Envision a reality where financial concerns don’t have you in constant turmoil. You possess adequate funds to handle your bills, everyday expenses, hobbies, and beyond. Additionally, you aspire to manage your finances effectively to be able to support the lifestyle you genuinely wish to lead. All of this becomes attainable when you attain financial stability. To accomplish this, there are several key steps you should follow.
A financial advisor in your area can assist you in establishing goals to achieve and uphold your financial stability throughout your life.
What Does It Mean to Be Financially Stable?
Being financially stable means you feel assured about your financial circumstances. You aren’t anxious about settling your bills because you are confident in your available funds. You are free of debt, you have savings allocated for your future ambitions, and you also have enough saved for emergencies. Financial stability does not equate to wealth. In reality, it isn’t represented by a numerical figure at all. It is more like a state of mind. With financial stability, you can eliminate money-related stress and direct your attention to other areas of your life.
While this may seem like an illusion, achieving financial stability is indeed possible. It will require time and effort on your part. However, if you adhere to the 10 steps outlined below, you will be well on your path to achieving your financial aspirations.
Step #1: Make your finances personal
It’s essential to state this from the outset: your personal finances are indeed personal. This doesn’t imply that you should refrain from discussing your financial matters with anyone. Making your finances personal refers to concentrating on your unique situation rather than comparing it to others.
This is a crucial factor that can aid you in attaining financial stability. In our society, we often find ourselves comparing our lives with those of others. Society suggests that we need to adhere to a certain lifestyle, claiming that it exemplifies success.
Tune out that noise! Disregard the pressure to keep pace with your neighbors. It is irrelevant if your friends have higher earnings than you. What truly matters is your financial situation and how you can leverage your resources to achieve your goals.
Another significant aspect of this principle is to dismiss the idea of a “correct method” of doing things. Indeed, some financial choices tend to be more beneficial than others. Nevertheless, many aspects of personal finance are subjective. There isn’t a universal approach or timeline that works best for everyone.
If you set a savings objective and fall short, don’t criticize yourself for making a mistake. Instead, evaluate what occurred. What successes did you experience, and what areas fell short? Use that knowledge to enhance your strategy for the future.
Step #2: Your most important investment is yourself
Before you consider putting money into the stock market, you should prioritize investing in yourself. Dedicate the time, energy, and finances needed to acquire the skills that are essential for you. This encompasses obtaining college degrees. It also pertains to other types of knowledge and skill sets. Learning subjects that do not directly pertain to your job can sometimes benefit you just as much as job-related skills. Employers generally seek well-rounded employees who can add value to a company in various capacities. They also prefer individuals who demonstrate the motivation and ambition to enhance their own abilities.
Did your interviewing skills hinder you from landing that ideal job? There are courses, books, and online materials available that you can utilize to better prepare for the next opportunity. Enhancing your skills is always a wise investment. It opens up more possibilities and boosts your career-earning potential.
At the same time, your health plays a crucial role in your success. Medical expenses can quickly deplete a savings account. While it’s impossible to avoid all illnesses, maintaining a healthy diet along with regular sleep and exercise can be very beneficial. This also implies managing your stress levels. Discover ways to relax and de-stress.
Step #3: Generate income by engaging in something you love
For most individuals, the primary means of earning money is through employment. Thus, if you’re contemplating financial security, the most effective starting point is to obtain a job that provides you with consistent income. Ideally, look for a job that you find enjoyable.
Engaging in work that you love will simplify things significantly. For some, this might entail switching careers. It could involve moving to a different company if you dislike the people or environment in your current workplace. Perhaps the solution for you is to secure a part-time job and begin freelancing. While this may not seem like the traditional approach, your happiness (and mental well-being) is more crucial than adhering to norms.
Step #4: Create and adhere to a budget
That’s right, budgeting. You’ve probably heard this recommendation before. However, budgeting isn’t as daunting as it may appear. A budget serves merely as a tool to assist you in allocating money toward the things you wish to invest in.
First and foremost, why is budgeting significant? By maintaining a budget, you can monitor where your money is being spent. It’s easy to overspend if you’re not fully aware of your expenditures. Thus, more than anything else, a budget aids you in tracking your finances.
Once you understand your spending habits, you can devise a plan. There will always be necessary expenses that you must cover. This might include your rent or mortgage, utility bills, groceries, car payments, or commuting costs. These necessary expenses should account for about half of your spending. (Experts typically advise that your rent/mortgage should not exceed 30% of your monthly expenditures.)
Then you should attempt to allocate 10% to 20% of the leftover funds toward your future. That includes your retirement account, emergency fund, and other savings accounts. After doing all that, you can live off the remaining funds. To avoid overspending, you may want to calculate how much you should allocate each month for typical expenses like dining out or purchasing clothing. Regardless of what exactly you spend on, strive to spend intentionally. Direct your money towards the aspects that matter to you. Then reduce spending on the rest.
Step #5: Live within your means
Like establishing a budget, this is advice that many individuals have encountered. The issue is that numerous people find it challenging to adhere to it. As highlighted in step one (Make Your Finances Personal), we inhabit a world where we constantly hear about the items that we “should” purchase. It’s quite simple to spend money on unnecessary extras. Nonetheless, living within your means is crucial for your long-term financial success. If you consistently use all of your funds or exceed your earnings, you cannot anticipate accumulating any savings.
Living within your means works in conjunction with budgeting. Your budget indicates how much money you possess and can spend each month. Then you can utilize that figure to ensure you do not overspend.
Step #6: Establish an emergency fund
Before you give too much thought to investing in retirement or addressing your debts, you should aim to create an emergency fund.
An emergency fund serves as a safeguard against the unforeseen. There is always the possibility that you may lose your job and find yourself without a steady income for a while. Perhaps you need to make a significant car repair or take an unplanned trip. An emergency fund will cover some or all of these costs and assist you through difficult times. An emergency fund will also provide peace of mind by offering you a fallback plan.
Sometimes individuals bypass an emergency fund in favor of saving for retirement. Then, when an unexpected expense arises, they have to withdraw funds from their retirement account to manage it. Withdrawing funds prematurely from your retirement account should always be a last resort. It diminishes your retirement savings, and you will likely incur penalties. For instance, you must pay a 10% penalty if you make early withdrawals from a 401(k).
Step #7: Eliminate your debts
Debt will perpetually hinder your ability to achieve financial stability. After determining how much you can afford to spend (via budgeting) and establishing an emergency fund, prioritize eliminating debt. Eliminate any outstanding credit card debt you might possess and steer clear of accruing new debt on those cards. Do you have student loans? Make additional payments to settle them as swiftly as possible. Just because you entered into a 10-, 20-, or 30-year repayment scheme doesn’t imply you can’t pay off your loans in a shorter timeframe. Settling your loans sooner will genuinely save you money over time since you will incur less interest.
The sole exception to this is a mortgage. If you have a mortgage, you have some leeway in paying it off. Prioritize all other debts before addressing your mortgage. You should continue making all your mortgage payments, but allocate extra funds towards your other debts first. Once your other debts are settled and you have savings for retirement (step eight), then you can concentrate on paying off your mortgage ahead of schedule (should you choose to).
Step #8: Save and invest for your retirement
When you are young, contemplating retirement can be challenging. Why should you allocate money for an event that’s many years in the future? Regrettably, this mindset is why the typical American lacks retirement savings. If you aspire to achieve financial stability, it’s essential to prepare for times when you won’t receive a paycheck. This is particularly pertinent if you are considering retirement plans. Do you wish to travel post-retirement? Do you aim to volunteer or enroll in local classes? Those are wonderful pursuits, but they require funding.
Give priority to your retirement now, and you will appreciate it later. Even if you do not have much to contribute to retirement savings, begin right away. An individual who starts early will accumulate more wealth over time due to the power of compound interest.
As you contemplate retirement savings, begin with your workplace. Numerous employers provide a 401(k) or 403(b) program. Utilize these options, particularly if they include employer matching. Employer matching refers to when your employer matches some or all of the contributions you make to your company’s retirement plan. Neglecting to take advantage of employer matching is akin to forgoing free money.
If your employer does not offer a retirement plan, consider opening an individual retirement account (IRA).
Step #9: Make sure to have some fun
When concentrating on saving money or reducing debt, it’s easy to overlook enjoyment. Ultimately, enjoyable activities typically involve expenses. However, don’t become so engrossed in your finances that you neglect to live. Enjoying your life will help maintain your happiness and health.
When considering your monthly spending limit, remember to allocate a portion specifically for enjoyment. Perhaps you can treat yourself to a massage every few months or attend a performance. Also, be aware of inexpensive and complimentary events. Take a hike or gather friends for an evening of games. Another excellent method to enjoy yourself is by commemorating your financial achievements. Did you recently eliminate a credit card balance? Consider these five economical ways to honor your debt accomplishments.
Step #10: Adhere to your long-term financial strategy
In a perfect world, you would stick to your budget every month. Your vehicle would never require maintenance and you would not risk losing your job. Sadly, we do not exist in a perfect world. Unforeseen circumstances arise, and occasionally you simply spend more than you expect. Try not to feel disheartened when events don’t unfold as you envisioned.
Even when circumstances are challenging, stay committed. Persevere even if you stray for weeks, months, or years. Don’t be concerned about achieving perfection. Give it your best effort and aim to improve just a little bit each day.
If you are finding it difficult to adhere to the financial plan you’ve established, a financial advisor can assist you. SmartAsset’s complimentary matching tool can connect you with up to three financial advisors in your vicinity.
Bottom Line
Financial stability represents the ability to lead your life according to your preferences without stressing about how to cover your next bill. For many individuals, this may appear to be an unattainable aspiration, yet it is certainly within your grasp. Adhere to the 10 steps mentioned above, and you will set yourself on the route to financial stability.
Tips for Reaching Financial Security
◾Whether you are saving for retirement through a workplace plan or an IRA, a financial advisor might assist you in formulating a financial strategy tailored to your requirements and objectives. Locating a qualified financial advisor does not have to be challenging. SmartAsset’s free tool connects you with up to three financial advisors who operate in your area, and you can interview your advisor matches at no expense to determine which one suits you best. If you are prepared to locate an advisor who can support you in meeting your financial objectives, initiate the process now.
◾An emergency fund will offer reassurance when unexpected situations arise. Deciding where to maintain your emergency fund is a personal choice. Some individuals keep their emergency fund in their standard savings account. If you determine you need an emergency fund of $10,000, you can simply ensure there is $10,000 in your savings account that you do not touch. It might be tempting to utilize that money, however. In such a situation, you could establish a separate savings account or open a money market account.