How To Become Financially Secure

By Cliff D'Arcy
June 6, 2006

Earlier this week, I was checking the share prices on Teletext while explaining to my four-year-old son why investing in the stock market is a wise move.

At this point, he piped up, "Daddy, are we rich?" I thought carefully before replying, "No, son, but Mummy and I are careful with our money, which is nearly as good as being rich!"

Actually, although my wife has always been careful with her money, it took me until I was well into my thirties before I finally got a sensible grip on my personal finances. Here are five lessons which I learnt along the way that created the relative financial security which I enjoy today:

PART ONE: BUILD YOURSELF UP

1. Spend less than you earn

Although this is perhaps the simplest financial lesson to learn -- the Romans said Sumptus Censum Ne Superet ("Let not your spending exceed your income") -- I found it tough to learn this lesson.

Indeed, in this celebrity-obsessed age, where people are fixated by every antic of the "idiot famous", it's so easy to have "Champagne tastes and a beer income". Of course, it's much harder to live below your means by budgeting carefully in order to ensure that there's always something left at the end of each month. However, take it from me, if you don't learn this lesson, it won't matter whether you're on benefits or a David Beckham-sized salary, you will eventually come a cropper!

Learn how to budget and visit our Living Below Your Means discussion board.

2. Be a saver

Naturally, before you become a saver, you need to get rid of any expensive borrowing, apart from your mortgage. You can learn how to do this in How To Master Your Credit Cards and Great Deals For Borrowers.

Once I'd got my spending under control and paid off my debts, I reached for the next rung on the ladder to financial security by beginning to save. If you'd like to be a smarter saver, all you need to do is: save as much as you can, as often as you can, and make sure that you earn the highest after-tax rates of interest on your nest egg. You can learn about tax-free savings accounts, plus other Best Buys for savers, in Your Ultimate Guide To Saving.

Check out the great rates paid by these easy-access savings accounts!

3. Be an investor

After building up my savings until they covered around six months of my expenses, I then set to work building long-term wealth by investing in well-managed companies. I did this by investing in:

• the shares of my employer, which enabled me to take advantage of discounts and tax breaks;
• low-cost index-tracking funds, which are a cheap way to follow a particular stock-market index, such as the FTSE 100;
• index-tracking shares known as Exchange Traded Funds, which behave like index-tracking funds but can be bought and sold in the same way as other shares, making them incredibly cheap and flexible; and
• the shares of individual companies, which I try to buy inside my tax-free ISA shelter, in order to avoid tax on my dividends (the income from shares) and capital gains.

Why the obsession with investing in shares, though? Well, when I qualified as a financial adviser many years ago, I worked with a wise old owl who once told me that if I invested a tenth of my income for my entire working life, I'd become seriously wealthy one day.

PART TWO: DON'T FALL DOWN!

4. Protect yourself and your family

Having climbed the three rungs mentioned above, many people fail to reach for the fourth rung of the financial-security ladder: protecting yourself, your family and your prized possessions. Inevitably, this means buying insurance, yet many people are put off from paying premiums for protection, which they see as "dead money". Trust me: having paid thousands of death and other claims in my insurance career, I can vouch for the fact that insurance is anything but a waste of money!

The trick to buying insurance is to get maximum value-for-money; these articles will help you to do just that:

Life insurance: Oops, You Bought The Wrong Protection and More Buying Blunders To Beware Of

Income protection: Look After Your Greatest Asset

Motor insurance: Get £400 Off Your Car Insurance

Household (buildings and contents) insurance: Don't Renew That Insurance

Travel insurance: Don't Trip Up When You Travel

5. Watch out for scams

Finally, once you've made your pot, don't lose it all (or any part of it!) by falling for one of the hundreds of financial scams which catch out the unwary or plain greedy. Every year, millions of people fall for one scam or another, such as advance-fee frauds, boiler rooms, fake lotteries or pyramid and Ponzi schemes.

Wise up by reading How To Spot A Scam and Ten Ways To Get Ripped Off, and keep your wits about you by remembering this golden rule: any scheme which promises returns of more than, say, 6% a year involves putting your money at risk. If you want to double your money without being ripped off, become a patient investor: eight years or so ought to do it!

More: Use the Fool to compare credit cards, compare mortgages and compare savings accounts.