When it comes to financial security, it’s possible to ask a bewildering range of questions, but they can all be boiled down to inquiring about two big ideas. The first one is asking how to become independently wealthy while the second one is asking, “What does it mean to be financially sound.”
These concepts may look similar, but it’s important to distinguish between them. Asking about how to become independently wealthy is inquiring about how to increase personal income or return from investments while asking what does it mean to be financially sound emphasizes managing money with greater wisdom.
Let’s explore each idea in more detail.
First, let consider how to become independently wealthy.
Here are some habits wealthy people follow:
1. They save, invest and increase their income to live life on their own terms. Since they want to be rich, they devise plans to improve their wealth and to manage their money. If they spend their money as quickly as they earn it, like many celebrities and sports stars, they will eventually have serious problems building long-term wealth.
2. They establish the habit of saving more and spending less. While it is easy for some people to accumulate assets when they have a high monthly income, one of the keys to growing their net worth is to spend less than they earn. Lavish spending habits are the reason professional athletes earning $20 million a year go bankrupt. In contrast, extreme saving habits allow bus drivers to retire as multimillionaires. Wealthy people often consider the simple act of saving to be as important as the next hot stock. They move toward financial independence through long-term thinking. However, while saving is a necessary step in wealth building, investing is the key to getting really rich.
3. They understand that the only real difference between wealthy people and everyone else is that wealthy people rely on the income they generate from their investments and businesses rather than from their jobs. Their goal is to get to the point where their money rather than their labor makes money.
4. They will gladly spend money on hiring professionals who will help them grow their wealth. For instance, they will hire an expensive accountant to understand how to avoid paying taxes on things that could be written off as business expenses.
5. They leverage financial instruments to grow their wealth. For instance, they may use an IRA, Roth IRA, or any other investment vehicle, to build their wealth. In addition, they love to invest in the financial markets, spending hours learning how to trade in the stock market, buy and sell commodities, or investing with the best currency pairs in the FOREX market, like the euro and US dollar, the US dollar and the Japanese yen, and the British pound sterling and the US dollar.
6. They focus on developing passive income streams rather than trading their time for money like many well-paid doctors or lawyers. They understand that it’s more important to do the work once and get paid for it repeatedly through royalties or recurring commissions than to only focus on getting a paycheck.
7. They avoid getting entangled in get-rich-quick schemes because they understand the value of giving their money enough time for growth.
Next, let’s consider the question, “What does it mean to be financially sound?”
Here are some habits people who seek financial security follow:
1. They will set up an emergency fund to park their extra money. If unexpected expenses arise, they can withdraw money from the emergency fund, accumulate credit card debt, withdraw cash from their pension account, or pay a penalty fee to withdraw money. Creating an emergency fund can take away money from other goals, but it provides money for an emergency like a job loss or expensive car repairs.
2. They are frugal with how they spend their money. Financially astute people try to avoid debt. Even if they earn a high income, they will not define their self-worth by the number of houses or cars that they own.
3. They strive to acquire financial stability in several ways. They try to earn enough to cover all their expenses, manage financial emergencies, and pursue future goals. Regardless of age or income, people who strive for financial security try to maintain a good, but not an extravagant, standard of living well into the future. They prefer a lifestyle where money rarely causes unnecessary stress rather than a fast-paced one. While their individual goals may vary, they all make sure that they are on track to achieve their personal financial goals to increase their safety and well-being.
4. They seek calm and peace. The importance of financial security varies for each individual, but they all share a strong interest in acquiring mental tranquility and the feeling that they can cover all their expenses and live a secure and comfortable life even after retirement.
5. They show good judgment when it comes to earning, saving, spending, and investing, and they routinely make good money management decisions, decisions that focus on security, stability, and financial benefits.
6. They focus on financial stability rather than wealth building. They will not only work hard at their jobs to ensure a steady income stream, but they will also spend a great deal of time organizing their finances. For instance, they may start by creating a comprehensive list of their fixed costs, like rent or mortgages and car payments. Then they keep track of their variable costs such as groceries, medical bills, and other income sources that fluctuate. They try to get increasingly more effective at getting their finances in order.
The Bottom Line
It’s important to point out that while there are many parallels between wealthy people and those who are financially comfortable, there are also some key differences. For instance, both groups love to save money, but they do so for different reasons. Wealthy people save to accumulate enough money to invest while those who merely aspire to live a financially sound life save to increase their level of comfort and security.