Taking a close look at your finances can be intimidating and for some of us stress-inducing. But if you want to become financially stable one day, then you or someone will have to do it.
So it's time to put your big girl panties on and woman up! Because today we are diving into your finances.
Here are the 5 simple steps to becoming more financially stable:
- Take a Snapshot of Your Personal Finances
- Start Building Your Emergency Fund
- Pay off Your Debt
- Begin Saving for Your Retirement
- Plan for Your Big Purchases
Let's look at each of these in more detail below.
Take a Snapshot of Your Personal Finances
What is a personal finance snapshot?
Your personal finance snapshot is an overview, big picture look at where you are currently with your finances.
It should answer the questions: Where are your finances at the moment? How much are you spending vs how much are you bringing in? Do you have debt? If so, how much? etc.
Your snapshot should provide you with a quick look at your overall financial situation. This is key to understanding where you are now so that you can navigate to where you want to be.
Why take a personal finance snapshot?
When you take a look at your personal finance snapshot, you can see where your money is going and begin to understand your financial situation better. You can see what you are doing well as well as some things you may need to work on. Having a personal finance snapshot is key to becoming financially stable.
Saved $3,000 this year? Yay, time to celebrate! ... Spent way too much money eating out? No worries, you can make it up next year!
Overall, you'll be able to determine if you have been making smart financial decisions thus far.
By becoming aware of your money and your money habits, you can be more in control of it. You can begin to direct the money where you want it to go.
And that is hopefully towards a more prosperous and stable financial future.
How do you take one?
Putting together your personal finance snapshot doesn't have to be hard. Start off by writing down your monthly income and expenses. Don't forget to include those silent monthly subscriptions services that we all tend to forget about as well as a miscellaneous category for one-off purchases.
Next, take note of the amount of money in your savings, investment, and retirement accounts. These are your assets. And when you combine all of these together you have a snapshot of your finances.
Feel free to do this on a sheet of paper or in Excel/ Google Sheets. I personally prefer using spreadsheets because if you want to calculate things such as how long it will take you to pay off your debt, you can do so easily.
Your personal finance snapshot will help you stay on top of your finances and make better decisions with your money!
Start Building Your Emergency Fund
What is an emergency fund?
Another important step for financial stability is having an emergency fund. An emergency fund (sometimes called an abundance fund for my money mindset trainers 😉 ) is money that you save in case something unexpected happens and you need a little extra cash.
Life is unexpected and sometimes random expenses that you did not plan for will pop up. Your car suddenly breaks down. The pipes in your house freeze. Your kiddos decided to jump off the porch and twist their ankles.
That is when having an emergency fund will come in handy.
Why do you need it?
You may have heard this fact by now but do you know that the average American cannot afford a $400 emergency? Just $400 ! Crazy, right? This is a statistic we definitely have to change. And that starts with setting up an emergency fund.
Life happens and you want to be prepared for it. Especially if you don't want to go into debt unnecessarily and slow down your plans for financial freedom (Hint: debt is a financial stability killer).
Having an emergency fund helps you to weather these unexpected storms and can prevent you from going into debt which can be a big hurdle on the road to financial freedom. We will talk about debt more a bit later.
How much do you need for your emergency fund?
The amount of money you need for your emergency fund depend on the type of job you have and your family situation. A person who is single with a steady job will not need to save nearly as much as a freelancer with 3 kids.
As a base, if have a steady job, you should save anywhere from 3 - 6 months worth of expenses in your emergency fund. If you want to be more conservative, you can save 3 - 6 months of your income instead.
However, this amount changes drastically if you are a freelancer. If you are a freelancer, you should plan to save anywhere from 6 months to a year's worth of expenses (or income, if you want to be extra safe).
Of course, even saving 3 - 6 months worth of expenses is no small task. Keep in mind that that number is your goal. So don't stress yourself out about building your emergency (ahem ... abundance) fund in less than 6 months.
Really. I love the enthusiasm. But honestly, dealing with money can be stressful enough. You don't want to stress yourself out further by setting unrealistic goals for yourself.
Debt and Your Emergency Fund
There is one thing to note about saving for your emergency fund and that is whether or not you have high interest debt. Having debt with huge interest rates, such as credit card debt, is like having a hole in your financial freedom boat.
If you don't put a stopper to it, you may just end up watching your financial future sink.
So, if you do have high interest debt, it is best for you to have a starter emergency fund of $1,000. Once you have $1k in the bank, you will then use all of your extra cash to pay off that high interest debt instead of building up your emergency fund.
When your high interest debt is paid off, you can go back to building up your emergency fund to where it needs to be.
Have a separate bank account for your emergency fund. Never mix it with your spending cash! That is a recipe for disaster.
Pay Off Your Debt
Why is this important?
In the game of financial freedom, debt is definitely the enemy. Just as the compound interest of your investment account can exponentially grow your wealth, debt can exponentially destroy it.
Debt slows your down your ability to save and invest and hurts your cash flow. It drains your money and just adds another bill on top of your current set of bills. And no one wants that.
So paying off your debt is important if:
- you don't want to waste your money
- you want to have more money in your pocket
- and, most importantly, if you want to be financially free sooner, rather than later.
How to pay off your debt?
I've gone over various debt payoff methods in a previous post so feel free to check that out if you need more in-depth info.
But, essentially, there are two ways you can pay off your debt if you don't think you have any room in your budget: 1.) Decrease your expenses , 2.) Increase your income.
I find that a combination of both of these works best as you will be able to pay off your debt much faster. And trust, living a debt free life will be worth it!
To decrease your expenses, start by cutting the things that you may be paying for and rarely use. Then cut the things that don't bring you joy or only offer temporary happiness. After all, these are a waste of your money as well.
To increase your income, you may want to consider starting a few side hustles. You could drive for Uber, pick up a part-time job, or do online focus groups for a little extra cash.
There is plenty of money out there. You just have to be willing to go out there and get it!
Debt drains your wealth. So pay off your must expensive debt first!
Begin Saving for Your Retirement
An often overlooked step to becoming financially stable is saving for retirement. Saving for retirement is definitely something you'll want to start sooner rather than later. Because, to truly have all of the money you'll need for retirement, you're going to need the magic of compound interest.
Hopefully, your job offers a 401k plan with a match that you can and should be taking full advantage of (that's free money honey!). If so, make sure you are investing enough into your 401k to get the match.
But if your company doesn't offer a 401k, you can always set up your own IRA or Roth IRA and even an HSA if you qualify. These are limited in the amount you can invest per year but at least it is a start.
So, if you haven't already done so, take some time now to open up a retirement account at your nearest brokerage. And start investing.
Should you pay off your debt or start saving for retirement?
Good question. And like all good questions, the answer is, it depends.
For me, paying off debt is hands down the best way to go because I hate the feeling of money being thrown down the drain. Not to mention, if you are unable to contribute a significant amount to your retirement account, then it might not be worth it.
For instance, having just $1000 in your retirement account with an approximate yearly interest of 10% is still only $100. Meanwhile, $1000 on your credit card charging 22% interest means you just lost $220.
On the flip side, if your company offers matching with your 401k, you should definitely invest enough to get that match. Because, at best, it will be a 100% return on your money and paying off your debt can't get you those kinds of returns.
Always Plan for Big Purchases
A key part of being financially stable and maintaining your budget (should you choose to do one), will be planning for your big purchases ahead of time.
No one likes to be suddenly hit with $500 bill for a new washer. So instead of letting these things surprise you, why not plan for it in advance?
If you know your washer is going to go up soon, start saving now. That way, when the time comes, you'll be ready. No stress and no dipping into your emergency fund.
You could set up a "new washer" savings jar or add a savings bucket to your savings account. Either way it is always better to be prepared.
If you want to stay on top of your budget, plan for large purchases ahead of time!
All in All
Becoming more financially stable is not something that can be achieved overnight. It takes commitment and the ability to just take things one step or one day at a time.
And, eventually, if you add the days up long enough, one day you will have achieved the financial stability you've always dreamed of.
Good Luck!
*DISCLAIMER: The Information provided in this post is simply the opinions of the blogger and is given in the spirit of educational fun. It is not investment advice. Please do your own research and decide what is right for you before investing in any asset. If necessary, seek the help of a certified professional in discussing your options.
Hi,
You are so on point when you wrote:
Because many times it is not about how much money you make. But what you do with the money you have that determines your ability to become financially stable.
I often think of athletes and celebrities that at one time were making millions of dollars only to end up without any money. If they had maintained financial stability, they would still be wealthy.
Thank you.
Exactly. Because, as you pointed out, you can make a lot of money and still end up broke. And, on the other hand, you can make very little money and still end up rich. It is all about what you do with your money that matters the most.