What is financial stability? If you asked ten people what it means to be financially stable, you’d likely get many different answers. What it means to you might be completely different from what it means to someone else. The key is personalizing the definition for yourself and understanding what it will take for you to get there.
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What Does It Mean to Be Financially Stable?
Financial stability means something different to just about everyone. If we had to generalize it, though, we’d say you’re stable financially when you can comfortably afford your regular bills, plus the ‘fun stuff’ you want to do with your family.
In other words, you aren’t worrying about where your money is coming from, if you have enough to cover your monthly expenses, or if you could cover emergencies. You’d also have enough money to do things your family wants to do whenever you want, and of course, it means being debt-free.
Financially Stable Example
Every example of financial stability will look different, but here’s one example.
You can pay all of your monthly expenses on time without worry and have enough disposable income to cover living expenses, money for unplanned expenses, and can pay off or did pay off your debts.
To continue the feeling of financial security, you can also invest a portion of your monthly income and save money in a high yield online savings account to ensure you have a fully-stocked emergency fund and retirement plan you contribute to regularly. You also invested in your own financial literacy to be confident in how you handle your money.
Check out our article, “What Are the 7 Streams of Income?“
Benefits of Financial Stability
Financial stability is often one of the top financial goals of most people. It’s the feeling of security knowing you don’t have to worry about money and can focus on creating a financially successful future.
Here are the top benefits of financial stability.
Being financially stable means you have the financial freedom to do what you want. You know you are debt free (or close to it) and that you make more than enough money to cover your monthly expenses.
You don’t have to stress out about planning vacations, racking up credit card debt, or paying overdraft fees. You confidently know you have everything covered and can plan your future, ensuring you have the same level of financial security then too.
Stress and Overall Health
When you are financially stable, you don’t have to worry about money as much. You know your important expenses are covered and that you’ll even have extra money left. This decreases your stress levels because you don’t have to spend your time worrying about how you’ll make more money or make ends meet.
People with financial struggles often turn to other coping mechanisms, such as drinking, smoking, or even binge eating. Unfortunately, these habits, along with high-stress levels, can ruin your overall health and even cause chronic illnesses, such as diabetes, high blood pressure, or even cancer.
With good financial health, you can afford not only your regular expenses but also the cost of regular self-care, such as doctor appointments, regular exercise, healthy food, and anything else your body needs for optimal health.
Stability in the Family
Financial stress is often one of the top reasons for divorce or disaccord in a family. Conversely, when your financial situation is positive, there are fewer reasons to fight or even fewer reasons to watch over one another.
When there are money problems, it can feel like one person is constantly watching over the other. No one can spend money freely without feeling guilty or being accused of making the financial issues worse.
With good financial health, though, you’re better able to keep the peace within your family and enjoy your time with one another rather than stress about money and important financial decisions.
Stress, money problems, and fighting with family members can take their toll on your mental health. Lying awake worrying about how you’ll make ends meet can cause anxiety and depression, causing you to find different coping mechanisms, such as drinking, smoking, or overeating.
When you’re financially stable, you’re able to be in a good place mentally. You don’t have to worry about how you’ll pay your mortgage, utility bills, and other necessary bills. You’ll also have money left for self-care, such as therapy, classes for meditation, or just time away to give your brain a break.
Signs You May Be Financially Unstable
The signs of financial instability vary by person, but here are some common signs that your personal financial situation isn’t in the best shape and could use some support.
- You don’t have an emergency fund with at least 3 – 6 months of expenses saved
- You have one or more credit cards with over 30% of the credit line outstanding
- You make only the minimum payments on your credit cards
- You use credit cards to cover your daily living expenses
- You don’t put money aside for retirement savings
- You don’t have a rainy day fund to cover unexpected expenses
13 Steps to Becoming Financially Stable
It’s never too late to achieve financial stability. With these steps, you can be that much closer to your goals of financial success.
Pay Off Debts
Debt is an opportunity cost to any potential income growth. Therefore, paying your debt off as quickly as possible will make saving money much easier.
Focus first on credit card debt and student loan debt. They both have the highest interest rates and take up more money than is necessary. Next, focus on car loans and any mortgage debt you have.
The only debt that might be considered ‘good’ and you don’t have to prioritize paying off is your mortgage. You might realize tax benefits from the interest paid on your primary mortgage, but once you have the money left to pay off your mortgage, don’t hesitate to do so and become 100% debt-free.
Track Your Spending
You can’t reach your financial goals until you know where you spend money. You won’t know how much you spend each month and where you go wrong without careful tracking.
If you don’t track your spending already, pull your bank and credit card statements from the last 6 – 12 months. Categorize your spending and see how it stacks up. Where do you overspend? Where can you cut back?
Keep tracking your spending moving forward too. If you don’t have a budget, now’s the time to make one and track how you do. If you overspend in specific categories, figure out what you can do to cut back so you can create good financial habits.
Make a Plan and Stick To It
Financial planning for the long-term is crucial to achieving your financial dreams. Along the way, though, life can happen, and you might fall off the horse.
Stick to the plan and get back on course as quickly as possible. Even if you have emergencies for a few months in a row that make it hard to stick to your financial plan, or if you find yourself spending money you shouldn’t be spending, take a step back and figure out why you’re doing it.
Fix the issue, and then get back on your plan. Don’t give up if you stray from your plan to reach your financial goals, even if it’s for months or years. Always come back to the plan to ensure your personal finances are where you want them.
Set Short and Long-Term Goals
It’s just as important to set short-term goals as it is long-term goals. Short-term goals are financial goals you’ll meet in the next year or two, and long-term goals are financial goals that take as much as five years or more down the road.
The most common long-term goal is retirement. Having enough retirement savings is the key to financial stability in the long run. Other long-term goals may include saving money for college or a down payment on a house.
Keep revisiting your goals, make sure you’re on track to meet them, and evaluate whether they’re still valid based on your life circumstances.
Become Financially Literate
Investing is something you’ll do for the rest of your life, so financial literacy is an invaluable asset. Never stop learning and trying new things. You never know when your next investment will help you achieve your financial goals.
Live Below Your Means
It’s easy to live life at or even above your means, especially as you get raises or find ways to make more money. Instead of letting lifestyle creep happen (living above your means), bank the extra money you earn. If you get a raise, invest the money instead of spending it. If you come into a windfall, figure out how it can help you reach financial stability by paying off debts or investing in your retirement plan.
Resist the urge to keep up with the Joneses or live a more elaborate life because you’re making more money. Keep your eye on the prize, focusing on financial security versus how many possessions you have.
Related article: Frugal Living: Simple Ways to Help You Live Intentionally
Don’t Borrow to Finance a Lifestyle
Don’t charge your lifestyle, and don’t take out loans to finance a lifestyle. The only exception to this rule is if you’re investing in yourself, such as going back to school or you’re investing in a house.
In both scenarios, the value of what you’d earn should outpace the total cost of the financing. In any other situation, especially using your credit card company to help elevate your lifestyle only leads to debt, financial insecurity, and the inability to reach your personal finance goals.
Create an Emergency Fund
One emergency can wipe you out if you aren’t careful, and not having an emergency fund could be one of the largest hurdles to becoming financially stable. Your emergency fund should have 3 to 6 months of expenses in it.
This means it should cover your living expenses for 3 to 6 months while you try to get back on your feet. It should only be used during times of emergency, such as losing your job, falling ill, or getting injured and being unable to work.
Invest in Your Retirement
No matter how young you are now, invest in your retirement plan. The longer your money can sit in your retirement accounts, the more time it has to grow. Compound interest and earnings are the best way to increase your retirement savings and ensure you have more than enough when you retire.
If your employer offers a 401K with employer match, always invest at least as much as they will match. For example, if they’ll match the first 3% of your salary dollar-for-dollar and you make $100,000 a year, invest at least $3,000 per year to get the ‘free’ $3,000 and increase your retirement account.
Take Calculated Risks
Don’t be afraid to take risks. Just do your research first. The best time to take risks that could affect your personal finances is when you’re young.
For example, going back to school to get your Master’s degree to earn more money is a calculated risk. It costs you money now, but it should increase your earnings in the long run. Other calculated risks may include changing jobs for more income or better mental health or moving cities to improve your job opportunities.
Invest in Yourself
Never stop learning and investing in yourself. If you want to go back to school to make more money, do it. If there are skills you need to get a promotion, or there’s a new industry you want to crack into, find out what you have to do to make it happen.
Never stop learning new things or investing in yourself in ways that help you and your net worth grow.
Select a Profession You Enjoy
Becoming financially stable doesn’t mean taking on a job you hate. You aren’t going to give a job that you don’t enjoy your all, which could mean you won’t get promotions or raises. You’ll also go through life unhappy all in the name of money.
Instead, invest in yourself and find a profession you love. If that means you have to go back to school or start at the bottom of the totem pole again, so be it. The key is to be happy mentally while ensuring you have enough money to achieve financial stability.
Balance your financial concerns between today and future goals. Don’t save so much for the future that you can’t spare any money for enjoyment today. You need to take the trip, spend family time doing something fun, or buy the house that you will all enjoy.
But you must focus on the future too. How much will you support your children when they’re 18 and off to college or ‘real life’? How much money do you need for retirement? These are all concerns that should play into the big picture when choosing your short-term and long-term goals.
Financially Secure vs Financially Stable
When you’re financially secure, you have enough money to cover your bills and the basic cost of living. You don’t have to worry about money on a daily basis and know your bases are covered—financially stable means you are set not only for today but also for the future. You’ve put a plan in place that takes care of today and the future to meet your financial plan, have financial security for your lifetime and feel confident about your choices.
Financially Stable FAQ
How Much Money Is Financially Stable?
No two people need the same amount of money to achieve financial stability. How much you need depends on your regular expenses, lifestyle, and future financial goals. When you have enough money to cover your bills, spend how you want, and have enough money saved for your retirement goals, you can consider yourself in good financial health.
What Income Is Considered Financially Stable?
There isn’t a specific income level you must meet to be considered in good financial health. The income that covers your expenses, allows you to save for emergencies and retirement, and ensures that you can live the lifestyle you want is the income that will help you achieve financial stability.
How Can You Tell if Someone Is Financially Stable?
Personal finance is quite private, so it’s hard to truly know when someone is stable financially. However, when they aren’t using credit cards to get by, have retirement savings that are on the path to having more than enough for their lifestyle, and have a fully-funded emergency fund, you can consider someone to have achieved financial security.
Will I Ever Be Financially Stable?
It can feel like a never-ending road to become stable financially, but with the right steps, you can get there. It comes down to budgeting, saving, living below your means, not using credit cards, and getting yourself (and staying out of) debt to feel stable financially.
Why Is It Important to Be Financially Stable?
Financial stability is important for your financial life and your overall mental and physical health. Taking the stress of money off your mind and having enough money for proper self-care can help you live a longer and happier life.
Can You Be Financially Stable Without a College Education?
A college education isn’t the only way to feel financially sound. Financial literacy is the key to becoming stable financially, as is having the skills necessary to make enough money. Many people have gone on to be millionaires by opening their own businesses and doing things ‘their way’ without a college education. So is college necessary to feel secure financially? It’s not, as long as you know how to handle your money and can make enough money to fund your present and future.
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The Bottom Line
Being financially stable doesn’t mean you have to have the highest net worth or own the largest house. It means you can comfortably afford your life now, and you’ve saved for the life you want in the future. You don’t have to worry about whether you can pay your bills or retire on time because you have reached financial sustainability. You’ve planned well enough to feel financially prepared for whatever comes your way.
Samantha Hawrylack is a personal finance expert and full-time entrepreneur with a passion for writing and SEO. She holds a Bachelor’s in Finance and Master’s in Business Administration and previously worked for Vanguard, where she held Series 7 and 63 licenses. Her work has been featured in publications like Grow, MSN, CNBC, Ladders, Rocket Mortgage, Quicken Loans, Clever Girl Finance, Credit Donkey, Crediful, Investing Answers, Well Kept Wallet, AllCards, Mama and Money, and Concreit, among others. She writes in personal finance, real estate, credit, entrepreneurship, credit card, student loan, mortgage, personal loan, insurance, debt management, business, productivity, and career niches.