Let’s face it; many people would love to be rich. Few people wouldn’t want to jet set around the world traveling, attend the most coveted premieres, drive their dream cars, lavish gifts upon their love ones, etc. However, there is limited value in even thinking about riches until you can become and stay financially solvent. Solvency isn’t about income. No matter whether you make $40,000 a year or $400,000 a year, you can still be broke. Solvency is simply your ability to meet your entire financial obligations with some money to spare. It is the degree to which your current assets exceed your current liabilities.
Solvency exists on a continuum. For example, some define their ability to meet obligations as being able to afford their credit cards, student loans, and car payments. Nonetheless, these people are generally a lot less solvent than someone who is debt-free, has a sizable emergency fund, is consistently investing, and can afford some fun. These two extremes differ profoundly but the financial vulnerability of the former scenario may only become evident during a time of financial adversity. While a great starting point, having just enough to pay ones bills today typically doesn’t provide enough of a buffer during financial crisis. As nearly 61% live from paycheck to paycheck, lack of solvency has placed many in a very risky position. If you haven’t structured your finances to decrease your economic exposure, your solvency may be very fleeting! It is imperative to build long-term financial solvency, so let’s discuss why.
1) Job Security is an Illusion
No amount of experience, natural talent, or education can guarantee that you will have a job tomorrow. Thus, your only job security is your ability to get another job. It is critical to recognize the precarious position insolvent wage-earners are in. Any employee is constantly interviewing for his or her job: every single day! Use this as a motivator to make wise but sometimes painful financial decisions. It’s not about fairness, or even initial comfort, as much as it is doing what’s necessary to put your family in the best financial position. This may mean delaying or even foregoing some fun on occasion, especially while becoming solvent. For example, if the only way you can have such fun is by counting on money that you have yet to earn, then perhaps the purchases are beyond your budget at this point. Remember, future paychecks are not promised, and believing otherwise is typically evidence of denial.
2) Life Happens
Regardless of whether it is right or wrong, an uncomfortable reality is that money influences many of life’s decisions. It affects things such as whether we choose to work a job or start a business, where we live, how much we invest, and sometimes even who we marry. Additionally, the one thing that we can count on in life is change. I recall a situation where a seemingly insignificant clerical error caused six consecutive paychecks to be missed over a three month period. Being solvent in that situation made the difference between going into debt and thriving. Also, while I was paying off my debts years ago, my neighborhood HOA decided that it was time to replace the roofs. Although I had no problems with my property, we all had to fork over a sizable chunk of money unexpectedly. Although I was displeased, especially with the timing, I wrote the check and moved on.
Regardless of whether you want to have children, go back to school, or capitalize on unique business opportunities, you don’t necessarily have to derail your finances because of transient nature of life. Having long-term solvency decreases your financial risks because you have more resources available to you. Thus, when life happens, you’ll be ready.
3) Solvency is the First Step Towards Independence
The Rat Race refers to a pattern of behavior where we work for a living but barely make any progress financially. It’s actually a misnomer because even rats have more sense than to stay in this ridiculous model. There’s nothing wrong with having a job, but depending solely on a job for your financial provision is a very risky proposition (see Job Security Is an Illusion above). Do you long to break free from your golden (or copper) handcuffs? Then, consider that long–term solvency lays a necessary foundation to pursue independence. Financial solvency combined with consistent investing and/or running a profitable business places one in an enviable economic position where he is no longer dependant on earned income (from a single employer) for his financial provision. In short, solvency can be an invaluable foundation to your wealth plan. Embrace it!
4) Solvency is Honorable
Financial solvency can be a reflection of your sense of responsibility. True financial responsibility means you can afford to pay all of your bills in timely manner. I mention this not to place those who face hardship under condemnation. However, it is evident that some people never truly take ownership of their finances and how their decisions affect their finances. Some have incomes adequate to meet their financial obligations and invest for the future yet instead choose to spend it irresponsibly. Have you ever met someone who wears brand new tennis shoes but can not afford food or those who take vacations but cannot afford clothes and school supplies for their children? Unfortunately, financial education is often not taught, and sometimes we just prioritize badly. Nonetheless, there is real honor in financial solvency, as it indicates that maintaining your good name by respecting your commitments transcends all the other things that you could be spending your money on. Making strides towards achieving solvency reflects maturity that goes well-beyond the financial sphere.
Thus, the next time you dream a little about your financial future consider dreaming of being solvent. If you have a reasonable income and expenses, not only is solvency totally achievable, but you will likely become solvent before you become rich anyway.
Pursue solvency today, and you’ll be in a better position tomorrow 🙂
About the Author: I’m Roshawn Watson, and I write at Watson Inc on eliminating debt, investing money, and building wealth. Get my free eBook Your Foundation to Wealth by signing up for my email updates (no spam I promise). Get my RSS feed and connect with me on Twitter @roshawnwatson too.