Financial Terms You Need To Know
By Robert Stitt
Do you ever watch commercials on television and wonder what the people are actually saying? The actors talk about having things like financial independence, financial freedom, and financial security. It sure sounds good, but what do these terms actually mean?
Financial Independence/Financial Freedom. The terms “financial freedom” and “financial independence” are really the same thing. It’s like talking about your couch, sofa, davenport, divan, settee, or chesterfield; the fancy words may make your language sound rich, but, in the end, you’re still just talking about a couch. In finance, freedom and independence are words that refer to a situation in which monies coming in are greater than monies going out. Often, there is an element of multiple income streams as well. This way, if one stream dries up, the money will still keep coming in.
Contrary to popular belief, financial freedom or independence is not tied to “things”. In fact, those with glamorous lives may not have financial freedom at all. Many times they are leveraged to the hilt and burdened with immense debt. Other times, people with fancy homes and cars spend every waking moment at work so they can appear to be free, but, in reality, they are enslaved by their things.
Financial Security. Financial security goes beyond the current time period and looks to the future. This is the term that balances out financial independence and financial freedom. To be financially secure, you need to be financially free and be able to stay that way. Thus, financial security is the term that brings many professional athletes, musicians, and other stars to their knees in bankruptcy court. They had the appearance of financial independence, but, in reality, they were living beyond their long-term means. In order to be financially secure, a person needs to have multiple non-interruptible income streams or substantial savings that can cover expenses if a primary income source is halted.
Financial Responsibility. Financial responsibility is the act of making sound financial decisions. It has nothing to do with the amount of money you make or have saved. It has everything to do with how you react to your circumstances. There’s nothing wrong with driving a new Mercedes – if you can afford it. Experts say that all expenses related to your transportation needs should amount to less than 15 percent of your monthly income. If a new Mercedes fits into this profile, buy away. However, if it doesn’t, then the purchase is not financially responsible.
Financial responsibility is the cornerstone that creates financial freedom and, ultimately, financial security. Sadly, it is not a magic pill or a secret switch. It’s not even a golden lottery ticket. Time magazine, Forbes, and many other publications have run story after story about the 70+ percent of lottery winners who end up bankrupt within seven years. Circumstances don’t make you financially responsible; financial responsibility needs to control your circumstances.
Next time you are watching television and an actor talks about one of these terms and offers you a secret path to success, you will know that the real secret is responsible spending and savings.