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SmartAsset: 10 Steps to Reach Financial Stability

Imagine a world where you don’t have to constantly stress about money. You have enough to cover your bills, regular expenses, hobbies and more. Beyond that, you want to manage your finances so you end up able to afford the lifestyle you truly want to live. These things are all possible when you achieve financial stability. To get there, there are a number of important steps you’ll want to follow.

A financial advisor who serves your area can help you set goals to reach and maintain your financial stability throughout your life. 

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.

Step #1: Make your finances personal.

It’s very important to say this right off the bat: your personal finances are personal. That doesn’t mean personal in the sense that you can’t talk to anyone about your money. Making your finances personal means focusing on your situation and not worrying about anyone else’s situation.

This is one of the most important things for helping you to reach financial stability. We live in a culture where we constantly compare ourselves to others. We are told that we need to live a certain lifestyle because that’s how successful people live.

Block out all that noise! Forget about keeping up with the Joneses. It doesn’t matter if your friends earn more money than you. The only thing that matters is how much you have and how you can use what you have to reach your goals.

Another important part of this rule is forgetting about the “right way” to do things. Yes, some financial decisions are generally better than others. However, many things in personal finance depend on the person. There isn’t one specific method or timetable that’s best for everyone.

If you create a savings goal and you miss it, don’t beat yourself up for doing the wrong thing. Just look at what happened. What went well and what didn’t go well? Use that information to improve for next time.

Step #2: Your most important investment is yourself.

Before you ever think about investing money in the stock market, you should look to invest in yourself. Invest the time, energy and money to teach yourself the skills you need. This includes college degrees. It also includes other knowledge and skills. Learning things that don’t directly relate to your job can sometimes help you just as much as work-related skills. Employers typically want well-rounded employees who can contribute to a company in multiple ways. They also want someone who shows the drive and ambition to improve themselves.

Did your interviewing skills hold you back from getting that dream job? There are classes, books and online resources that you can use to improve for next time. Improving your skills is always a good investment. It opens you up to more opportunities and increases your career-earning potential.

At the same time, your health is vital for your success. One thing that drains a savings account very quickly is medical bills. While you can’t prevent all illnesses, a healthy diet with regular sleep and exercise can go a long way. That also means limiting your stress. Find ways to relax and unwind.

Step #3: Earn income by doing something you enjoy.

The primary way for most people to earn money is through a job. So if you’re thinking about financial stability, the best place to start is with a job that pays you a steady income. Even better is to find a job that you enjoy.

Doing work that you enjoy will make things that much easier. For some people this means changing careers. It could mean changing companies because you don’t like the people or structure at your current company. Maybe the key for you is to get a part-time job and to start freelancing. That may not sound like the conventional way to do things, but your happiness (and sanity) is more important that following convention.

Step #4: Start and follow a budget.

That’s right, budgeting. You’ve most likely heard this advice before. Budgets aren’t as bad as they may sound though. A budget is just a tool to help you spend money on the things you want to spend money on.

First of all, why is a budget important? When you keep a budget, you can track where your money is going. It’s easy to spend more than you should if you don’t actually know how much you’re spending. So more than anything else, a budget helps you keep track of your money.

Once you know how you spend your money, you can make a plan. There are always essential things that you have to spend money on. That could include your rent or mortgage, utility bills, food, car payments or transportation to and from work. These essential things should make up about half of your spending. (Experts generally recommend that your rent/mortgage not make up more than 30% of your monthly spending.)

Then you should try to put 10% to 20% of the remaining money toward your future. That means your retirement account, emergency fund and other savings accounts. Once you do all that, you can live off the remaining money. To make sure you don’t overspend, you might want to figure out how much you should spend each month on common things like eating out or buying clothes. Regardless of exactly what you spend money on, try to spend purposefully. Put your money toward the things that are important to you. Then cut back on the rest.

Step #5: Live below your means.

SmartAsset: 10 Steps to Reach Financial Stability

Like creating a budget, this is advice that many people have heard. The trouble is that many of us have a hard time following it. As mentioned in step one (Make Your Finances Personal), we live in a world where we constantly hear about the things that we “should” buy. It’s very easy to spend money on extra things that we don’t need. However, living below your means is key for your long-term financial success. If you regularly spend all of your money, or more money than you make, you can’t expect to grow any savings.

Living below your means works in tandem with budgeting. Your budget tells you how much money you have and can spend each month. Then you can work with that number to make sure you don’t overspend.

Step #6: Create an emergency fund.

Before you think too much about putting money into retirement or toward your debt, you should work to build an emergency fund.

An emergency fund is a way to protect yourself from the unexpected. There’s always a chance that you lose your job and have to get by for a bit with no regular salary. Maybe you need to make a big car repair or take a trip you hadn’t planned for. An emergency fund will cover some or all of the costs and help you through a tough time. An emergency fund will also ease your mind by giving you a backup plan.

Sometimes people skip an emergency fund in favor of saving for retirement. Then a big expense comes up and they have to pull money from their retirement account in order to cover it. Removing money early from your retirement account should always be a last resort. It detracts from your retirement savings and you’ll probably have to pay penalties. For example, you have to pay a 10% penalty if you make early withdrawals from a 401(k).

Step #7: Pay off your debts.

Debt will always make it difficult to reach financial stability. Once you know how much you can comfortably spend (through budgeting) and once you have an emergency fund, focus on getting rid of debt. Pay off any credit card debt you may have and avoid future debt on your cards. Have student loans? Make extra payments to get rid of them as quickly as possible. Just because you signed a 10-, 20- or 30-year payment plan doesn’t mean you can’t pay off your loans sooner. Paying your loans sooner will actually save you money in the long run because you’ll pay less in interest.

The only caveat here is a mortgage. If you have a mortgage, you have some time to pay it off. Prioritize all other debts before your mortgage. You should still make all your mortgage payments, but put extra money toward your other debts first. Once you have your other debt paid off and once you have savings for retirement (step eight), then you can focus on paying off your mortgage early (if you want to).

Step #8: Save and invest for your retirement.

When you’re young, it’s hard to think about retirement. Why should you save money for something that’s decades away? Unfortunately, this thinking is why the average American has no retirement savings. If you want to reach financial stability, you also need to plan for the days when you won’t have a salary. This is especially true if you have any plans for retirement. Want to travel after you retire? Want to volunteer or take some local classes? Those are all great things, but you can’t do them without money.

Prioritize your retirement now and you will thank yourself in the future. Even if you don’t have a lot to save for retirement, start now. Someone who starts early will earn more in the long run thanks to the magic of compound interest.

As you think about saving for retirement, start with your work. Many employers offer a 401(k) or 403(b) plan. Take advantage of those, especially if they offer employer matching. Employer matching is when your employer will match some or all of the contributions you make to your company retirement plan. Not taking advantage of employer matching is like passing up free money.

If your employer doesn’t offer a retirement plan, you can open an individual retirement account (IRA).

Step #9: Make sure to have some fun.

When you focus on saving money or paying off debt, it’s easy to forget about fun. After all, fun like things usually cost money. But don’t get so focused on your money that you forget to live. Enjoying your life will help to keep you happy and healthy.

When you look at how much you can afford to spend each month, try to budget in a certain amount just for fun. Maybe you can get a massage every couple of months or go to a show. Keep on the lookout for cheap and free events too. Go for a hike or invite friends over for a game night. Another great way to have fun is celebrating your financial successes. Did you just pay off one of your credit cards? Try one of these five frugal ways to celebrate your debt successes.

Step #10: Stick with your long-term financial plan.

SmartAsset: 10 Steps to Reach Financial Stability

In an ideal world, you would stay within your budget every month. Your car would never need repairs and you would never lose your job. Unfortunately, we don’t live in an ideal world. Unexpected things come up and sometimes you just spend more money than you anticipate. Try not to get discouraged when things don’t go as planned.

Even when things aren’t going well, follow through. Stick with it even if you fall off for weeks, months or years. Don’t worry about doing things perfectly. Do your best and try to get just a little better every day.

If you find yourself struggling to follow the plan you’ve laid out for your finances, a financial advisor can help. SmartAsset’s free matching tool can pair you with up to three financial advisors who serve your area.

Bottom Line

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.

Tips for Reaching Financial Security

  • Whether you’re saving for retirement through a work plan or an IRA, a financial advisor could help you create a financial plan for your needs and goals. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • An emergency fund will provide security when unexpected things come up. Where you keep your emergency fund is a personal decision. Some people keep their emergency fund in their regular savings account. If you decide that you need an emergency fund of $10,000 then you can just make sure there are $10,000 in your savings account that you never touch. It can be tempting to spend that money though. In that case, you could create a separate savings account or open a money market account.

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Derek Silva, CEPF® Derek Silva is determined to make personal finance accessible to everyone. He writes on a variety of personal finance topics for SmartAsset, serving as a retirement and credit card expert. Derek is a member of the Society for Advancing Business Editing and Writing and a Certified Educator in Personal Finance® (CEPF®). He has a degree from the University of Massachusetts Amherst and has spent time as an English language teacher in the Portuguese autonomous region of the Azores. The message Derek hopes people take away from his writing is, “Don’t forget that money is just a tool to help you reach your goals and live the lifestyle you want.”
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