I've been busy travelling for work and recently was up to Inuvik with by business partner. It's hard to believe we were only an hour from the Arctic Ocean. That will be one of my goals for the next time I am up there – to dip my toe in the Arctic Ocean.
To get to Inuvik, we had to fly from Edmonton to Yellowknife, Yellowknife to Norman Wells and then Norman Wells to Inuvik. With all that flying time, we had a lot of conversations about our business but one of the interesting conversations we had motivated me to write this article about financial security.
What is Financial Security? That was one of the questions we debated. Do we feel financially secure and why? What does financial security mean and where does financial security come from? What does it take to become financially secure and comfortable? Is financial security different than financial independence or financial freedom?
In our discussions, it was evident that financial security comes from different sources. Here are three keys to attaining financial security
The first source of financial security comes from having positive cashflow (as opposed to negative cashflow). Positive cashflow comes when you live within your means and when your income is greater than your expenses. When you have positive cashflow, you can't help but feel more financially secure than someone who lives the opposite – they spend more than they make. When you spend more than you make, you will have financial stress. So clearly, there is a correlation between positive cashflow and financial security.
Related article: Do you know how much you spend?
After 25 years in this business, I have seen some people who make fantastic incomes but spend all of it and more. I've also seen people with modest incomes but manage their expenses well to create positive cashflow. This discussion reminds me of the old saying, “It's not how much money you make, it's what you do with it that makes all the difference.”
The bigger the spread between your after tax income and your outgoing expenses, the more financial security you will have.
Although positive cashflow is important to financial security, it alone, may not be enough. What happens to the person that loses their income all of a sudden because they lost their job or got into an accident or had a heart attack. As important as having positive cashflow is, it's also important to have some assets in case your cashflow changes or stops. I think we can all relate to this: the more assets we have, the more financially secure we will feel. This is where emergency funds can be an important component of providing financial security. As important as emergency funds are, ultimate financial security goes beyond just having 3 to 6 months of income stashed away. The more money you have saved, the better. The more money you have stashed away, the more secure you will feel. This is where having RRSPs, TFSAs and other investments can help to create more financial security.
Related article: Calculating how much you are worth
The last key to financial security is how much you have in debt. I think most people will agree, the less debt you have, the more financially secure you will feel. Even if you have enough income to make debt payments, you still have debt expenses and financial stress comes if something changes with your income. If you have no debt, it may be easier to deal with changes to your income.
I get that debt can be useful and productive. Even in our business, we sometimes use debt to productively to grow our income but in the end, debt creates a payment so less debt means greater financial security.
Related article: How to pay off debt faster?
I've been fortunate over the years to meet many people that have paid off their mortgages and live debt free and they will all tell you they feel more financial security as a result of it. If anyone has debt, they will also be served well to pay off debts which will also positively contribute to greater financial security.
My five cents
At the moment, our business is going very well. We continue to enjoy good income that provides good income security for our families. Despite the fortunes of the business, I think it's still important to use some of that income to build savings through Tax Free Savings Accounts (TFSA) and RRSPs to create more asset security. It's also important for me to have some life insurance in place to make sure my family is financially secure if something happens to me. Overall, I'm feeling pretty good about the state of my financial security.