Financial stability is everyone's dream. You want to be in a position where you have total control of your finances, have confidence about your future, and don’t struggle to make ends meet. A financially stable person doesn’t have to worry about financial setbacks because they are confident they will bounce back, and they don’t have to overspend or borrow to finance their lifestyle.
Financial stability allows you to set and achieve realistic goals; it gives you peace of mind, enables you to make better and more informed financial decisions, and helps you build a better future for yourself.
So, how can you tell if you are financially stable? This article will explore twelve signs that will help you know how stable you are and what you can do to gain total stability.
Examining your debt-to-income ratio is one of the best ways to look at how financially stable you are. If you spend more than 30% of your monthly income to service loans, you could be digging a rabbit hole for yourself. This could cause you to struggle to meet other financial obligations like paying your bills and investing.
If, for instance, your spend 35% of your income on debt repayment and 30% on rent, you will only be left with 35% to buy food, pay utilities, and school fees if you have children and are still expected to save. This will prove challenging to manage, and you might find yourself taking more debt before the end month.
Having your debt under control allows you to save more, have peace of mind, and be financially stable. Additionally, you’ll be attractive to lenders and qualify for good debts like a mortgage.
What do you do immediately after you receive your salary or count your profit at the end of a month? Do you prioritise paying bills, entertaining yourself, or saving?
The concept of paying yourself involves taking a portion of your income and investing or saving it for future use before you do anything else. It can be as simple as taking 15% of your income and putting it away in your retirement account.
Paying yourself first improves your money-saving culture, keeps you committed to your financial goals, safeguards your future, and all this ultimately keeps you financially stable. If you choose to do the opposite, spending then saving, you will struggle to save.
The best way to develop the habit of paying yourself first is to automate your finances, pay bills in advance, and invest in instruments that force you to make a monthly contribution. Two such instruments are pension schemes and SACCOs.
Read Also: What Does Paying Yourself First Really Mean?
It is one thing to have financial goals and another to achieve them. One of the causes of financial instability is losing track of these goals. When you don’t track and save toward the goals you’ve set for yourself, you will end up wasting money by living beyond your means.
If, for instance, your financial goal is saving for a house downpayment, you will ideally want to cut your housing expenditure for the short term. But if it so happens that you are spending 40% of your income on rent now, you will have problems meeting your goal. You will likely find yourself borrowing from your downpayment fund to pay bills, which will slow you down.
To ensure you stay on track to achieve your goals:
To be in control of your finances, you must know how to balance your income with your spending. This start by knowing how much you earn and subtracting what you spend. If the value you get is negative, you are in boiling soup. If you are breaking even and have zero balance after all expenses, you aren’t very safe.
The easiest way to ensure you have a balanced expenditure is to have a well throughout budget that accounts for all your expenses and aligns with your income. A budget shouldn’t just account for food, rent, education, and other important bills. It should also account for what you save.
For starters, you can adopt the 50/30/20 budgeting rule. It is straightforward and can help you live within your means, keep you financially stable, and help you meet future financial goals. The 50/30/20 budget work like this:
50% - Goes toward needs. This can cover rent, food, health, and minimum expenditures and debts
30% - This portion of your income will cover the nonessentials like entertainment, eating out, etc.
20% - This will go towards saving and investing for your goals
Read Also: 6 Simple Steps to Create a Working Budget
Loss of income can be detrimental and a major cause of financial instability. It will prevent you from being able to pay your bills and meet your other obligations like servicing debt and saving for the future. Different scenarios can lead to loss of income, and you should be prepared for them.
Some of the biggest causes of loss of income are: retrenchment, termination of your contract, your employer going bankrupt, developing a terminal sickness, and forced early retirement. A financially stable person can prepare for all of this by:
By preparing for the loss of income, you will be able to stay stable, bounce back faster and avoid its devastating effects.
Read Also: How to Protect Yourself From Loss of Income
Financial crises are one of the biggest causes of financial instability. How well you can withstand them shows how stable you are. Are you the kind that will go smoothly without a dent when you come out on the other end, or will a crisis lead you to debt and unparalleled instability?
Take the case of Odhiambo’s neighbour Mr. Mutua, a 33-year-old. Mutua is the firstborn in his family and carries financial responsibility. He recently lost his younger brother, who was battling cancer. Mutua paid for all the expenses, including the funeral costs. He did all this without relying on anyone or holding fundraisers.
Odhiambo, who stood by his neighbour throughout the ordeal, could later ask him how he managed all that. Mutua told him that:
Odhiambo took note of Mutua’s suggestions, and he is now on track to prepare himself well for any emergencies that can lead him to instability.
Emotions make you human and can play a significant role in your decision-making process. While this can affect most aspects of your life, the effects can be more grandeur when you let emotions run your financial decision-making. When you are afraid, your mind might be clouded by uncertainties preventing you from taking action. When you are happy and excited, you might make hasty decisions without considering their implications.
A financially stable person makes decisions based on facts. They'll do extensive research and understand the benefits and drawbacks their choices will have. They'll not let fear, greed, or excitement dictate their financial steps. And when they're overwhelmed, they'll seek a second opinion from an expert instead of giving up or making half-baked decisions.
If you do the opposite, you will be relying on luck. And that can backfire. Let's say, for example, greed drives you to purchase stocks of a specific company. Fear will prompt you to sell immediately at a loss when the value deeps after months of going up. The more you take such emotion-induced actions, the more you lose control of your finances.
Paying bills is no one's favourite thing, but you still have to do it. If there was a special spectrum to help you now if you are stable or financially struggling, it could be this. They'll create a scale and ask you, "on a scale of one to ten, how early do you settle your bills?" One being very early and ten being very late.
If you pay your rent before the fifth day of a new month, that could be one, very early; hence you are stable. And if you pay after your landlord has placed a big padlock on your door and you had to find elsewhere to sleep, that could be nine on the scale (very late). And that could mean you are financially unstable.
And this goes for all your bills. If you are struggling to pay them on time, you might be experiencing instability, and you need to find a way to rescue yourself from it.
If you spend less money than you earn from your salary and other sources of income, you are living below your means. And living below your means doesn’t mean you have to live a very frugal lifestyle where you don’t spend money to make yourself happy.
It involves spending money wisely now to avoid going into debt and saving a portion of your income to guarantee yourself stability in the future. Achieving this requires making intelligent financial decisions, sticking to a budget, and cutting back on unnecessary spending to save more.
To stay financially stable and ensure you live below your means, you should avoid blind competition or keeping up with the Joneses. Avoid peer pressure and making financial decisions to please others or show off your social status. When it backfires on you, you will only have yourself to blame.
Retirement is inevitable; whether you prepare for it or not, a day will come when you'll have to hang your tools of trade. And when that happens, you will need to pay your bills and support yourself without any active income. Without retirement planning, you will be forced to depend on your children or the government, which is a risk you don’t want to take.
How well you are prepared to deal with scenarios can show how financially stable you are and want to remain. Starting to save and invest is the only way to ensure you live a comfortable life in your golden years.
How can you save and invest for retirement?
Ignorance is bliss, but when it comes to your finances, you can't afford to be ignorant. Without enough financial knowledge, you will likely make serious financial blunders that can cost you a lot. And it can be hard to bounce back from some of those mistakes, leading you to permanent instability.
Financial education can help you control and smartly manage your finances; it will help you differentiate bad investments from good ones and help you make sounder decisions. To stay financially stable, you need to invest in increasing your financial knowledge. This can be done by reading financial literature, talking to professional advisors, and enrolling in a financial literacy class.
Financial instability doesn't end when you face the inevitable. Even after your demise, you want to be sure that your legacy is protected and your dependents aren't struggling to make ends meet. You want to ensure the wealth you have accumulated, doesn't matter how small it is, doesn't get appropriated, lost, heavily taxed, or claimed by the government. Estate planning allows you to avoid all this.
At all times, ensure you have an up-to-date will, you have an appointed fiduciary to look after and distribute your wealth, and that you have a life insurance policy your dependents can redeem.
Financial stability is a long game. It doesn't end when you are finally comfortable and in control of your finances. That is just the start, and you must now work hard to ensure you don't lose that stability. To achieve that, you will need to constantly review your finances, look for red flags and address any that you find before things get out of hand.
The end goal of being financially stable is to achieve financial security. A point where you are financially comfortable, debt free, and don't have to worry about money. So, you are still in the early stages. But you get closer every day when you take steps that keep you stable and avoid paths that might lead you to lose control of your finances.