Achieving financial security involves making a series of decisions about how to use your disposable income. While saving and investing are important, the respective interest rates means paying off debt is usually the most important first step. After this, it makes sense to find the balance of saving and risky investing that suits your need, making sure to keep investments as diverse as possible. Whatever your financial situation, adequate insurance is a vital part of avoiding serious financial problems.
Simply rushing out to save or invest money in order to achieve financial security is counterproductive if you have debt. A simple rule to remember is that every dollar you don't spend should chase the highest interest rate. In other words, you should always put all disposable income towards paying off the debt with the highest interest rate, unless you can get a guaranteed savings return with an even higher rate. For example, putting money into a savings account paying 3% is foolish if you have a credit card debt charged at 16%. There is one important exception to this rule: give priority to secured debts such as mortgages and car financing, because the consequences of falling behind on payments can be more expensive in the long run.
Once you begin saving and investing, risk versus reward is an important part of financial security. If you put all your money into risk-free savings, you will likely get a very low return. Alternatively, if you put all your money into high-risk investments, you might make a fortune, but you could also lose everything. It's best to look for a range of savings or investment routes with varying balances of risk versus reward, always aiming to make sure that even if everything goes badly, you’ll still have enough to survive.
When investing, one of the key tips is diversity: This is the financial equivalent of the saying "Don’t put all your eggs into one basket." The goal is to avoid a situation in which one investment going badly has a disproportionate effect on your finances. Diversity works on multiple levels: investing in different companies, investing in companies from different sectors, investing in different types of asset and so on. A good way to achieve appropriate diversity is to consider what could cause one of your investments to perform badly and then make sure that at least some of your investments would not be hurt by the same factors.
People trying to achieve financial security should take care to be adequately insured. It is certainly true that from a pure statistical view, insurance is a losing bet lopsided in favor of the insurer. That said, the sheer cost of being uninsured or underinsured and then suffering a financial disaster means that skipping insurance is a false economy.
