Content of the material
- What Does It Mean to Be Financially Stable?
- 13. Get Out – and Stay Out – of Debt
- 2. You Dont Lose Sleep Over Finances
- 3. Dont Borrow to Finance a Lifestyle
- 10. Diversify Your Investments
- 4. You Dont Worry About Losing Your Job
- Bottom Line
- Step 4: Live debt free as often as possible
- Understanding the Concept of Financial Stability
- 3. Set saving and expense budgets
- Examine Your Spending Closely
- Why Is Financial Security Important?
- Step 2: Create a comprehensive budget
- Watch our webinar on-demand to avoid these top 5 money mistakes
- 5. Set emergency fund
- 8. Take Calculated Risks
- Signs You Might Be Financially Unstable
- Final Thoughts
- Share this post:
What Does It Mean to Be Financially Stable?
When you are financially stable, you feel confident with your financial situation. You don’t worry about paying your bills because you know you will have the funds. You are debt free, you have money saved for your future goals and you also have enough saved to cover emergencies. Financial stability isn’t about being rich. In fact, it isn’t a number at all. It’s more of a mindset. When you have financial stability, you don’t have to stress about money and you can focus your energy on other parts of your life.
This may sound like a dream, but financial stability is something you can achieve. It will take some time and you will need to put in the work. If you follow the 10 steps below, though, you’ll be well on your way to reaching your financial dreams.
13. Get Out – and Stay Out – of Debt
It’s hard to make a case for being financially independent when you owe money to banks or other people. You should have a goal of getting out of debt as soon as possible.
You can have different time horizons for getting out of debt with each debt category.
For example, you can commit to eliminating your credit card debt in five years, while eliminating your student loan debt in 10 years, and your mortgage in 15 years.
That’s not an overnight solution to your current debt problems, but it sets you to heading in the right direction.
And once you get out of debt in any category, stay out and never come back! There’s no such thing as “good debt” when you’re trying to achieve financial independence.
2. You Dont Lose Sleep Over Finances
When you go to sleep at night, you tend to sleep deeply and peacefully. And if anything does keep you awake, it’s usually not related to financial matters.
This is a non-financial benefit that people who are financially stable have as a result of their strong financial position. This isn’t to say that you don’t have any money worries at all, but rather that they are not significant, and never without some sort of reasonable solution.
3. Dont Borrow to Finance a Lifestyle
Borrowed money should be used when your gain will outrun your borrowing costs. This might mean investing in yourself—for your education, to start a business, or to buy a house. In these cases, borrowing can provide the leverage you need to reach your financial goals faster.
On the other hand, using credit for a lifestyle you can’t afford is a losing proposition when it comes to building wealth. And the added interest expense of borrowing further increases the cost of the lifestyle.
10. Diversify Your Investments
This gets back to not knowing what the markets will do in the future. The best way to protect yourself against unexpected surprises is to diversify your investments across several different asset classes.
Big picture, you should have a certain amount of money invested stocks, fixed income investments, peer to peer lending, cash, natural resources, and real estate. That will keep you from taking a big hit in the event any of those sectors crashes, while at the same time taking advantage of strong markets wherever they may be.
Also, don’t get crazy with your investments. Stick with index funds for stocks, since they have lower investment fees and don’t generate a whole lot of capital gains taxes. Keep your real estate investments in real estate investment trusts (REITs), which are actually something like real estate portfolios themselves.
4. You Dont Worry About Losing Your Job
This is one of the very best indicators that you are financially stable. It’s a sad state of affairs that the vast majority of people in the US live from paycheck to paycheck. The thought of losing their job, even for a month or two, would be a financial disaster.
Since your finances are in balance, losing your job isn’t something that you worry about, at least not the potential for ruining your finances.
Financial stability is the freedom to live life on your terms without worrying about how you’ll pay your next bill. This seems like an unreachable dream for many people but it is very much within your reach. Follow the 10 steps above and you will put yourself on the path to financial security.
Step 4: Live debt free as often as possible
Paying the minimum credit card balance on time every month isn’t a sign of financial stability. It’s actually quite the opposite.If you’re carrying over a balance each month, you’re paying accrued interest on that balance. Essentially that means your debt goes up exponentially every single day. Which means the progress you’ve been making from the previous three steps is slipping away because of your debt.While it’s true that there are times using credit accounts has its advantage, for the most part it’s dangerous. One of the most common and worst mistakes I’ve seen repeated over and over again is using credit cards to pay for everyday necessities even when cash (or debit) is available.
Leave the plastic at home. Avoid using credit when you can pay in cash. And limit your credit use if you are struggling to pay the full balance at the end of the month.I’m not saying to avoid using credit cards entirely. In fact, credit cards are a good way of building a credit history and your credit score if you use them correctly. Unfortunately, most households don’t use them correctly. When you start adopting poor habits with the use of credit cards or other forms of debt, it can become extremely detrimental to your financial life. A good general rule of thumb is to only buy something if you can afford to pay cash for it within thirty days.
If you currently have debt that you’re looking to pay off and get rid of, I’d recommend using Savvy’s debt payoff planner to effectively manage and eliminate your debt.
Understanding the Concept of Financial Stability
When your income and your expenses are never the same, it can cause some serious stress. In fact, feeling worried about your financial situation can take a serious toll on your confidence and your mental health.
Worrying about how to pay that next bill can create a sense of panic and constant duress. When you're financially stable, you can start to focus your attention on other things that matter like family and home.
Even if becoming completely debt-free seems out of reach, there are some things you can do now to become more proactive about your financial health. When you take these small steps, it becomes much easier to reach your goals at a faster rate.
When you actually do achieve financial stability, you'll notice your stress levels start to dop. Your confidence will increase and you'll be free to enjoy things more openly without worrying about money and costs.
So, how do you actually get there and what can you do to reach your goals? Let's dive into some suggestions to help move you closer toward being completely financially sound.
3. Set saving and expense budgets
Recording your expenses regularly is necessary. This is to monitor your spending pattern and use it for further financial planning. For the basic cost of living such as housing, utilities, food, and transportation, this should to be controlled to not over 50% of monthly income. Saving and emergency budgets should be set at least around 10-20% a month. Lastly, other expenses should be less than 30% of income.
Examine Your Spending Closely
One of the most crucial parts of real financial stability is having awareness about the money you spend. Whether it's your monthly Netflix subscription, that gym membership you never use, or weekly trips to Starbucks, overspending can lead to financial distress.
Sit down and make a comprehensive list of your monthly bills including things like movie services and other recurring charges. You should also be honest with yourself and mark down what you spend on fast food, coffee, or happy hour, too.
Once you have a clear picture of where your money goes, it can be much easier to know where to cut. Mark the items on your list that you can cut back or on completely eliminate. Think of it as more money to go towards reaching your financial goals.
A true examination of the money you spend can be an eye-opening thing. It's also a great way to start looking at money differently and thinking about spending it on the things you need versus the things you want.
After you decide where you can cut spending, do it! Log into accounts and cancel them, start packing your lunches, or make your own coffee each morning to help you save money on the things you don't need.
Why Is Financial Security Important?
To some, preparing your finances for the unexpected feels a little silly when you’re just trying to keep the lights on. I know you’re probably thinking, “Rachel, how can I prepare for the future when I’m just living paycheck to paycheck?”
You never know what life will to throw at you (ahem, remember 2020?). Life as we knew it hit the giant pause button—except on the light bill, the mortgage payment, and the grocery bill. And that’s why financial security is so important.
You won’t always have to deal with a global pandemic—thank goodness! But life happens in all sorts of ways. The washing machine decides it’s done its last load. You get a tire blowout on your way to work. Your spouse is laid off from their job.
But when you’re financially prepared, financial emergencies like these are really just inconveniences. That’s what financial security is all about.
And don’t worry, I’m going to talk about how you can achieve financial security—even if you’re living paycheck to paycheck.
Step 2: Create a comprehensive budget
After you’ve created your plan, or financial roadmap, it’s time to start unraveling the layers of your plan and the major components.Your next step should be focused on creating a comprehensive budget for many reasons. First, how you spend your money impacts every other financial decision you make. Second, taking control over your spending habits is one of the easiest things that you can start doing immediately to have a long lasting impact over time.So what exactly does a comprehensive budget look like? While there is no golden format or guideline, there are necessary things you’ll need to include in your budget. To keep it simple, you’ll want to organize your budget into two primary categories: inflow (your income), and outflow (your expenses).
When you’re tallying up your income, you will want to make sure you include things such as part-time work or side hustles that you have committed to and are expecting to receive compensation for. Passive income such as rental property income or investments that pay monthly dividends also count.
Next, it’s time to calculate your expenses. There are a few different routes you can go with this one. My preference has always been by breaking down my expenses into fixed and variable expenses. Although, many others will break down their expenses into needs and wants.
When you have those figured out, you’ll want to calculate your budget to see what you have left over either in a personal surplus or deficit after running the numbers. Your budget can help you identify areas where you might be spending too much and how you can make significant changes immediately.
The more accurate and detailed you can be, the better off you’ll be in the long run. You’ll be more likely to achieve financial stability when you know exactly where every dollar is going.
Watch our webinar on-demand to avoid these top 5 money mistakes
There are some common money mistakes that people make every year that lead to added fees or debt and credit problems. This on-demand webinar will explain what the five most common money mistakes are and how to avoid them, so you can save money and avoid the frustration of these common financial challenges.
5. Set emergency fund
Economic uncertainty, illnesses, and accidental incidents can be happened at any time. To set an emergency fund for yourself, it is a must. The amount for this fund should be around 6-12 months. Furthermore, health and accident insurance are recommended too, as it will secure your bank account when you face with expected events. You then can live at ease and do not to bother your closed ones.
8. Take Calculated Risks
Taking calculated risks when you are young can be a prudent decision in the long run. You might make mistakes along the way, but when you are young, you have more time to recover from them.
Examples of calculated risks include:
- Moving to a new city with more job opportunities
- Going back to school for additional training
- Taking a new job at a different company for less pay but more upside potential
- Investing in stocks
As people get older, some may assume more responsibilities such as paying down a mortgage or saving for a child’s education. It’s easier to take risks when you have fewer responsibilities.
Signs You Might Be Financially Unstable
Although I covered the definition and a bit about what it means to be in a good financial place, I want to share some warning signs that your finances might be a bit unstable first.
Sometimes you may not realize you are on the verge of instability or you might be in some form of denial.
Back in 2013-2014, I knew I wasn’t financially in the best shape but chose to pretend it wasn’t bad.
But until I really reflected and wrote down what was happening, I didn’t realize how bad my money mistakes were.
Here are the signs of unstable finances:
- Very low emergency fund or you have none at all
- Maxed out one more credit cards and barely making minimum payments
- Your credit score is extremely low, or the scoring has been sinking
- If you lost your job, you’d be financially screwed immediately
- You are not saving for retirement because you can’t afford to or know how to
- After your monthly expenses, you have nothing leftover
- Late fees or overdraft fees happen quite regularly
- Money is constantly stressing you out and losing sleep over it
- You end up borrowing money from family or friends more than you want to admit
- You’re drowning in total debt because you’re making bare minimum payments, trying to consolidate, or trying to push it off.
These are just some of the handful of warning signs. And five of the above, I dealt with for a few years after college.
Maybe you fit into only a few of the signs above or maybe them all.
The important step here is not to feel ashamed or feel that you are alone — as so many people of different generations are battling these too.
But the great news is you are learning and reading this post, looking to make changes with your finances.
In the next section, I’ll cover how you can become financially stable. These are the steps I took in order to reach a new level of financial health.
Financial stability isn’t about being rich or reaching a particular number. It’s all about your mindset and the comfortability you feel in your life currently.
You want the freedom to live on your terms and not be controlled by money and debt.
The more control you have over your money, the more stability and peace you’ll find with your finances.
By following the steps above, keeping the right determined mindset, and being patient — you will find your own form of financial stability.
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