Security

Security to me means that I am prepared for "hit by a bus" scenario.

I have life insurance to provide for my wife and children. Health, disability, auto and home insurance policies also provide me additional protection in their respective areas. I also have a list of where these policies are, who my agents are, phone numbers and basic policy information (#s, amounts, costs, etc.) I keep this information both in a file at my house and in a safety deposit box at bank (a friends home will also work - think: "house burns down" scenario). Also my wife and my brother and sister-in-law who live nearby also know where these things are.

I also try to maintain an emergency fund of cash in a bank account or money market account (with checks) so that I am prepared for a financial disaster, layoff, or natural disaster. It took several years to build up this cash fund. I started with a goal to have enough cash for 6 months of my normal financial needs (mortgage, food, insurance, transportation, etc.). Now I am trying for 12 months' worth. I do this by saving a little each month, and "investing" a portion of all "found" money (gifts, inheritances, tax returns, anything unexpected).

I have a will and update it each year around New Year's to reflect any changes in my life during past year (new children, new home or business, etc.). Most people don't need an extensive will, forms you buy at your office supply store will do. But in some states if you die without one, watch out. What happens to your money and even your children could be entirely up to some state or court appointed official.

Stability

The next level of personal finance is stability.

Stability to me means that first of all I live within my means. I don't spend more than I earn. Otherwise I am spending my savings, investments, emergency money, or getting into debt. I have a lot of debt, but most of it is real estate which is producing some income. I try to avoid credit card debt and purchase everything with money I already have. I don't buy things expecting that next month I will have more money or I will get a big raise or promotion. You can't sell me a car based on a monthly payment amount; I want to know final price!

In order to make sure that I am living within my means, I created a simple budget and I track my expenses using Simple Joe's Expense Tracker. I can tell how much I have spent in each budget category and I know when to keep a closer eye on certain types of expenses, or when and where I can cut expenses and what I can live without in order to stay within my budget. Counting pennies is pretty tedious, but tracking where dollars go can be eye-opening.

Another aspect of stability is avoiding or eliminating debt. Debt in itself is a form of stability; you always have to make those payments until it is all paid off.

Some recent reports show that average American is $7,000 - $20,000 in debt. Most of it is consumer debt: credit cards, store accounts, rent-to-own, auto loans, etc. And those types of consumer debt usually charge a higher interest rate than any savings account, CD, or money market account; even more than most high-flying risky investments.

This means that $1,000 in debt at 18% is costing you 9 times what your $1,000 savings account at 2% is producing. Consumer debt is a dangerous spiral that is very hard to get out of.

The first problem is, as mentioned before, living within your means. Don't get further into debt to support an extravagant lifestyle. Or even if you are frugal, if you are using credit cards and debt to finance your purchases, you either need to stop purchasing luxury items or find a way to increase your income to support these purchases/payments.

You may even have to lower your standard-of-living because you have racked up considerable debt and need to free up some money to pay it down. But don't wait to start. Those minimum payments are often designed to keep you paying 18% interest for 40 years! That's longer than most home loans. You could even end up paying more than 10 times original cost of item just in interest payments. Is that new stereo really worth that much?

To help people get themselves out of debt we created "Pay Off My Debts" tool in Simple Joe's Money Tools. It is also available as a stand-alone product called Simple Joe's Debt Eraser. These tools help you create a Rapid Debt Reduction Plan which shows you how much to pay on each debt each month in order to save as much on interest charges as possible and pay off your debts as soon as possible.

These tools can help you systematically eliminate your debts whether you owe $1,000 or $100,000. The key is to start living below your means and start focusing on paying off your debt.

It doesn't make much sense to be worried about whether or not your 401k earns 8 or 9% this year, if you are paying 21% on your credit card debt.

A third aspect that starts in stability category and transcends to next personal finance level, growth, is concept of investing in yourself. By this I mean spending time to educate yourself in personal finance matters, as you are doing right now and spending time gaining more knowledge and improving your skills or even developing new ones.

As an employee, this can have a direct relation to who gets laid off during next round of cutbacks. If you have some skills or have demonstrated some abilities that are not possessed by your co-workers and these skills make you a more valuable employee, you are less likely to get pink-slip.

Also while you are making yourself more valuable to your current employer, you are also making yourself worth more to future employers. It is much easier to land a job if you have some special skills that are in high demand or even if you bring some special knowledge or experience that you fellow job-seekers may have overlooked or failed to invest in.

Being in computer industry, I have to spend hours each week reading trade magazines, exploring web sites, and reading emailed newsletters to keep abreast of what is new in my field. If I stopped learning just five years ago, I would have missed out on Internet revolution, email, web sites and majority of income I now enjoy.

All could mean same thing to you: financial catastrophe.

No, you may not have to declare bankruptcy or move back in with your parents, but losing your job could put a big dent in your financial goals and even set you back several years. You may need to live on your savings or liquidate some of your investments.

If you have no savings or investments you may have to rely on credit cards and could rack up significant credit card debt. Then when you find a new job, your expenses may have increased because of additional credit card payments.

And job you eventually find may not pay as much as one you lost. So you are now forced to live on less while your expenses have either continued at same level or even gone up.

Studies show that average worker will have six career changes in his or her lifetime. Not just job changes, but career changes.

So how can you prepare for your own financial "downtime"?

An emergency fund.

An emergency fund is really just savings. But it is not savings for a particular item or even an investment for your future or your retirement. It is your "rainy-day" fund. But unlike insurance where once you pay your premium, money is out of your hands, your emergency fund is yours to keep.

So how much do you need? How can you build your emergency fund? And where should you keep money?

The easiest way to figure out how large your emergency fund should be is to take your current income and multiply it by number of months you could be out of work. If you make $3,000 each month and you want to be prepared for a 6 month "vacation", you will need $18,000.

But obviously saving $18,000 will take some time. How quickly you want to build your emergency fund depends on how concerned you may be about your current and future employment prospects.

Saving $100 each month will take you 180 months or 15 years. Saving more each month means you will be protected sooner. Also consider that during next 15 years your income may increase and your expenses usually rise to match your income.