Money cannot buy happiness. This is an adage that some live by while others ignore. Even though money can’t buy happiness, we need it to achieve our dreams. If you have enough money, you will have peace of mind. So, how can you become financially stable? It's not complex if you're disciplined, knowledgeable about the right investment channels, and consistently manage your finances.
Don't assume that being financially stable is only for those with something in their accounts. You can as well start from scratch and be stable financially.
What it means to be financially stable
To become financially stable simply means to be confident in your financial situation. Those who are financially stable live within or below their means. This means they spend more than they earn and still have some left to save.
Being financially stable means, you don't depend so much on a paycheck. For some, it's about becoming debt-free and having a substantial emergency fund. Regardless of your personal beliefs, financial stability offers peace of mind to all.
Becoming financially stable is a personal journey. It is important to understand your current financial state; that is where you stand. Maybe you can gauge your financial standing through a simple questionnaire.
What causes financial instability?
To truly understand financial stability, it's not enough to know the definition. You must also be aware of what can make you financially unstable. Are you overspending or going beyond your means?
Financial instability could be due to your own actions. Overspending by buying expensive and unnecessary things or taking on too much debt for luxury items. All these could lead to being unstable financially.
Financial instability can cause great anxiety because you will try to figure out how to manage expenses and bills. Suppose you lost your main source of income and have bills that need to be paid. Without a steady income, paying these expenses can seem daunting. You should know the right steps towards financial stability to get out of such a situation or prevent it from happening.
How You Can Become Financially Stable
Any person can learn how to become financially stable. The secret is shifting your mindset. Don't view your financial situation as something that's happening to you. Those who are financially stable are always in control of their finances, even during emergencies.
Here are some ways to become financially stable:
1. Formulate a Plan and Follow It
If you don't make a plan, you are setting yourself up for failure. This is true in matters dealing with your finances, especially your financial future. Making financial decisions without a solid plan may take you nowhere. In fact, without fully comprehending the implications of your decisions, you may unintentionally disrupt other critical areas of your life.
Financial planning goes beyond tracking expenses. Your budget helps manage spending, but a good financial plan goes beyond that. It helps in assessing where you are now and maps out the exact steps you need to take to get there by analyzing your income, spending, savings, debt, and insurance.
Achieving financial stability is ideal, and there's no tool more crucial than a well-crafted financial plan. While budgeting and discount apps have their place, nothing compares to the significance of a solid financial plan.
Commitment is crucial to effective financial planning. The results you desire will only appear after investing sufficient time and effort.
2. Set A Budget
After creating the financial roadmap, come up with a budget. Your spending habits determine every financial decision you make, so it's crucial to take control by having a budget in place.
It is overwhelming to craft a comprehensive budget. However, it shouldn't be. Rather than stressing over a specific format, just remember to categorize your finances into two main areas: inflow (your income) and outflow (your expenses).
When calculating your earnings, include any part-time work, side hustles, or expected compensation. Remember to count passive income sources such as rental properties or investments with monthly dividends.
To determine your expenses, you can choose between different methods. You can categorize them as fixed and variable expenses, but others prefer to categorize them as needs and wants.
After that, determine your income and expenses. Once you have those sorted, the next step is to tally up your budget, highlighting where you have a surplus or deficit. By doing this, you can easily identify overspending and take steps to make changes.
3. Live Debt-Free
Contrary to popular belief, consistently paying only the minimum monthly credit card balance does not signify financial stability. In fact, it may indicate the opposite.
Failure to pay your debts every month will lead to the accumulation of interest, thus increasing the amount to be paid.
Most people rely on credit cards to cover their daily expenses instead of using cash or debit. Although using credit accounts can be beneficial in certain situations, it is very risky.
We are not saying to avoid using the cards entirely. In fact, using your credit cards wisely can help you obtain a good credit history. However, many people fail to do that. If you develop bad habits with credit cards or debt, it can severely harm your finances. A useful guideline is to only buy items if you can pay for them in cash within a month.
4. Don't Be a Spendthrift; spend on Necessary Things
It is important to create a budget for various reasons. One is that you will spend your money wisely as you strictly follow what you have set. Besides, it will help you save money and use it for only important things.
Being frugal doesn't imply that you are stingy or don't enjoy life's pleasures. It means you are wise about your finances and have recognized areas where you can cut back on unnecessary spending.
Remember, every rupee saved is a rupee earned. This way, you can invest and benefit yourself. As you try to cut off on expenses and possibly stop spending altogether in some areas, take the money you save and add it to your emergency fund. Consider creating an emergency fund if you don't have one yet.
Your emergency fund is not solely for unexpected rainy-day expenses. It should be a dedicated account strictly reserved for financial emergencies. Financial experts suggest keeping an emergency fund of 3 to 6 months' worth of after-tax income to help you deal with unexpected financial difficulties.
5. Have an Adequate Emergency Fund
Having a sufficient emergency fund shows you're reaching financial stability. It's important to focus on creating an emergency fund before investing money in retirement or paying off debts.
An emergency fund helps you prepare for unexpected events such as job loss, unexpected car repairs, or unplanned trips for which you need extra money. It acts as a backup when you don't have a regular income. An emergency fund can provide financial assistance during tough times and alleviate stress. The fund may cover all or some of the expenses.
It's common for people to prioritize saving for retirement over creating an emergency fund. But you will surely dip into your retirement savings when an emergency strikes. This should be a last resort because it will reduce your retirement savings and may result in penalties. For instance, withdrawing from a 401(k) before the right time will lead to a penalty of 10%.
6. Repay Your Debts on Time
To become financially stable, prioritize paying off any debts you have. First, create a budget to determine your comfortable spending limit and establish an emergency fund.
If you have a mortgage, prioritize paying off all other debts before paying extra towards the mortgage. It's still important to make all of your mortgage payments, but it's recommended that you prioritize paying off your other debts first by putting extra money towards them. After paying off your debts and starting to save for retirement, you can consider paying off your mortgage early if that's your goal.
7. Earn Money by Doing Something You Enjoy
Your best bet to become financially stable is to get a job that provides a consistent income. Moreover, you can do something you love, such as freelancing or looking for another part-time job. Doing this will help you earn extra income on top of your steady monthly income.
Achieving financial stability doesn't have to be challenging. Think about your hobbies and skills, which can help you get closer to your goals. Make sure to utilize every opportunity that arises and strategize on how to increase your long-term earnings.
8. Do not Finance Your Lifestyle by Borrowing
It's advisable to borrow money only when the gains you'll get exceed the borrowing costs. For instance, you can invest in yourself for education or starting a business.
Using credit to maintain a lifestyle beyond your means is not a good strategy for building wealth. Additionally, the interest incurred from borrowing adds to the overall cost of that lifestyle.
9. Invest in Yourself
Consider yourself as a financial asset. Making investments in yourself will yield benefits in the long run. The most valuable assets of any person are skills, knowledge, and experience. You can enhance your knowledge and skills and then make wiser decisions. Investing in yourself is a lifelong process that involves obtaining a degree or certification from a college and consistently updating and acquiring valuable skills in demand.
10. Save for Retirement
Planning for retirement may not be a top priority, especially for those in their 20s, as it may seem far off. However, taking a few steps now to start saving can benefit from compounding in the long term. Saving a small amount early in life can significantly impact your future. When you delay, it will be very challenging to build your retirement savings.
You may also read this: Effective Ways to Get Rid of Debt
Conclusion
Dreaming of a life where you don't have to worry about money problems? A life where bills and expenses are easily covered, making you able to afford the lifestyle you desire? The secret is to become financially stable. But, to achieve financial stability, plan, set a budget, don’t spend unnecessarily, refrain from debt, have an emergency fund, manage debt effectively, and invest in retirement as early and as often as possible. It is also important to invest in yourself. When you take all these steps, you are only a step away from being financially stable.
