When we are planning to purchase a product that we are interested in, we often say, how much is that? We are longing for a time when we don’t have to check prices when we are buying a steak or salad. There are many other things that we want to buy, including house and cars. We have plenty of concerns when it comes to our financial conditions. We could be worried that we have overspent last year. As a result, we may not be able to put away the amount of money that we previously plan. We may also don’t have the ability to survive financial crisis for long. In some cases, our families or small businesses may only last a few weeks when confronted with sudden economic pressure. Rather than guessing, we should get out our calculator to work out what our annual expenditures are. We could divide it by twelve, to find out the monthly amount. We should do the same with our annual income and find out how long we would survive without being paid.
Unfortunately, things can be more complicated than that, because many of us can’t figure out our annual expenses. To make things worse, we may also have no savings. In this case, it is possible that we don’t have the ability to manage our money and we precariously live from pay to pay. In general, we have financial problems if we live month to month, have no savings, spend more than we earn, have multiple credit cards and use half of them to pay the other half and depend entirely on debts.
People who have financial stability are able to live within their means and have enough savings to cover at least one year of basic living expenses, including food, education, bills, mortgage, debt payments and others. One year is considered stability, because there’s also the possibility that one family member needs medical treatment during the period and we may have at least three months to find a new job. We can achieve this situation by making sure that our savings can cover twelve months of expenses.
Being financially stable isn’t enough, we should also try to improve our status to financial security. It means that we should we have enough capital invested or savings to cover five to ten years of basic living expenses. In this case, to achieve financial security, we may need enough savings that are equal to the value of our house.
The last level of status is financial independence and it means that we have enough savings that allow us to cover basic expenses for the rest of our lives without ever working again. It should be noted that achieving financial security or financial independence may not be easy to calculate, because we should also consider the rate of inflation and other possible increases of costs. When making our financial plan, we should consider when we should be able to reach these financial statuses.