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According to the Financial Security Index from Bankrate, October 2015 marked the lowest point for consumers – at least this is true for the past 12 months. The website monitors this index and releases their findings once a month. In October, the measurement is 101.1. Although this is the lowest since October 2014, it is still considered to be high enough to show that American consumers feel strongly about their finances. In fact, when asked about how they felt about their overall financial situation, 26% said that it was better than last year. 53% said that it was about the same while 20% said that it was worse.
There are many signs of financial security. It is not enough that we achieve financial independence. The latter refers to being in a financial position wherein you are not required to work in order for you to have the money to pay for your basic needs (and even beyond that). Being financially secure takes more than just being financially independent.
You can only say that you are secure when you know that even your future self will be financially stable too. It is not just your present that is stable. Even the future is already set. Even if something happens today, you know that it is not the end for you or your family. The future will still be financially taken cared of – at least even for a specific period.
The challenge here, of course, is how can you secure your financial standing? What are the signs that will tell you that you have achieved a certain level of financial security?
Believe it or not, some people think that being financially secure means being in debt.
Debt means you are financially secure – under the right circumstances
In a study done by PewTrusts.org, it is revealed that debt can be considered a measurement of a consumer’s financial security. At least, this is true for some ages.
According to the study, younger generations – or at least those who are high-income earners, feel secure when they have debt. It is revealed that those with higher-income and net worth can afford to take on more debt. So the more resources that you have, the more access to sustainable credit forms is given to you (e.g. prime mortgage loans).
The revelations in this study is actually a bit more complex than that, but we can make two assumptions from it.
You can only take on debt when you feel confident about your finances.
First of all, you will only borrow money if you know that you are capable of paying it back. In case your income is low or you are on the edge of retirement, you know that you cannot afford to be in debt. This is especially true when it is a high interest type of debt. You need to make sure that you can pay something back. You may not have the cash on hand but if you are sure that your job is stable enough to give you the finances to pay for the debt, then you will feel confident in borrowing money. That means you are in a good financial position.
Some people may argue that people are driven to borrow money when they are in a financial crisis. For instance, you will opt to buy basic necessities with your credit card if you do not have the cash to buy it. While this is a possible scenario, not everyone will attempt to do this unless their backs are really against the wall. Most people would rather cut back on spending. Logic will dictate that you should not borrow money if you know that you cannot pay it back. Otherwise, you will only add more fuel to the fire pit that is your debt.
You will be approved of debt when the creditor or lender think that you are financially capable of paying it back.
Another assumption that we can make that proves people in debt have financial security is that the creditors and lenders are confident enough to allow them to borrow money. One of the requirements is the ability to pay back the loan. If the borrower does not have a job that looks stable enough to sustain loan payments, the creditor or lender will not approve of the loan.
Of course, these two assumptions do not apply for everyone. There are those who borrow money because they are not financially secure. Some people still use credit (through their credit cards) when they do not have money. However, if you will follow the logic, you will realize that people who borrow money are those who can afford to pay for it and are deemed to be financially capable in making payments.
The theory that those who have financial security is in debt is further supported by a separate study by Gallup.com. According to the joint efforts of Wells Fargo and Gallup to produce the Investor and Retirement Optimism Index, three out of four investors are currently in debt. Now the study defines investors as people who have invested at least $10,000 in stocks, bonds or mutual funds. The study further reveals that this is 44% of American adults – at least during the time of the survey last August 2015.
The investors owe debt on their mortgage (53%), credit cards (37%), car loan (35%), student loans (23%) and other debts (12%). The rate of the investors in debt are higher for those who are non-retirees – strengthening the results of Pew Trusts that tells us how those who are working are more prone to borrow money. 83% of non-retirees have at least one debt while only 53% of retirees are in debt.
Debt can still threaten the security of your finances
These two studies, apparently, prove to us that being in debt can actually signify that you have financial security. However, you should not generalize it. You should never forget that debt still has the power to ruin you – if you react to it differently.
Although you may be financially secure, you still have to borrow money wisely. Do not borrow just for the sake of having that extra cash. Your debt should be a tool to help you improve your financial position.
Here are three instances where debt can destroy your financial security.
If you fail to pay it back.
Obviously, failing to pay back the debt is the one thing that will lead to the destruction of your finances. When you borrow money, make sure that you study your finances well to guarantee that you can afford to pay it back. If not, you should just keep yourself from borrowing money in the first place.
If you let it accumulate.
Another situation wherein your debt will lead to the destruction of your financial security is when you let it accumulate. Avoid borrowing when you still have a hefty balance to pay back. Sometimes, having too much debt can be confusing. You might miss out on some payments and that can lead to you waste money on late penalty fees.
If you use it irresponsibly.
The last debt scenario that can lead to the destruction of your finances is when you use debt irresponsibly. Do not if you do not need it. Make sure all borrowing is planned – even those that are done through your credit card. If you want to keep on using your card, make sure you practice responsible credit card use. Include it in your budget so that you know the limitations of your purchase. This will also help you pay back what you spent through your card because it is included in your budget. You can pay it in full so you avoid the finance charges.
In most cases, people justify being in debt because they feel like they need to keep their credit scores up. While you have to be in debt to have a good score, you have to remember that it is not the amount that you owe that will keep it up. It is your behavior towards debt that will keep your credit history in good condition. Here is a video from National Debt Relief that explains when it is logical to let your credit score take a hit.
