Financial stability is your first step on the road to financial security and freedom. Being financially stable means that the money coming in (money earned) is greater than the money going out (money spent). Traditionally, that would mean earning more and spending less, but there’s a lot more involved in the equation. These six essential steps will help you achieve your long and short term goals of financial stability.
Step 1 – Live Within Your Means
For some people, this is much easier said than done. Until you get your spending under control, however, you will never be able to achieve the financial stability you seek. There are several parts involved in this step:
- Determine your monthly income. This is the foundation for a working budget. It tells you how much money you have to work with each month.
- List all of your expenses. Mortgage payments, car notes, utility bills, credit cards, etc. Don’t forget things like club memberships and entertainment subscriptions, as these expenses all add up. Also include money for things like vehicle maintenance, fuel, transportation expenses, clothing, children’s education, children’s activities, and household maintenance.
- Subtract the expenses from your income. If the numbers are grim, it’s time to dig deep and make some big changes in your lifestyle, if you truly seek financial stability.
Step 2 – Reduce Spending
Once again, this is a multi-step process. Go through your monthly expenses and identify the things that aren’t essential. Are you paying for gym memberships you aren’t using? Can you reduce monthly mobile phone expenses by switching plans? Are there other expenses you can eliminate or reduce?
The next part of this process is to prioritise your other monthly expenses. Things like entertainment, clothing, dining out, etc. These expenses add up from month to month and can greatly affect your financial stability. Prepare meals ahead of time and take them to work. This reduces the need to dine out and forces you to plan meals ahead of time, thus reducing shopping expenses.
Consider downsizing your transportation costs. This can involve getting rid of a car payment and utilising public transportation, walking, or saving ahead and paying cash for a car rather than purchasing one with a loan.
Step 3 – Start a Rainy Day Fund
You might not realise how important saving money each month is to the process of building financial stability. It is one of the most essential ingredients. By having a rainy day fund, you have the means to take care of life’s little emergencies out-of-pocket rather than turning to high interest credit cards or emergency loans.
Step 4 – Reduce Bad Debt
This is a process, depending on your past spending habits, that may take some time. You need to reduce or eliminate as much bad debt as possible.
What is bad debt?
Bad debt is debt that doesn’t have the potential to add value. Things like mortgages, business loans, and educational loans are all considered to be good debts that will potentially recover themselves over time. Bad debts involve things like credit card debt, consumer loans, and auto loans. These things either have interest that accumulates each month or depreciate (lose value over time). Pay them off and eliminate them altogether.
Step 5 – Save More Money for the Future
Not everyone can go out and get a second job to save for retirement. Fortunately, that isn’t the only option available to you. Some people make extra money doing things like freelancing from home and personal tutoring. One other, highly important option for saving money for retirement is through financial planning. If you’re relatively new to the world of financial planning, a firm such as Fisher Investments UK has information to help you figure out how much you need to save for your retirement and offers current market analysis. This information may give you a sense of what you need to do to build the financially stable future you’re looking for.
Step 6 – Automate the Bill Payment Process
Automating your monthly bill paying process means you do not need to write cheques and mail them off each month in order to take care of all the bills. This not only frees up valuable time, but also eliminates wasteful spending on late fees and greatly reduces missed or overlooked payments.
These six simple steps work together to create a financial future that is full of stability and will start you on a path toward financial freedom as you face the ups and downs life has to offer.