Being financially stable is meeting your current and future financial obligations without experiencing financial hardship. This means always having enough money to cover your essential expenses. Expenses cover housing, food, transportation, and healthcare, as well as having money saved for unexpected expenses.
Finances define us as individuals and can be an extremely sensitive topic to most. Financial success can come from a college degree, owning a business, or climbing your way up the corporate ladder.
Succeeding financially also means not allowing your finances to control you. Poor finances may cause loss of sleep, bad moods, stress, and many other ailments. Try your best not to allow your mental health to affect you negatively.
Achieving Your Goals
With a stable financial foundation, you could afford a down payment on a house, buy a new car, start a business, or even start saving for an early retirement. Despite having to worry about bills you can now focus on financial goals.
Always have enough money saved to cover your essential expenses and some unexpected expenses. A little cushion of savings is also necessary to relax and focus on other things in your life.
Unexpected events, such as a job loss, medical emergency, or natural disaster, can be financially devastating. Having your finances in order will better prepare you to weather these events.
Proper training to achieve financial stability will take time and patience.
Early Retirement
Retiring early is very possible to achieve if you have the right plan and mindset. You could easily set up your own savings fund and have access to it anytime, instead of a 401k.
Your goal is to start saving early and leaving below your means. Living below your means is not spending every penny you make to afford a huge house or fancy car. You could live even better during retirement having saved the proper amount of money.
Nothing wrong with living each day as if it were your last, but try to think of longevity. Start saving now or you will regret not saving later. Take a small percentage of each paycheck and put it in a separate account.
Sometimes, people close to retiring get screwed over by their company and lose their entire pension. This happens too often and causes people to work way past retirement age. For more information on early retirement, check out the FIRE (financial independence, retire early) movement.
Quit wasting your time working for a company that treats you as a number and not your true value. Retire when you want to and not when you have to.
Budgeting Tips
Budgeting can be extremely difficult to do especially if your income is tight. Concentrate on obvious priorities like bills and savings. Forget buying anything you want and focus on what you need. Sometimes when finances are tight you need to stay strong and wait until you can comfortably afford a big purchase.
- Create a Budget. Record income and expenses to see where your money is going. Only then can you make adjustments to spending habits in hopes of freeing up some money.
- Pay Off Debt. Focus on paying off your high-interest debt first, such as credit cards. Sell items you no longer need and use the money to pay the debt off.
- Emergency Fund. Aim to have at least three to six months of living expenses saved in an emergency fund. This will give you a financial cushion if you experience a financial setback.
- Bad Habit Spending. Analyze your bad habit spending (cigarettes, alcohol, gambling, etc.) and cut it in half. That money could now be saved while still being able to enjoy some bad habit spending.
- Seek Professional Help. If you are struggling to achieve financial stability, consider talking to a financial advisor.
Given these points, you should also find unique ways to make additional money on the side. A lot of people have a side hustle they tell very few about. Time to find a side gig of your own.
Make Money with Money
Nobody likes being told how to spend their money. We are supposed to learn proper ways how to spend money at an early age however, most of us learn wrong. We end up deep in debt and live with little savings.
Even people with college degrees struggle financially because now they have to pay back their student debt.
A college degree may grant you higher pay, but that extra pay is going toward student loans. DO NOT borrow for college unless you already have a solid plan of paying it back in a short time. This type of debt could live with you for 20 years or more.
Income
Surviving in society involves having a proper income. Income can come from many sources and may include, but is not limited to the following:
- Wages and Salaries. The most common form of income. Wages are forms of payment done by the hour whereas a salary is normally expressed annually, yet paid weekly or bi-weekly. The difference with a salary is you get paid the same regardless of hours worked.
- Self-employment. Earnings from your own business. Owning your own successful business will contribute to financial stability.
- Investments. Stocks, bonds, and real estate may yield a good return on investment.
- Government Benefits. Unemployment, social security, or welfare should be used only temporarily.
- Inheritance. Any income gained from an inheritance, if you are so fortunate.
Learning that you receive income from a job to pay for your expenses is not correct. Makes sense considering that is what most are taught. However, there is a very important concept that can allow your money to work for you.
In addition, if a job loss occurs, expenses begin piling up. It is possible to pay expenses without having an income. This is where the term asset comes in. Having assets can further your financial stability in more ways than you can imagine.
Assets
An extremely important factor most of us never learn is something called an asset. An asset is something of value that can generate income. They can be tangible (property or equipment) or intangible (intellectual property or goodwill). One perfect example of an asset is a house.
One thought is to buy a house, fix it, and sell it for a profit – OR – fix the house up and rent it out. Imagine having a house that you live in and a house that you rent out. Charge enough so that the rented house income covers your mortgage, too.
Assets can provide security in the event of financial hardship. If you lose your job you lose your income, but the revenue generated from your assets will help to cover your expenses. The whole idea is to let your assets pay for expenses.
Most people use their income to pay for expenses and when that income stops, financial instability occurs. A smart thing to do is to use a sizable portion of your income to improve your assets, thus increasing value and revenue.
Investing in assets can make you a lot of money provided you make the right decision. Assets are also more secure and less risky to invest in than liabilities.
Liabilities
Liabilities are debts or obligations that a person or business owes to another party. They can be incurred in a variety of ways, such as through borrowing money, purchasing goods or services on credit, or being sued. There are some ways to make money from liabilities indirectly.
A business owner may take out a loan to finance the purchase of equipment. The equipment is an asset that can generate income for the business, and the loan is a liability that must be repaid.
If the business is successful, the income from the equipment will be more than enough to cover the payments on the loan. The business owner will then make a profit on the investment.
Another example is a hedge fund manager using leverage to invest in stocks. If the value of the stocks increases, the hedge fund manager will make a profit on the investment. However, if the value of the stocks decreases, the hedge fund manager will lose money on the investment.
Lastly, a debt trader may buy a portfolio of bonds that are trading at a discount. If the interest rates go down, the value of the bonds will go up. The debt trader can then sell the bonds at a profit.
It is important to note that there is no guaranteed way to make money from liabilities. The risks involved in these activities can be significant, and you should only do them if you fully understand them.
Expenses
We all hate paying bills and would rather spend our hard-earned money on ourselves. As reality has it, we must pay our expenses because that is how the world works. Expenses are constant and reoccurring which is why you must budget adequately.
There are several categories that expenses may fall under. The most common categories include:
- Fixed expenses are consistent from month to month such as rent, insurance, auto, etc.
- Variable expenses vary monthly and range from groceries, gas, entertainment, etc.
- Intermittent expenses occur less frequently like car repairs, medical bills, vacations, etc.
- Discretionary expenses are used for whatever your heart desires.
Do your best to allocate a proper percentage of your income to these categories. Once fixed expenses are covered, see if there are ways to lower your variable expenses.
For example, try using coupons to save on groceries or consider going out less. If you go out once a week, go every other week and save that money. Using a smart thermostat is a great way to save on energy costs and save even more money.
Every dollar adds up, so be a little frugal, especially in the beginning.
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Resources:
- London Business News
- Times Money Mentor
- Investopedia
- Featured Image Courtesy of Free Stock photos by Vecteezy