Financially stable means being responsible with your money, saving, budgeting, and preparing for the unexpected. Unfortunately, fewer than 1 in 3 adults in the U.S. say they are financially secure.1
Maintaining a firm grasp on your finances is not always easy. You can work hard at being frugal, creating a budget, and being responsible, and then one unexpected expense throws everything off. Unfortunately, this happens to the best of us. And sometimes, it’s unavoidable.
All you can do is prepare for the unexpected while everything is good. And there are a lot of ways to prepare. Learning these skills may end up saving you a lot of time and money in the long run. So learn them now, to avoid a lot of financial heartache in the future.
Read on to learn more about financial stability, the best ways to manage your personal finances, and how to prepare for the unexpected.
What Is Financial Stability?
Being financially stable means that you have control over your finances. For example, you know where your money is spent, you have the income you need to pay your bills, and you’re saving for a rainy day.
Below are some of the factors that will determine whether or not you’re financially stable:
- You make enough money to pay all of your bills and expenses.
- You pay your bills and expenses on time.
- You’re regularly monitoring your credit scores and credit reports.
- You know how to responsibly use a credit card and pay it off immediately.
- You’re saving money for unexpected expenses or future large purchases like a home or car.
- You don’t have too many loans or credit cards.
- You regularly create a budget and stick to it.
- You’re good at avoiding purchases when it’s a want vs. a need.
- You don’t have too much debt.
Every single one of these factors plays into whether or not you have financial security and stability. But it’s not all or nothing. If you can check at least a few of these off, then you’re doing great, and you’re on your way to mastering your money!
It’s important to remember that becoming financially stable certainly doesn’t happen overnight. It takes a lot of hard work, dedication, and time. But if you’re willing to learn the basics and put in the work, you’ll start to become comfortable managing your money, and you’ll see your credit score rise.
Becoming Debt Free
The amount of outstanding debt you have says a lot about your financial stability. After all, if you have too much debt to make the payments you need to, you’re probably struggling financially. Overwhelming debt can lead to late fees, more interest charges, and sometimes even collection agencies.
So what’s the best way to tackle all of this debt? Well, there are several strategies for paying off debt, but it mostly comes down to one thing: consistently making payments. And to do this, you might have to figure out how to make some extra money.
Finding ways to make more money may not be easy, but it will help pay off your debts. Consider a part-time job on the side, a side hustle you’re passionate about, or even driving for ride-sharing or delivery apps. Driving for ride-sharing or delivery apps can be a great way to set your own schedule and work as much as you want or need to.
Once you have more money coming in, you can allocate that cash to paying off your credit card debt, utility bills, or even student loan debt.
Building Up Your Savings
Another essential part of improving your financial health is learning how to save money. Saving money will come down to two things: making enough to set some aside and proper budgeting.
Start by creating a monthly budget. Total up all your monthly expenses like bills, rent, gas for your car, groceries, etc. Now total up all of your income for the month. Subtract your total expenses from your total income, and now you know how much is left over.
What you do with the leftover amount is ultimately up to you, but saving a percentage of it can help you achieve financial stability.
Understanding Financial Literacy
Becoming financially stable will require you to assess your own financial literacy. Financial literacy means possessing the knowledge and skills necessary to manage your finances properly. In addition, it means being familiar with common personal finance terms and practices.
Personal Finance Basics
Being financially literate will require you to be familiar with the following concepts:
- Creating and implementing a budget
- Adding to a savings account for future large purchases
- Building an emergency fund
- Saving for retirement
- Paying down your debts
- Purchasing insurance
- Monitoring your FICO score
These are just the basics. Once you’re familiar with these, you start to explore other areas of financial literacy, like investments.
Credit Scores & Reports
Your credit report is generated by a credit bureau and is an essential part of your financial life. The three major credit bureaus track and organize your financial behavior. For example, they monitor whether you make payments on time, how much debt you have, and how you handle credit cards. Then, they use this information to assign you a three-digit number known as a credit score.
Your credit score tells lenders, banks, and other financial institutions how trustworthy you are with money. As a result, they tend to offer the best loans and interest rates to borrowers who have proven that they are responsible.
Another way you can contribute to your overall financial stability is by improving your credit score. You can do this by:
- Making your payments on time
- Keeping your overall debt low
- Maintaining a diverse credit mix (different types of credit/loans)
- Avoid opening a lot of new credit accounts
If you focus on these things, you can start to improve your credit. And a higher credit score will lead to better financial products and interest rates in the future.
Getting Out of a Bad Financial Situation
For many people, the reason they are financially unstable is because of unexpected expenses and emergencies. For example, maybe you have a hospital bill you can’t pay, or your vehicle just broke down, and you need to fix it. These types of emergencies can throw off an entire monthly budget and make it difficult to recover.
In situations like these, many people aren’t sure where to turn. If you don’t have an emergency fund ready to go, then it may seem like there’s no way out. Some people choose to apply for a personal loan to pay off debts like these. But before you fill out application forms for installment loans, make sure that the loan and lender you’re applying for are credible and trustworthy.
The Dangers of Debt
Ending up in debt from a financial emergency is no fun at all. And if you don’t handle the situation responsibly, you could potentially make the situation worse. Debt has a way of snowballing into more debt if you don’t know how to handle it.
For instance, let’s say you end up with a hospital bill that doesn’t fit into your budget. Unfortunately, this can lead to more debt, garnished wages, and a lower credit score.
Eventually, failing to pay a debt will lead to the debt being sent to a collection agency. Once this happens, your credit score will drop significantly. You can also end up having wages garnished from your paycheck to repay the debt.
It’s best to avoid this scenario by talking to the hospital or company you owe and being truthful. They may even allow you to set up a payment plan so you can chip away at the debt slowly.
But some borrowers choose to apply for quick cash loans to settle other debts.
A predatory loan would be any loan that comes along with an extremely high interest rate, very short repayment period, and unfavorable loan terms.
Payday loans are a perfect example of a predatory loan. This is because many of them have unreasonably high APRs and force the borrower to repay the loan within only a couple of weeks. This makes payday loans very difficult to repay on time.
If you’re in a financial emergency, it’s best to avoid payday loans and other predatory loans. They may be tempting, and it may seem like you can get the cash you need quickly. But the high rates and unreasonable loan terms might make your financial situation worse.
When a borrower can’t repay a predatory loan, the lender may extend the loan term. This is known as “rollover,” and it’s common practice for predatory lenders. It may sound like a good thing, but it leads to more interest and more fees. These additional charges can create a cycle of debt that’s difficult to escape.
The bottom line is, being financially stable means avoiding predatory lenders, even during financial emergencies.
Managing Common Loans
If you want to be financially stable, you’ll need to manage your loans and make sure you’re paying them on time. It might not always be easy, but it’s one of the most critical factors that affect your credit score.
If you’re like most Americans, you probably have at least one loan. But, let’s face it, you probably have several. And keeping track of all the payments and due dates may be overwhelming. So it’s wise to automate the process by setting up automatic personal loan payments. In addition, using an auto-pay feature will help you to avoid missed payments and late fees.
Here’s a shortlist of some of the most common types of loans out there and some best practices for managing them:
An auto loan can help you purchase a vehicle that you don’t have the cash to pay for all at once. You can get one through a bank or credit union or through the car dealership itself. Having a high credit score will help you to get a better interest rate on your auto loan.
Auto loans are usually repaid over five years, but it will depend on your specific loan and lender. And just like with any other recurring monthly expense, we recommend setting up auto-pay, so you don’t have to worry about making your payment on time.
Because an auto loan is a secured loan, failing to make payments means that the car company will take the vehicle away. Missed payments can also lead to a drop in your credit score.
A mortgage is a loan to buy a home or property. These tend to be substantial loans since properties are usually quite expensive.
Mortgages are often given based on a 15 or 30-year repayment schedule. If you need lower monthly payments, you would want to use a 30-year schedule to provide you with more time and lower monthly installments.
Just like with any other type of loan we’ve mentioned, a better credit score will mean a better interest rate and more favorable loan terms. But, on the other hand, a low credit score might make it difficult to even receive approval for a mortgage at all.
Student loans are relatively self-explanatory. It’s a loan that you use to pay for higher education like a traditional college or technical school. And because college is so expensive, student loan debt can take a long time to repay in total.
Remember, just because you have a high debt like a student loan doesn’t mean you aren’t financially stable. As long as you consistently make your payments on time and pay off the loan by the due date, you can maintain financial stability.
If you’re having trouble repaying your student loans, many lenders offer what is known as forbearance. This is a way to pause your payments for a set period until you’re financially stable enough to resume. But keep in mind that interest will likely continue to accrue during a forbearance period. So be careful with how long you keep a student loan in forbearance.
A Final Note on Financial Stability From CreditNinja
The bottom line is that being financially stable means taking ownership of your finances. Learning how to make your money work for you can make debt repayment easier. Whatever your journey is with becoming financially stable, CreditNinja wants you to remember that financial freedom is possible.
Financial stability is a process, and it’s not easy to achieve financial peace of mind. But if you work hard, research personal finance best practices, and put in the time and effort, you can obtain financial stability.
And if you want to increase your financial literacy, check out the online CreditNinja blog. You can read about various financial topics, such as credit scores. Credit is important, so understanding your credit score is critical for financial wellness. For example, you can learn how to improve a Tier 4 credit score.