Financial Security

Financial Security is a buzzword used around a lot by personal finance industry. Let us go beyond the cliché and try to understand it better.
Financial Security is our comfort with current financial situation and confidence that it will continue to last into the future. It is still vague as this comfort is generated at different levels for different individuals.
Generated by combination of following there elements:
1. Net-worth
2. Liquidity
3. Solvency

Net-worth:
Net-worth is the first measure of material wealth that one possesses. It is simply what s/he owns. It is your equity in what you own after reducing the outstanding loans. You are said to have more wealth even if you have lesser assets and no debt when compared with someone with a big house and a shiny car bought with mortgages, loans and other debt.

Liquidity:
Liquidity is another, very important measure of wealth. It is often poorly understood and overlooked. It is a measure of ability to come up with cash quickly (with in a few days). Two individuals with similar net-worth may be very different when measured for liquidity. It can also be generated with ability to borrow or available credit. Someone with $200,000 equity in a million dollar house may have very poor liquidity, whereas same equity in a $600,000 property may be very liquid and easy to access.

Solvency:
Long-term solvency is most poorly understood part of the personal financial security by both the customers and may members of the financial industry. It is a measure of an individual’s ability to meet his day to day financial obligations on an ongoing basis. These obligations are the interest, debt repayment and living expenses to keep up the current lifestyle. One should be able to service these from an ongoing source of income like a job, business or income investments.

An optimal combination of the above three attributes of our finances will determine our financial security. It also helps to take better decisions and allocate our finite dollars at the right place, measuring its impact on the above listed areas.