumer’s control, while others, such as the socioeconomic climate, are not.  The charge for practitioners and policymakers, then, is to help individuals make the most of the agency they do have, and to tailor their services and strategies accordingly. It also highlights where this work, which focuses largely on the individual or the household, intersects with place-based strategies of the community development field (see, for example, the essays in this volume by Angela Glover Blackwell and Paul Weech ). The possibility of building new bridges between these two fields holds great promise.

In the same way that the subject of calculus weaves together many strands of mathematics, the notion of financial well-being combines many of the interventions that we have described in this essay. It starts with high-quality and culturally appropriate financial information. Financial coaches heighten the value and impact of this information by encouraging self-directed goal-setting and personal accountability. Yet individual effort is not, nor should be, enough. The lessons from behavioral economics, marketing, and policymaking affirm that the design of products and services, the delivery structures and platforms, and financial incentives and regulatory protections matter just as much as an individual’s actions in achieving financial well-being. In many ways, financial well-being captures the ultimate outcome that we’ve been seeking when we align people, systems, and policies towards a common goal.

“What It’s Worth”: Advancing Ideas, Sharing Experience and Changing Policy

The field of financial capability is young. But the rapid growth of interest and activity signals that it is addressing a vital need within our economy and society.

This book aims to accomplish three goals:

• Illustrate the realities of the financial problems and challenges faced by American households today (Section 1);
• Capture the enormous creativity and innovation underway in different sectors, institutions, and among policymakers to expand the content and delivery of financial capability to serve different markets and needs (Section 2); and
• Point to next steps in research, policy, and practice across all sectors — public, private, and social — to implement both proven and evolving solutions so we can all live a life of financial well-being.

What It’s Worth reflects a diverse range of voices. Authors include public health professionals, policymakers, college presidents, bank regulators, economists, and nonprofit leaders who all agree that our financial lives matter. Although the authors approach the topic grounded in their unique backgrounds and experiences, each articulates why financial health and well-being matters to them and the work they are trying to achieve.

The book affirms that this is a universal issue that affects all of us, although not in the same ways. It is not an “us” versus “them” topic; we all can understand, sometimes in a deeply personal way, the challenges and opportunities met while striving for a sense of financial well-being. It presents solutions both practical and strategic to ensure that both practitioners and policymakers can work in concert to set people on the path to financial well-being. We look forward to collaborating with you on this journey.

The authors express deep appreciation to Christopher Bernal of CFED for his research assistance.

• Gallup, “ Americans Rely Less on Credit Cards than in Previous Years ” (April 25, 2014).
• CFED, “ Assets and Opportunity Scorecard, Average Credit Card Debt ” (2014).
• U.S. Census, Historical Census of Housing Tables – Homeownership (October 31, 2011); CFED, “ Assets and Opportunity Scorecard, Homeownership Rate ”(2013).
• Sheila Bair, “Foreword.” In The State of Lending in America and Its Impact on U.S. Households , edited by Debbie Bocian et al. (Washington, DC: Center for Responsible Lending, 2012).
• CFED, “ Assets and Opportunity Scorecard, Main Findings ” (2015).
• Michael A. Turner, Patrick Walker, and Katrina Dusek, “ New to Credit from Alternative Data ” (Durham, NC: PERC, March 2009).
• Anne Kim, “ What’s Your Number? Credit Scores and Financial Security ” (Washington, DC: CFED, 2013).
• Federal Deposit Insurance Corporation, “ Community Banking Study ” (Washington, DC: FDIC, December 2012).
• Federal Reserve Bank of St. Louis, “ Payday Loans: Time for Review ,” Inside the Vault (Fall 2014).
• Michael Greenstone and Adam Looney. “ Rising Student Debt Burdens: Factors Behind the Phenomenon .” (Washington, DC: Brookings Institution, the Hamilton Project, July 5, 2013).
• Teresa Ghilarducci, Joelle Saad-Lessler, and Kate Bahn, “ Are U.S. Workers Ready for Retirement? Trends in Plan Sponsorship, Participation, and Preparedness ,” Journal of Pension Benefits (Winter 2015): 25–39.
• CFED, “Downpayments on the American Dream Policy Demonstration (ADD),” Common Progress Report (Spring 2001).
• Federal Deposit Insurance Corporation, FDIC Money Smart Survey of User Organizations , 2003 to 2004 (Washington, DC: FDIC, 2004).
• Michael Sherraden and Ray Boshara, “Learning from Individual Development Accounts,” in Overcoming the Saving Slump: How to Increase the Effectiveness of Financial Education and Saving Programs , edited by Annamaria Lusardi (University of Chicago Press, 2008), 264–283.
• Consumer Financial Protection Bureau, “ Feedback from the Financial Education Field ” (Washington, DC: CFPB, May 2013).
• Josh Sledge, “ From Financial Education to Financial Capability: Opportunities for Innovation ” (Chicago: Center for Financial Services Innovation, March 2010), 5.
• IDEO, “Human-Centered Design Toolkit, 2 nd Edition” (San Francisco: IDEO, July 2011), 18.
• Rachel Black and Elliot Schreur, “Connecting Tax Time to Financial Security” (Washington, DC: New America Foundation, February 2014).
• Richard Thaler and Shlomo Benartzi, “ Behavioral Economics and the Retirement Savings Crisis ,” Capital Ideas (Summer 2013).
• John Beshears et al., “The Importance of Default Options for Retirement Saving Outcomes: Evidence from the United States.” In Social Security Policy in a Changing Environment , edited by Jeffrey Brown, Jeffrey Liebman, and David Wise. (Cambridge, MA: National Bureau of Economic Research, 2009).
• Financial Clinic, “ Annual Report for Fiscal Year 2013 ” (2013).
• Credit Builders Alliance, Analysis of CBA Members: Confirms Value of Credit Building , August 2014.
• Consumer Financial Protection Bureau, “ Financial Well-Being: The Goal of Financial Education ” (January 2015).
• NeighborWorks America, “ One-in-Three U.S. Adults Has No Emergency Savings Despite Improving Economy .” Press release (March 31, 2015).
• CFED, “ Assets and Opportunity Scorecard, Liquid Asset Poverty Rate ” (2011).
• Consumer Financial Protection Bureau, “ Financial Well-Being: What It Means and How to Help ” (2015).

About the Authors

Andrea Levere

Prosperity now (formerly cfed).

Andrea Levere is the President of Prosperity Now (formerly CFED), where she has worked for over two decades building a movement to propel low-income communities out of poverty by building financial capability and assets. She began her career in economic development finance after getting an MBA at the Yale School of Management, and has combined… Read more

Leigh Tivol

Prosperity now.

Leigh Tivol has worked in the field of financial capability since long before it had that name. She has helped low-income families save for the future, battled predatory lending, secured funding for affordable housing, delivered technical assistance to community organizations, served in state government and, since 2006, has been expanding economic opportunity on the staff… Read more

Financial well-being is intrinsically linked to every aspect of a person’s life—and the ability to dream and plan. Explore the factors:

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Protect Your Wealth: The Importance of Financial Security

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Financial security plays a crucial role in preserving and protecting wealth. It may seem unachievable to many, but anyone can be financially secure.

Understanding Financial Security

You have financial security when you have enough money for basic needs such as food, shelter, clothing, living bills, and healthcare. Being financially secure also means having peace of mind because you are debt-free and have money for emergencies. 

There are many benefits to having financial security :

• You have peace of mind and are stress-free knowing that you have money for basic needs and unexpected emergencies. 
• You can confidently handle financial obligations, plan for the future, and maintain independence.
• You can pursue opportunities, explore new career paths, start a business, take time off to travel, or spend time with family without being solely driven by financial constraints.
• You are free from stress-related health issues enabling you to focus on self-care and maintaining a healthy lifestyle. 
• With financial security, you can improve relationships with friends and family. 
• Being financially secured allows you to support loved ones in times of need. 
• Financial security allows you to save and invest for your retirement.

In short, financial security provides a strong foundation for a fulfilling and rewarding life.

Creating a Budget for Financial Security

A budget can help you have full control of your finances. Your goal is to see where the money goes by tracking your finances.  

Master the 50/30/20 rule in budgeting so you can track your spending:

• 50% is for your needs – rent or mortgage , car payment, utilizes, and groceries. 
• 30% is for your wants – streaming services, shopping, vacations
• 20% is for your savings and debts – an emergency fund, retirement, child’s education,  credit card payments

Step 1: Write down your monthly expenses. 

• Fixed bills (rent or mortgage, car payment)
• Variable bills (utilizes, groceries)
• Other expenses (food, gas, entertainment, credit card bills, money for family, unplanned expenses such as medical bills or car repairs. 

Step 2: Write down your take-home income.

Step 3. Subtract your expenses from your take-home income . Your answer should be more than zero. If it is less than zero, it means you are spending more money than you make. 

It is not how much you earn, but how much you spend and save. Keeping track of your budget allows you to find ways to spend less money which could be your monthly savings. 

The most challenging thing about saving is remembering to save. It is easier to save if you have a plan. To start your saving plan, record all your expenses, find ways to cut your spending, and make saving automatic. 

Remember your emergency funds to ensure financial security during job loss, injuries, illnesses, and urgent home repairs. 

Your personal finance is too important to ignore and saving is your foundation to financial stability. 

Debt Management for Financial Security

Reducing debt and paying it off should be a goal for financial security . Your debt-to-income ratio is the relationship of your debt to your income. The lower your debt, the more control you have over your income.

A successful debt management plan entails making timely and regular payments. You can start by paying smaller debts first to eliminate interest rates and the number of monthly payments or deal with the debt with the highest interest to have more money left on your income. 

Avoiding debt and staying financially secure requires discipline, self-control, and long-term planning. More importantly, educate yourself about personal finance .

Responsible financial habits and conscious choices can help you build a solid financial foundation and enjoy a more secure financial future.

Investing for Financial Security

As the saying goes, “Money does not grow on trees,” but money can grow by saving and investing wisely. You can grow your money by working for money (employment or business) and making money work for you (saving and investing). 

A savings account, checking account, and certificates of deposits are safe places to put your money and have access to them anytime. 

The National Credit Union Association or the Federal Deposit Insurance Corporation may insure these products. While your money works for you, it is paid a low wage (interest).

Investing in mutual funds, securities, and other similar investments does not come with federal insurance. While investing comes with a higher risk, the potential to earn more money is higher.

It is wiser to put some of your money in savings and invest some of them. Risk management means spreading your money among various investments. 

Here are some investment products that can build wealth that lasts. 

• Short-term investments
• Savings accounts
• Certificates of deposits
• Money market funds
• Treasury bills
• Long-term investments
• Stock ETFs and mutual funds (stocks, bonds, commodities, and other assets)
• Real estate (or REITs)
• Low-cost index funds

Building wealth entails time and patience. So, if you still need to invest your money, consider your options and make money work for you.

Retirement Planning for Financial Security

Retirement planning ensures you have enough money for expenses during your retirement years. The plan typically entails saving and investing for a retirement nest egg during your working years. 

Most people consider retirement plans with tax breaks and other benefits as good options. Retirement savings may include:

• Traditional IRAs

There are several ways to build a diversified retirement income. You can combine a few of these sources: 

• Guaranteed Income. These are fixed annuities that are unaffected by market volatility. 
• Investments. These can provide income with growth potential. 

It is crucial to start saving as soon as you can to maximize your retirement savings. 

Protecting Your Assets for Financial Security

Wealth protection refers to wealth management strategies that help individuals protect their assets. 

Insurance is an essential component of asset protection and achieving financial security. Insurance options may include:

• Health Insurance
• Life Insurance
• Disability Insurance
• Homeowners/Renters Insurance
• Auto Insurance 
• Long-term care Insurance
• Business Insurance
• Travel Insurance
• Professional Liability Insurance

The specific insurance coverage you need depends on your circumstances, assets, and risk management plan. 

Wealth Preservation for Financial Security

Wealth preservation entails the management of your wealth for asset protection to maintain it until and during retirement. 

Investing in wealth preservation, such as annuities, target-date funds, and real estate, ensures capital does not lose value.

Wealth preservation is crucial for achieving financial security because it helps protect and sustain the financial resources you have accumulated over time.  

Minimizing financial risks and wealth preservation are important aspects of achieving long-term financial security. 

• Diversified investments
• Emergency fund
• Debt management
• Budget review and adjustment
• Continuous education
• Investment portfolio
• Estate planning
• Tax management 

 Building and preserving wealth takes time and discipline. Maintain a disciplined approach to investing and follow your financial plan consistently. 

Managing Risks for Financial Security

Risk management is crucial for achieving financial security . Managing risks helps protect your financial well-being and ensures a stable foundation for your financial goals.

Common financial risks can have a significant impact on financial security and stability. 

• Income loss
• Medical emergencies
• Market volatility
• Debt burden
• Natural disasters
• Identity Theft and Fraud
• Lack of Adequate Insurance

Implementing strategies such as emergency savings, insurance coverage, diversification of investments, and proper financial planning can help protect against these risks and enhance financial security.

Final Thoughts

Financial security is crucial for protecting wealth and achieving long-term financial well-being. It provides stability, safeguards assets, and brings peace of mind. 

By prioritizing financial security , you can enjoy the benefits of flexibility, opportunity, and the ability to build a lasting legacy. 

You can protect and grow your wealth with careful planning , risk management , and a focus on long-term goals. This can ensure a secure financial future for yourself and your loved ones. 

Trust Greater Alliance Federal Credit Union to help you achieve financial security. 

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Financial Literacy: What It Is, and Why It Is So Important To Teach Teens

Education is the key to a successful financial future

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What Is Financial Literacy?

Understanding financial literacy.

• Why It Matters

The Bottom Line

Financial literacy is the ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing.

When you are financially literate, you have the essential foundation for a smart relationship with money. This can help start a lifelong journey of learning about the financial aspects of your life. The earlier you start to become financially literate, the better off you'll be because education is the key to a successful financial future.

Key Takeaways

• The term “financial literacy” refers to understanding a variety of important financial skills and concepts.
• Financially literate people are generally less vulnerable to financial fraud.
• A strong foundation of financial literacy can help support various life goals, such as saving for education or retirement, using debt responsibly, and running a business.
• Key aspects of financial literacy include knowing how to create a budget, plan for retirement, manage debt, and track personal spending.
• Financial literacy can be obtained through reading books, listening to podcasts, subscribing to financial content, or talking to a financial professional.

Investopedia / Paige McLaughlin

Since about 2000, financial products and services have become increasingly widespread throughout society. Whereas earlier generations of U.S. residents may have purchased goods primarily in cash, various credit products are popular today, such as credit and debit cards and electronic transfers. A 2021 survey by the Federal Reserve Bank of San Francisco revealed that 28% of all payments were made via credit card, with only 20% being made in cash.

Given the importance of finance in modern society, a lack of financial literacy can be very damaging to an individual’s long-term financial success.

Pitfalls of Illiteracy

Being financially illiterate can lead to many pitfalls, such as being more likely to accumulate unsustainable debt burdens, either through poor spending decisions or a lack of long-term preparation. This, in turn, can lead to poor credit , bankruptcy, housing foreclosure , and other negative consequences.

Thankfully, there are now more resources than ever for those wishing to educate themselves about financial topics. One such resource is the U.S. government-sponsored Financial Literacy and Education Commission, which offers a range of free learning opportunities.

Financial literacy can help protect individuals from becoming victims of financial fraud, a type of crime that is becoming more commonplace.

Scope of Financial Literacy

Although many skills might fall under the umbrella of financial literacy, popular examples include household budgeting, learning how to manage and pay off debts , and evaluating the tradeoffs between different credit and investment products. These skills often require at least a working knowledge of key financial concepts, such as compound interest and the time value of money.

Financial literacy can cover short- and long-term financial strategies. The strategy you use will depend on several factors, such as your age, investment time horizon, and  risk tolerance . Financial literacy also encompasses knowing how investment decisions made today will impact your tax liabilities in the future.

Financial products such as mortgages, student loans, health insurance, and self-directed investment accounts have grown in importance. It is imperative for individuals to understand how to use them responsibly. It's also important to know which investment vehicles are best to use when saving, whether for a financial goal like buying a home or for retirement.

Other developments in finance such as e-wallets, digital money, and P2P lending can be convenient and cost-effective but require that consumers be educated adequately to use them to their advantage.

Why Financial Literacy Matters

It supports financial well-being.

Day-to-day living expenses, living within your means, short-term borrowing, long-term budget forecasting. To manage these and other essential financial realities properly as you go through life, you must be financially literate.

It is important to plan and save enough to provide adequate income in retirement while avoiding high levels of debt that might result in bankruptcy, defaults, and foreclosures.

In its "Economic Well-Being of U.S. Households in 2022" report, the U.S. Federal Reserve System Board of Governors found that many Americans are not prepared for retirement. Twenty-eight percent indicated that they have no retirement savings, while about 31% of those not yet retired felt that their retirement savings were on track. Among those who have self-directed retirement savings, about 63% admitted to feeling low levels of confidence in making retirement decisions.

Millennials' Challenge

Lack of financial literacy has left millennials—the largest share of the American workforce—unprepared for a severe financial crisis, according to research by the TIAA Institute. Even among those who reported having a high  knowledge of personal finance , only 19% answered questions about fundamental financial concepts correctly.

Forty-three percent reported using expensive alternative financial services, such as  payday loans  and pawnshops. More than half lacked an emergency fund to cover three months’ of expenses, and 37% were financially fragile (defined as unable or unlikely to be able to come up with $2,000 within a month in the event of an emergency).

Millennials also carry large amounts of student loan and mortgage debt. In fact, 44% of them said they have too much debt.

Though these may seem like individual problems, they have a wider effect on the entire population than previously believed. The lack of knowledge of mortgage products prior to the 2008 financial crisis created widespread vulnerability to  predatory lending . The financial impact of that crisis affected the entire economy.

Financial literacy is an issue with broad implications for economic health.

If you are a younger individual, retirement may seem years away. Yet it is one of the best goals to begin saving for. That's because the earlier you start, the longer your invested savings will have to compound and the more money you'll end up with. An employer-sponsored retirement account, such as a 401(k) , can help.

Benefits of Financial Literacy

Broadly speaking, the benefit of financial literacy is that it empowers individuals to make smarter decisions about their finances. In addition:

• Financial literacy can prevent devastating financial mistakes : Floating rate loans may have different interest rates each month, while traditional individual retirement account (IRA) contributions can’t be withdrawn until retirement. For someone unaware of these and other financial facts, seemingly innocent financial decisions may have long-term implications that cost them money or impact life plans. Financial literacy helps individuals avoid making mistakes with their personal finances.
• Financial literacy prepares people for financial emergencies : Topics such as saving or emergency preparedness get individuals ready for uncertain times. Though losing a job or having a major unexpected expense can be financially impactful, an individual can cushion the blow by saving regularly.
• Financial literacy can help individuals reach their goals : By better understanding how to budget and save money, individuals can create plans that define expectations, hold them accountable to their finances, and set a course for achieving important financial goals. Though someone may not be able to afford a dream today, they can create a plan that can help make it happen.
• Financial literacy gives rise to confidence : Imagine having to make a life-changing financial decision without all the necessary information. With knowledge about finances, individuals can approach major life choices with greater confidence. They'll be more likely to achieve the outcome they desire and less likely to be surprised or negatively impacted by unforeseen outcomes.

Strategies to Improve Financial Literacy Skills

Developing financial literacy involves learning and practicing skills related to budgeting, managing, and paying off debts , and more. It means understanding and using credit and investment products wisely. The good news is that, no matter where you are in life and financially, it’s never too late to start practicing good financial habits.

Here are several practical strategies to consider.

Create a Budget

Track how much money you receive each month and how much you spend. You can use an Excel spreadsheet, paper, or a budgeting app . Your budget should include income (paychecks, investments, alimony), fixed expenses (rent/mortgage payments, utilities, loan payments), discretionary spending (nonessentials such as eating out, shopping, and travel), and savings.

Pay Yourself First

To build savings, this reverse budgeting strategy involves choosing a savings goal, such as paying for higher education, deciding how much you want to contribute toward it each month, and setting that amount aside before you divvy up the rest of your expenses.

Pay Bills Promptly

Stay on top of monthly bills, making sure that your payments are always sent to arrive on time. Consider taking advantage of automatic debits from a checking account or bill-pay apps, and sign up for payment reminders (by email, phone, or text).

Get Your Credit Report

Once a year, consumers can request a free credit report from each of the three major credit bureaus —Equifax, Experian, and TransUnion—through the federally created website AnnualCreditReport.com.

Review these reports and dispute any errors by informing the credit bureau of inaccuracies. Because you can get three of them, consider spacing out your requests throughout the year to monitor your credit regularly.

In a 2022 survey by the Federal Reserve, 27% of adults in the U.S. reported not "doing okay" financially. The number who reported not living comfortably increased from 2021.

Check Your Credit Score

A good credit score enables you to obtain the best interest rates on loans and credit cards, among other benefits. Monitor your score via a free credit monitoring service. Or, if you can afford to and want to add an extra layer of protection for your personal information, use a credit monitoring service . In addition, be aware of what can raise or lower your scores, such as credit inquiries and credit utilization ratios.

Manage Debt

Use your budget to stay on top of debt by reducing spending and increasing repayment. Develop a debt reduction plan , such as paying down the loan with the highest interest rate first. If your debt is excessive, contact lenders to renegotiate repayment, consolidate loans , or find a debt counseling program.

Invest in Your Future

If your employer offers a 401(k) retirement savings account, be sure to sign up and contribute the maximum to receive the employer match . Consider opening an IRA and creating a diversified investment portfolio of stocks, fixed income, and commodities. If necessary, seek financial advice from professional advisors to help you determine how much money you will need to retire comfortably and develop strategies to reach your goal.

Example of Financial Literacy

Emma is a high school teacher who tries to inform her students about financial literacy through her curriculum. She educates them on the basics of a variety of financial topics, such as personal budgeting, debt management, saving for college and retirement, insurance, investing, and even tax planning. Emma’s students can and will use these concepts for things like renting an apartment, getting a first job, or even just paying for fun activities such as going to the movies.

Understanding concepts such as credit cards, bank accounts, interest rates, opportunity costs, debt management , compound interest, and budgets, for example, could help her students start saving and manage the student loans that they might rely on to fund their college education. It could keep them from amassing dangerous levels of debt and threatening their credit scores.

Similarly, she expects that certain topics, such as income taxes and retirement planning, will eventually prove useful to all students, no matter what they end up doing after high school.

Why Is Financial Literacy Important?

Financial literacy gives an individual the tools and resources they need to be financially secure throughout their life. The lack of financial literacy can lead to many pitfalls, such as overspending and accumulating unsustainable debt burdens. This, in turn, can lead to poor credit, bankruptcy, housing foreclosure, or other negative consequences.

How Do I Become Financially Literate?

Becoming financially literate involves learning and practicing a variety of skills related to budgeting, managing and paying off debts, and understanding credit and investment products. Basic steps to improve your personal finances include creating a budget, keeping track of expenses, making timely payments, being prudent about saving money, periodically checking your credit report, and investing for your future.

What Are Some Popular Personal Budget Rules?

Two commonly used personal budgeting methods are the 50/20/30 and 70/20/10 rules, and their simplicity is what makes them popular. The first entails dividing your after-tax, take-home pay into three areas: needs (50%), savings (20%), and wants (30%). The 70/20/10 rule also follows a similar blueprint, recommending that your after-tax, take-home income be divided into segments that cater to expenses (70%), savings or reducing debt (20%), and investments and charitable donations (10%).

What Are the Principles of Financial Literacy?

There are five broad principles of financial literacy. Though other models may list different key components, the overarching goal of financial literacy is to teach individuals about earning, spending, saving, borrowing, and protecting their money.

Financial literacy is the knowledge of various aspects of personal finance and the ability to make smart decisions about money.

It includes preparing a budget, knowing how much to save, recognizing favorable loan terms, understanding what impacts credit, and distinguishing different investment options that can be used to save for retirement.

The financial skills that come from financial literacy can help individuals handle their personal finances responsibly which, in turn, can help them protect the well-being of their financial futures.

Federal Reserve Bank of San Francisco. “ 2022 Findings from the Diary of Consumer Payment Choice .” Page 6.

U.S. Department of the Treasury. “ Financial Literacy and Education Commission .”

Board of Governors of the Federal Reserve System. “ Economic Well-Being of U.S. Households in 2022 .” Pages 68, 71.

Bolognesi, Andrea and et al. “ Millennials and Money: Financial Preparedness and Money Management Practices Before COVID-19 .” TIAA Institute Research Dialogue , no. 167, August 2020, pp. 5, 6, 15, 22.

Bolognesi, Andrea and et al. “ Millennials and Money: Financial Preparedness and Money Management Practices Before COVID-19 .” TIAA Institute Research Dialogue , no. 167, August 2020, pp. 13.

Federal Trade Commission. " Free Credit Reports ."

Board of Governors of the Federal Reserve System. “ Economic Well-Being of U.S. Households in 2022 .” Page 5.

MyMoney.gov. " My Money Five ."

• Financial Literacy: What It Is, and Why It Is So Important To Teach Teens 1 of 29
• Financial Goals for Students: How and Why to Set Them 2 of 29
• How To Teach Personal Finance 3 of 29
• How to Learn About Finance 4 of 29
• Principles of Building Wealth 5 of 29
• Finance Terms for Beginners 6 of 29
• Stock Market for Teens 7 of 29
• Investing for Teens: What They Should Know 8 of 29
• Saving vs. Investing: What Teens Should Know 9 of 29
• Talking to Teens About Financial Risk 10 of 29
• Portfolio Management Tips for Young Investors 11 of 29
• What Are Asset Classes? More Than Just Stocks and Bonds 12 of 29
• What Is Stock Trading? 13 of 29
• How to Use the Investopedia Simulator 14 of 29
• Credit Tips for Teens 15 of 29
• Credit Cards vs. Debit Cards: What’s the Difference? 16 of 29
• Banking 101 17 of 29
• Debt: What It Is, How It Works, Types, and Ways to Pay Back 18 of 29
• Financial Technology (Fintech): Its Uses and Impact on Our Lives 19 of 29
• What Is a Mobile Wallet? 20 of 29
• What Teens Need to Know About Cryptocurrency 21 of 29
• Buy Now, Pay Later (BNPL): What It Is, How It Works, Pros and Cons 22 of 29
• Best Ways to Send Money as a Teen 23 of 29
• 10 College Degrees With the Best Starting Salaries 24 of 29
• What Are the 5 Purposes of Budgeting? 25 of 29
• How to Read a Pay Stub 26 of 29
• Teens and Income Taxes: Do They Need to File? 27 of 29
• Renting an Apartment for the First Time: What You Need to Know 28 of 29
• Personal Finance Influencers You Should Know 29 of 29

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My Personal Financial Goals in Life: Financial Freedom

Table of contents, building a strong financial foundation, investing in long-term growth, embracing financial education and literacy, promoting generational wealth and giving back, conclusion: the roadmap to financial fulfillment.

• Gutter, M. S., Garrison, S., & Copur, Z. (2010). Emergency savings: The household financial safety net. Journal of Family and Economic Issues , 31(3), 377-388.
• Bengen, W. P. (1994). Determining withdrawal rates using historical data. Journal of Financial Planning , 7(4), 171-180.
• Lusardi, A., & Mitchell, O. S. (2014). The economic importance of financial literacy: Theory and evidence. Journal of Economic Literature , 52(1), 5-44.

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Financial Security - Essay Example

• Subject: Finance & Accounting
• Type: Essay
• Level: Masters
• Pages: 4 (1000 words)
• Downloads: 0
• Author: sengerwayne

Extract of sample "Financial Security"

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Financial Security Work Experience Essay

Experience with sama, experience with cyber security & data privacy, experience with iso 27001.

In my previous job, I was instructed to monitor security risks and immediately report them. As it is required by Cyber Security Framework Saudi Arabian Monetary Authority, all potential risks were documented. However, in some cases, they could be accepted if they did not contradict the regulations. My duties required me to constantly check for risk identification documents as they provided information on whether a certain risk was accepted or not.

Another one of my duties was the obligation to preserve the confidentiality of customers’ information assets. As I had access to a large amount of data regarding deposits and customers’ accounts, I was also exposed to the personal information of the bank’s clients. Under no circumstance was I allowed to disclose this information. Failure to do so was perceived as a severe violation and could result in fines and further penalties.

I was also contractually obligated to prevent cyber security threats. An important part of the job was done on computers and other devices, which were connected by a network. All-access had to be authorized in order to prevent any unidentified foreign presence. In order to eliminate the risk of virus exposure or data theft, I was required to ensure that every device I used for work was authorized and trustworthy.

Knowing the ISO 27001 standard was essential for safely operating with customers’ accounts and deposits. As such, I have knowledge of such control measures as physical access controls and firewall policies. Subsequently, I am skilled at risk identification since I am aware of the types of possible cyber threats, monitoring procedures, and incident management. As a result, I am fully eligible for ISO 27001 certification if such a need arises.

“Cyber Security Framework Saudi Arabian Monetary Authority.” Saudi Central Bank , Web.

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IvyPanda . "Financial Security Work Experience." January 6, 2023. https://ivypanda.com/essays/financial-security-work-experience/.

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