There’s a reason why fairy tales are told to children. We all love a happy ending. The prince marries the princess, the toad becomes a real person and the arch enemy becomes a friend. These stories give children hope and optimism for positive outcomes. But as adults, we realize that the outcomes of these stories don’t always match reality.
But is financial security a fairy tale? Or is financial security a true possibility? At USAA, we believe that it is. And we believe in it so much that we made empowering our members to achieve financial security part of our mission.
Financial security means being on track to meet your current needs and future goals while also being prepared for unexpected life events and emergencies. Financial security is key to life satisfaction and mental well-being.
It’s important to realize that financial security affects many aspects of your life, from your health to your career. Numerous studies have illustrated the impact of financial security, but here we’ll focus on two major ways it could affect your life, plus tips to help you gain solid financial footing.
Lack of financial security causes stress.
According to a study by the U.S. Department of Veterans Affairs, 13% of recently separated veterans have experienced financial troubles leading to higher levels of stress during their transition to civilian life. a
But it’s not just veterans and service members who are affected by financial anxiety. Many people experience high levels of anxiety and stress when it comes to making ends meet on their income while trying to pay off debt, build up their savings and achieve their financial goals.
According to a 2021 study by the Financial Industry Regulatory Authority, in the general U.S. population the “…lack of assets, high debt and money management challenges are major contributing factors to high levels of financial anxiety and stress." b
a. Eric B Elbogen, Ph.D., Empowering Veterans to Take Charge of Their Financial Health, National Veterans Financial Resource Center (FINVET), Department of Veteran Affairs
Lack of financial security affects mental well-being.
Financial insecurity doesn’t just cause stress and anxiety. It can also have a devastating impact on mental health. The VA report also shows that 23% of active-duty U.S. soldiers reported having “financial problems” in the 24 hours preceding a suicide attempt. In the general population, adults with unsecured debt are 5.8 times more likely to attempt suicide and 7.9 times more likely to die by suicide compared to those without unsecured debt.
It's clear that a lack of financial security affects a person’s life, with stress, anxiety and a decline in mental well-being all possible side effects of financial problems.
Principles of personal finance.
While financial security can be measured in thousands of different ways, USAA believes in following core financial principles that help put you on (or back on) the road to financial security.
Spend less than you earn.
When you spend more than you earn, you either go into debt or reduce savings. Even if you have savings, spending more than you earn over a long period of time will eat away at your money until it eventually runs out, leading to debt. Take control of your spending by creating and sticking to a budget or spending plan. Use our free and easy online budgeting tool to help you create a plan that fits your lifestyle.
Protect your life, loved ones and possessions.
While we can plan for the future and manage our assets wisely in the present, we must also prepare for those things that we can’t see coming. For example, a death in the family or a major disaster can cause financial devastation.
Protect your life.
If a loved one might struggle financially when you die, one way to protect your family’s financial security is through life insurance.
For military members, Servicemembers’ Group Life Insurance is a great benefit. But it often isn’t enough and you can’t carry it with you when you leave military service behind.
Protecting your health, including your mental health, is an important part of your overall financial well-being. Did you know that medical bills are one of the leading causes of bankruptcy in the U.S.? If you’ve been to the doctor or pharmacy lately, you can attest to the expensive nature of health care. Take care of yourself and your loved ones with healthy life choices and proper health insurance.
Another critical component of protecting your life is guarding against identify theft and fraud. Criminals are out there and if we let our guard down, they will take advantage of us. Follow smart practices like using two-factor authentication, shredding documents, not clicking on suspicious links and other safe online habits.
You can learn more about identifying and avoiding scams. If you do suspect fraud, it’s important to report it quickly.
Protect your loved ones.
Your financial decisions also protect your loved ones and their financial well-being. Here are a few ways you can protect your loved ones:
- Think about protecting their life with spousal and child life insurance.
- Monitor credit and safeguard against identity theft.
- Guard against elder abuse.
- Protect income through disability insurance.
Protect your possessions.
Disasters like house fires or bad storms can be financially devasting. Reduce your risk through appropriate insurance. Consider the following as staples of your protection strategy:
Another way to protect your possessions is through risk-reducing actions:
- Check fire alarms and make sure you have adequate fire extinguishers, as well as other fire protection measures.
- Install a home security system.
- Reduce your risk of wildfire damage. Keep trees, shrubbery and mulch from direct contact with your house and create a space around your home that is free of flammable materials and vegetation.
- Install window and door protection like impact-rated hurricane shutters and bracing for garage doors.
While these are great actions to take, let’s be honest: You can’t prevent a natural disaster. Just ask those who have been impacted by recent hurricanes and wildfires. But you can take steps to prepare for and hopefully limit the impact. Not sure if you and your home are ready? USAA can help you make a plan before the storm and rebuild your life after it with tips and planning tools.
It’s also important to make sure you have appropriate insurance to protect from any type of risk that your homeowner's insurance might not cover, like flood insurance. A flood isn’t covered through a normal homeowner’s policy, so you need to insurance for that risk separately.
Use debt responsibly.
Some types of debt can be necessary, like a mortgage. But high-interest debt can be a burden, hampering cash flow and reducing your ability to achieve financial goals. The best way to get control of your debt is to stop adding to it, and then create a plan to pay it down.
Generally, it’s recommended that you pay the debt with the highest interest rate first and then move to the debt with the next highest rate. But if you think you’ll be more successful by paying off the lowest balance first, do that. The best course of action is the one that gets you out of debt.
Take time today to review your spending to find ways to reduce expenses, freeing up money to accelerate debt payments. You can’t imagine the weight that is lifted off your shoulders when you are no longer burdened by debt. To get out of debt faster, you could also consider a balance transfer.
Keep enough for emergencies.
USAA believes in setting aside at least three to six months’ worth of basic monthly living expenses to help cover the unexpected, like home or car repairs, insurance deductibles or bills if you lose your job. But don’t get overwhelmed if that number seems too high or unachievable. Setting smaller milestones or goals along the way can help you stay motivated to save.
The exact amount you need may vary based on factors such as job security, family dynamics and insurance deductibles. If you have special circumstances in your employment (like if you’re self-employed or in a highly specialized role, which can make it harder to find a similar role), consider saving six to 12 months of living expenses.
One of the best places to store your emergency funds is in a dedicated savings account.
Save now for retirement and have guaranteed lifetime income.
Retirement is probably the largest, longest savings goal you’ll ever have. But saving for retirement is only half the battle. Once you retire, it’s just as important to be sure you have a spending and income plan that helps your money last for the rest of your lifetime.
The key to saving for retirement is to start early, start small and stay committed. Even if you can’t fully fund an IRA or fully capture your company’s 401(k) match, saving a little is better than nothing. It might not seem like much now, but it can really pay off to start saving for retirement early.
If you’re already in the “using my money in retirement” stage, one concern can be running out of money. You can't foresee every future expense, but you'll fare better if you have a retirement income strategy with potential solutions.
Make a plan, review it annually and update with major events.
At its most basic form, a financial plan is simply an outlined strategy for how you’ll reach your financial goals. It can be as simple or as complex as you want or need it to be. Your financial plan involves your spending plan, insurance considerations, debt management and retirement planning.
Review your plan annually or when major life events occur, like having a baby, getting married or divorced, or changing jobs. These milestones often come with changes in income or living expenses, which might require an adjustment to your plan.
Have a will, beneficiary designations and other legal documents.
Most people's estate planning goals come down to two things: They want their belongings to be distributed according to their wishes, and they want that to happen with minimal expenses and taxation, both while they're alive and after they die.
A will allows you to distribute your assets and property according to your wishes when you die. If you don’t have a will or it’s been a while since yours was updated, you can make one through Trust & Will. Military members and military retirees can go to their local Judge Advocate to establish or update their will.
But a will is only one part of your estate plan because items like the TSP, 401(k), IRAs or life insurance don’t pass via your will; they have beneficiary designations. Make sure your beneficiary designations accurately reflect who you want to receive your policy or account.
Other important legal documents to include in your estate plan can include a living will, a durable power of attorney and a letter of instruction. There are several types of powers of attorney, and they can be very important for members of the military and their families.
These seven core financial principles are the foundation of your path to financial security. And while there are many other decisions or topics that might need to be addressed or discussed, most (if not all) of them will fall into one of these seven principles. Here are a few examples:
- Need to set up a special needs trust for a disabled child? This would be part of the “make a plan” and “have a will” financial principles. You are planning for the care of your child and doing so with a legal document.
- Thinking about annuitizing TSP funds? That falls under “have guaranteed lifetime income.”
- Choosing to cook at home versus eating out for the third time this week? For many people, this can be a way to “spend less than you earn.”
Which areas of your financial foundation need focus? The USAA Advice Center is here to help you learn how to turn your financial security fairy tale into your reality.