I’ve heard a lot of people talk about financial stability as a necessary step towards financial freedom. They either want to achieve it or they fear it’s unattainable. Personally, I feel it’s within reach, although I don’t think it’s something we can achieve quickly. But before we go any further, you might wonder: what is financial stability?
I did a search to see how others define financial stability. Interestingly, many people have their own idea or definition of what it means to be financially stable. One individual might feel he’s stable as long as he can pay his bills. Other people might not feel financially stable until they’ve paid off debts or built a three to 6-month cash reserve–your emergency fund.
One Phroogie asked this question and here’s the answer we gave her–Financial stability (the reaching of one’s financial goals) is the results from one’s efforts to achieve personal economic satisfaction.
There’s no single definition, but for the most part, financial stability is a state of being comfortable with your budget and feeling you have enough income to meet your needs. This doesn’t mean you have to earn a ton of money to be financially stable. Depending on your lifestyle and how you spend money, you might have stability by earning just $25,000 or $30,000 a year. You don’t have to be rich to be financially stable.
Achieving financial stability might be one of your short-term or long-term money goals. You probably have an idea of what financially stability feels like, and in your mind, you haven’t reached this point. However, a closer look at your financial situation may reveal you’re already in a good place financially.
Jason Vitug recently described the 5 stages on the road to financial wellness. In his roadmap, financial stability is the place between stage 2 (financial capability) and stage 3 (financial security). I think you might just be more stable than you think.
Here are nine signs of financial stability so you can have more peace of mind:
1. You Don’t Lose Sleep Over Money
Even if you haven’t hit all of your money goals, you might be financially stable if you’re able to sleep at night without worrying about your job, bills and the economy. This isn’t to say that you don’t have anxieties. But, unlike some people, your worries aren’t money-related.
2. You Can Pay Your Bills
I’m the type of person who likes to look on the bright side. Yes, I hate the fact that my husband and I pay a ridiculous amount of healthcare every month despite being relatively healthy. And yes, I hate how the cost of food and living continues to rise. I feel life can be a financial ripoff. But when I take a step back and put things into perspective, I’m thankful for the fact that I’m able to pay my bills – especially when I speak with others and hear their struggles. Plus, there will always be ways to save on bills.
3. You Never Bounce Checks
Many banks give account holders the option of overdraft protection, which automatically transfers funds from a linked savings account to a checking account if they don’t have enough funds to cover a transaction.
But never having to use overdraft protection is a sign of being financially stable. This means you have adequate cash flow into your bank account to cover checks and debit card transactions. Additionally, you probably have a good routine of monitoring your balance so you don’t overspend. Set alerts to notify you of your daily balances and transactions. Monitor your spending with a separate budgeting app like Mint or Personal Capital.
4. You Don’t Use Credit Out of Necessity
There’s nothing wrong with paying for items with a credit card. Using a credit card responsibly helps improve your credit score. Financially stable people, however, don’t use credit out of necessity or as an extension of their incomes. Rather, credit is a choice – perhaps a tool to earn reward points or cash back. That’s why many people choose to use credit. The more you learn how to use credit as a tool not, you’ll discover ways to make it work for you.
5. You Constantly Receive Invitations for Credit
If you receive more pre-approved credit card offers than bills, you may be financially stable. And if these credit cards feature low rates and attractive perks, you’re probably doing really well. These credit card offers are based on pre-screening your credit report. Jason Vitug recommends that you opt-out of pre-screened credit offers.
After all, not everyone qualifies for top credit card offers. These are typically reserved for people who have a good debt-to-income ratio. Sometimes credit card offers can really help one’s self-esteem.
6. You’re Paying Yourself First
Many hardworking people can’t afford to put money into savings every week or month. Financial stability isn’t only about paying bills and having minimum debt, it also involves having the disposable income to take care of other needs such as building an emergency fund or saving for retirement.
7. You’re Living Within Your Means
I once read a news article about a married couple who earned about $200,000 a year, yet they were seeking advice on how to handle their financial problems. Now, if I earned this much a year, money would be the least of my worries. And I initially thought the article was a joke. That was until I read a rundown of their monthly expenses.
If I remember correctly, this couple brought home about $12,000 a month, after taxes and other deductions, yet they were spending roughly $2,000 more than their take-home pay. I say all of this to drive home a point stated earlier: you don’t need to earn a lot to be financially stable. One of our phroogal writers, Will Lipovsky saved 85 percent of his income. In your case, there are many ways you can save more than you spend.
You might feel financially stable earning $30,000 a year, whereas someone earning double or triple your salary might feel his finances are out of control. The big difference is lifestyle choices. Someone making more may be spending more to keep up with the Joneses and their extravagant lifestyle.
8. You Have a Backup Plan
Unfortunately, you can lose a job or go through something else that completely destroys your finances. However, you can maintain some stability with a backup plan, such as a cash cushion with six to twelve months’ worth of income, or perhaps a side hustle to supplement your income and keep your head above water when you have expected expenses.
9. Others Seek Money Advice From You
You might think you’re not financially stable but others may feel differently. Your close friends and relatives may observe your money habits and respect the wise decisions you’ve made. They may feel you have a firm grasp on your money, thus the best person to get advice from on saving, budgeting or managing credit.
Be mindful of the advice you share with family or friends. You don’t want to strain any relationship or stress yourself when your friend doesn’t follow the advice you’ve given.
To wrap things up…
I might not know the exact definition of being financially stable is for you. But I know it starts with the right mindset. Getting to a point where you feel in control of your finances takes time. If you haven’t reached this point yet, don’t worry – it’ll happen. It takes time to shift your mindset and change your behaviors. Remain mindful of the financial decisions you make to benefit–and not hurt–your personal finances to reach financial freedom.