Financial stability is synonymous with confidence, understanding, and having a strong financial foundation.
Personally, when I think of someone as being financially stable, I tend to think of an individual who is confident with their finances and the everyday decisions they’re making with their money.
I think of someone who has their income, debt, savings, insurance, and all other aspects of their financial life figured out.
And I also think of someone who’s finances are somewhat close to impenetrable; If one area falls short or gets impacted, they’re still able to navigate and manage their money with ease.
When you think in terms of these three things, financial stability can loosely be defined as having the financial foundation in place to ensure that your basic needs are covered and that you’re in a good position to reach your financial goals.
With that being said, financial stability itself is a goal that almost every single one of us dreams about achieving. And when we do get to the point of reaching financial stability, that milestone can set the stage for a comfortable lifestyle to follow.
As I’m sure you’re aware, achieving financial stability isn’t easy. It’s especially even more difficult in a world that is constantly changing. Just like most things in our financial lives, it comes down to being disciplined, organized, committed, and planning things through carefully. It’s also often a trial and error process that repeats itself.
If you’re reading this, there’s a good chance that you’re looking for proven and effective ways to become financially stable. Fortunately, you’re in luck. Below are five critical things that you need to be doing to set the stage for financial stability in your life.
It’s important to keep in mind that achieving financial stability won’t happen overnight. There are no shortcuts when it comes to your personal finances, so don’t expect this to be the magic formula. Rather, take the information below and use it as a springboard to making better financial decisions.
Step 1: Create a plan for your finances and stick to it.
Failing to plan is planning to fail. You’ve likely heard this phrase many times throughout your life, and for good reason. When it comes to your finances and particularly your financial future, this could not be more accurate.
Without a proper plan in place, you’re essentially making some of the most important financial decisions in your life without fully understanding what you’re getting yourself into and the impact it has on other areas.
Despite what most people might think, a financial plan isn’t just a way to analyze or take control over your spending. That’s what your budget is for.
Your financial plan is a blueprint or a roadmap that helps you navigate your entire financial picture. Your plan is there to assess where you are today and map out the exact steps you need to be taking to reach your financial goals and start improving. Your plan takes a look at your income, savings, spending, debt, insurance and risk, estate plan, and more. By getting the full view of your financial picture, you’ll be able to determine and better understand the impact each one has on the other. That’s when the real “magic” happens.
It’s the most important and necessary financial tool you can have if you’re serious about reaching financial stability. Budgeting apps, discount apps, and other forms of money management tools are great, but they are incomparable compared to the significance and importance of a financial plan.
One of the most important things to understand with financial planning is that it takes commitment. You really start to see the results after putting in the work for some time.
Savology is a free financial planning platform helping households reach their goals by providing fast and free financial planning for everyone. When you create your free account with Savology, you’ll have unlimited access to financial planning resources and tools, including our retirement calculator for free.
Step 2: Create a comprehensive budget
After you’ve created your plan, or financial roadmap, it’s time to start unravelling 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.
Step 3: Spend frugally and pad your emergency fund
One of the primary objectives of creating a budget, especially a detailed one, should be to identify how you can better put your money to work for you. This means, by creating a budget you’ll be on your way to making room for more savings, paying off debts, or even setting up an emergency fund that’s on the top of your priority list.
Living frugally doesn’t mean that you’re cheap or that you don’t enjoy what life has to offer. It simply means that you’re disciplined with your money and that you’ve identified areas in your spending habits where you didn’t necessarily have to be spending.
Remember, every dollar saved (not spent) is a dollar earned that you can then reallocate and put to work for you, not against you.
As you work on trimming down your expenses and even completely eliminating spending in some areas, use those ‘extra’ funds you save to pad your emergency fund, or create one if you don’t have one yet.
Your emergency fund isn’t just a rainy day fund, it’s more than that. It’s a separate account that can and should only be used in the case of financial emergencies such as unemployment, appliance breakdowns, or other unexpected costs.
Financial experts recommend anywhere from 3 to 6 months of after-tax income as being a sufficient emergency fund to help you weather any storms should you find yourself in this position. You can invest this money much like you would with your retirement accounts, but just make sure that you are able to pull the money out without any penalties and in a timely manner. There’s a good chance that you will need to dip into this reserve, but make sure you only do when you absolutely need to.
Having an adequate emergency fund is one of the telling signs of reaching financial stability.
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.
Step 5: Start planning for retirement as early as possible
Despite what anyone might have told you, there is absolutely no such thing as being too young to start planning your finances and preparing for retirement.
In fact, the earlier you can get started, the better off you’ll be and the less strain you will put on your finances later on in life.
The majority of individuals in the early, even late twenties push back retirement because they’re under the impression that they have plenty of time to worry about that in a few years. That’s a mistake. If you’re under thirty, this is a golden opportunity for you to start taking advantage of compound interest as soon as possible. Your future-self will thank you.
When you start planning and investing for retirement later on in life, your contributions become more important. In a lot of cases, it’s almost too late to reach your retirement goals before you even start, or you’re jeopardizing your current lifestyle to make sure you retire at a reasonable age with a decent amount of retirement income.
In 2020, the United States Treasury Department upped the limits on 401(k) annual contributions to $19,500. If you’re over age 50, that number increases to $26,000. IRA limits are $6000 and $7000 per year, respectively. You’ll want to contribute the max or as close to it as you can get. With compound interest on your side, this adds up significantly.
With just a 7% return, twenty years of contributing $19,500 per year will net you $765,609.
With those same numbers, if you were to start saving at twenty years old, you would have $3,749,777 by the time you reach your sixties.
Working towards financial stability
Achieving financial stability is difficult, but it certainly can be done. By following the five steps above and sticking to your financial plan, you’ll be well on your way to taking full control of your financial situation to build the solid foundation you need to create stability.
Remember, the best time to start was yesterday. The second best time is right now.
Your financial future starts today
Savology has helped more than 40,000 households across the United States improve their financial well-being by providing comprehensive digital financial planning. Users can get started with our free financial planning or premium monthly planning memberships, allowing them to build a personalized financial plan, holistic report card, personalized action items, and more. In addition to our consumer-facing platform, we’re helping employers across the country provide their employees with effective financial wellness benefits.