5 Secrets for How to Become Financially Stable
Even if you don’t have excess income you can achieve financial stability.
Financial stability can be tricky. You may assume that more income means greater stability, but that’s often not the case. Even with a six-figure salary, if your expenses outweigh your income then it may be impossible to be financially stable.
The good news is that with careful planning and a little common sense, you can achieve and maintain financial stability. Limited income may not be as much of a roadblock to reaching your financial goals as you think. By getting organized and taking steps to take control of your finances, you can reach a stable financial outlook.
#1: Credit card debt is the primary opposition to stability
There is no financially beneficial reason to carry credit card debt balances over from one month to the next. It doesn’t help your credit and it certainly doesn’t do any favors for your budget. If you have credit card debt, you need a plan to eliminate it as quickly as possible.
The reason credit card debt is so bad when you want to be financially stable is that it creates larger and larger bills. Since credit cards are revolving debt, the minimum required payment increases along with your balances. As a result, the more you charge the more you must pay each month. This means credit card debt can easily take over your budget and drain valuable income.
Eliminating your debt clears also eliminates bills so you can use your income for other things. So, the sooner you eliminate credit card debt in-full the faster and easier it will be to become financially stable.
Use these resources to craft a debt elimination plan that won’t damage your credit:
- Explore options for debt consolidation
- Do you need the help of a credit counselor?
- Learn about a debt management program
#2: An emergency fund minimizes financial vulnerability
A proper emergency fund is an essential tool to support financial stability. It ensures you can cover an unexpected expense, like a car repair, without relying on high interest rate credit cards. And the peace of mind you get from having that safety net in place is priceless. You don’t have to stress every time an emergency happens.
Most experts recommend that a good emergency fund should cover about 3-6 months of bills and other necessary budget expenses. But really, that amount is only necessary to cover unemployment or an extended illness.
If you’re just starting to save, aim for $1,000. This is usually enough to cover a major car repair, home repair or out-of-pocket medical bill. It’s also small enough that you can save effectively for it and feel like you’re making real progress,
Once you have that $1,000 then you can start working towards the full emergency fund you need for long-term stability. But starting out with a SMART goal like saving $1,000 gives you an achievable amount you can aim for so you can stay motivated.
#3: It’s past time to tackle your student loans
Student loan debt is the second most prevalent risk-causing source of debt for most households. There are a few reasons why student loan debt is so problematic for your budget:
- High student loan debt throws off your debt-to-income ratio. That makes it tough to borrow for things you need, like a car or first home.
- Unless you consolidate with a repayment plan, the amount you owe each month is based on how much you borrowed. Thus, monthly payments can be high relative to your income.
- Student loans can’t be discharged by bankruptcy, except in rare cases that are tough to prove for most borrowers. Even private student loans can’t be discharged.
- These loans can lead to wage and tax garnishment. Your paychecks can be reduced and your tax refund can be intercepted.
The faster you can eliminate your student loan debt, the better. Luckily, there are federal repayment plans available to make it easier to eliminate federal student loans. You can choose a plan that pays off your debt quickly if you have room to do so in your budget. Otherwise, there options that match the monthly payment requirement to your income so your loans are easier to repay.
Paying off student loan debt fixes your debt-to-income ratio so it’s easier to get approved for new financing. It also means fewer debt obligations on your plate, which reduces financial stress.
#4: You need to stabilize your credit, too
Establishing a stable credit outlook is a key part of becoming financially stable. If you don’t have good credit, creditors consider you a subprime borrower. This means you can be subject to higher interest rates and more restrictive terms on loans and new lines of credit.
If you have good credit, it fosters financial stability because it allows you to borrow easily. When you need a new car, you can get a favorable loan and potentially take advantage of dealership financing incentives. If you want to buy a home, you don’t have to stay up at night wondering if you can get approved.
Thankfully, if you take steps to eliminate credit card and student loan debt, your credit should already be in a better position. You can review your credit report to make sure it’s error free. If you find a mistake, dispute it to have the incorrect information removed. If you still aren’t satisfied with where your credit is, take steps to build credit.
#5: Bite the bullet and start a budget
We know – no one wants to hear that they should invest the time to make a budget. But it’s a simple fact that organizing your finances in a budget works. You know where your income goes each month and how your money gets spent. It’s easier to factor in savings and craft effective debt elimination strategies if you have real numbers to use. That’s what a budget provides.
Now for the good news: Technology available today makes it easy to budget. Instead of old-school pen and paper calculations or annoying spreadsheets, you can use an application to make your budget for you. Start by checking with your bank; you may have a Personal Financial Management (PFM) tool integrated into an online banking system. Otherwise, there are a range of secure, third-party budgeting tools you can find online.