What is financial security assurance and how do you do it?
Before we talk about financial security assurance, we first need to define what we mean. Of all the definitions we’ve found, the best is that from the Canadian Department of Human Resources and Social Development, which defines financial security as the ability to achieve material well being through an income sufficient to cover basic necessities (housing, food and clothing) and comforts of a family or individual.
From the preceding definition we can thus say that your financial security depends on generating a constant income day after day, month after month, etc.
But, is it possible to generate a constant, uninterrupted income? This depends on what type of income you perceive. According to the book “The Cash Flow Quadrant” by Robert Kiyosaki, income can be one of the following types:
- Earned Income. This could be your wages in a job, or fees which you receive as a self-employed independent worker.
- Passive Income. This is an income you receive from a property or investment which you own (a business, real estate, stock, bonds, etc.)
How the type of income you receive affects financial security assurance
If financial security means to cover your basic needs and comforts, then you need to manage and increase your earnings. However, if you having only one kind of income can be risky and fall short of financial security.
For example, if you only receive earnings through wages you do not have a high degree of security because:
- Your job, salary and advancement is decided by others
- Your job also depends on how well run is the company which employs you
- Your job further depends on economic conditions being favorable for the company where you work and difficult times could result in reorganization or reduction of personnel, or, in other words, jobs lost.
In my working life I’ve lived through two reorganizations which I was fortunate to survive. Yet, seeing several friends leaving I realized how vulnerable we all are as employees because we cannot manage, control or decide about the factors on which our jobs depend.
Being self-employed does provide certain advantages because you are independent and create your own job, yet your security is limited because your income is subject to your own efforts. That is to say, if you stop working (perhaps due to some illness) your income also stops.
So, what is the solution for financial security assurance?
In simple terms, have both earned and passive incomes. In this way you can have the certainty that if one of your earning sources has difficulty, you have another source of income to cover your needs.
To generate passive earnings, it is necessary that you educate yourself about how to start a business, invest, etc. We’ll discuss these further on.
For now, it is enough that you have an idea of that is best for you at this time. Financial security assurance? Quite possibly, but before we get into that, we need to understand what financial freedom is.
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