When it comes to financial matters, there is a wide range of situations to be in. Your finances could range from enjoying financial freedom to living paycheck to paycheck. But somewhere in between, you’ll find your footing as a financially sound household.
For many, this is a worthwhile money goal. Let’s explore the financially sound meaning. Plus, how you can push your finances toward this goal.
Financially sound meaning
Essentially, this benchmark means you have the ability to make good financial decisions on a regular basis. For example, someone who is financially stable might have the willpower to stick to their budget.
Beyond good financial decisions, you should have enough money to stay afloat during an emergency. Having the funds you need to pay your bills during an emergency is a key feature of this concept.
For example, if you lose your job, someone who is financially sound would have some money saved up to cover costs until you find your next job.
It's about stability with money
Importantly, you don't need to become a millionaire or have the funds to retire immediately to consider yourself financially sound. But if you can support yourself with a prolonged gap between paychecks, you can count yourself as stable with money.
The ultimate result of this idea is a stable situation. Ideally, households that practice this will see their net worth rise over time. Although it takes time to build stability, the hard work can be worth it in a big way.
How to create a financially sound plan for yourself
Regardless of where you are starting from, it can take a significant amount of diligence to hit this milestone. Luckily, it is entirely possible to move toward financial stability by making one smart financial decision at a time.
Below you’ll find a step-by-step guide to help you achieve financial soundness.
1. Assess where you stand
The first step to becoming stable with money is assessing where your finances currently stand. You can dive into this step by taking a hard look at your financial picture. A few things to look at include your net worth, your income, and your debts.
Here's a closer look at how to evaluate your net worth and your income.
Your net worth
Determine your net worth by subtracting the total amount of your liabilities from the total sum of your assets.
Assets include things that have value. In contrast, liabilities are a drain on your finances.
For instance let's say you have $10,000 in your savings account, $10,000 in your investment account, and a $5,000 balance on your auto loan. Without any other assets or liabilities, your net worth would amount to $15,000.
If you have a positive net worth, you are already on the right track in terms of building a financially sound life.
It’s also possible to have a negative net worth, which happens when the sum of your liabilities outweighs the sum of your assets. While a negative net worth is a challenging place to start, it’s still possible to transform your financial situation.
Your income is an essential part of any financial plan. With an income, you can pay your bills and use the surplus to save and invest.
An assessment of your income can start by looking at your pay stubs. Although you might know your gross pay, it's more important to understand your take-home pay. Your take-home pay includes the funds you get into your bank account after you pay for required taxes.
Once you have a picture of your income, it's time to stack it against your spending. Ideally, you'll spend less than you earn. If you are spending more cash than you earn, it's time to make some adjustments to either your income or spending.
Luckily, it's possible to grow the gap between your income and expenses by increasing your income through side hustles or cutting down on your spending.
2. Create a budget
The cornerstone of any financial plan is building a budget that works for you.
On the most basic level, a budget should help you avoid spending more money than you earn each month. You can break down your budget based on different spending categories.
For example, you might choose a set amount of money for housing, vehicles, and food.
Keeping track of your expenses with a budget can also help you pay your bills on time. In addition, if you have trouble remembering deadlines, consider putting your bills on an automatic payment schedule.
3. Set future financial goals
Financial goals are a big deal for those on the path to financial stability. Everyone has a slightly different take on their financial goals. But it’s important to set financial goals that align with your future plans.
A few examples of financial goals include saving for a big vacation, saving for holiday expenses, building an emergency fund, paying off debt, and covering a home improvement project. The reality is that everyone’s goals will look a little bit different.
4. Make a debt repayment plan
Debt is a drain on your financial situation. In fact, the average American has $96,371 in debt.
Staying on top of your monthly payments quite literally sucks the funds out of your budget, and makes it difficult to become financially sound.
Not all kinds of debt are created equally. For example, many consider credit card debt to be one of the most notorious types of debt while many consider carrying a mortgage a normal expense.
But in any case, the interest rate attached to your debts means that the burden is slowly draining away your funds.
If you have debt on your books, it’s time to take a close look at the balances. Some may decide that paying off their debt sooner is the right move for their finances.
Strategies to get rid of debt quickly
If you are facing a mountain of debt, it’s critical to create a plan to eliminate it. The only real way to get out of debt ahead of schedule is to make more than the minimum payment toward the balance. But some strategy comes into play.
Two popular repayment plans include the avalanche and snowball methods. Review the benefits of each to decide which is best for you.
5. Build emergency savings
An emergency fund is an important building block in your financially sound future. Essentially, an emergency fund protects your finances from unexpected expenses.
For example, let’s say that you get a flat tire. Instead of slapping the cost on your credit card and slipping into debt, you can reach into your emergency fund to cover the necessary expenses.
Most experts recommend saving between 6 to 12 months of expenses in an emergency fund. The funds should be kept accessible, which makes a high-yield savings account a good option.
6. Build retirement savings
While retirement might seem like something in the very distant future, the reality is that it takes a significant amount of time to save for this major lifestyle change.
Since retirement is a necessity and a dream for most, a financially sound plan isn't complete without an emphasis on retirement savings. If you want to retire at some point, then the best time to start saving is right now.
The sooner you begin saving, the longer your funds have to grow over time. Depending on your situation, you might decide to tuck these funds into a 401(k), IRA, or other tax-advantaged retirement accounts.
If your employer offers any matching funds, do your best to make enough contributions to snag that free money.
Regardless of where you are starting from, start stashing funds into retirement savings today.
7. Save for short to mid-term goals
Retirement might be the most substantial long-term financial goal for most households. But there are plenty of short-term and mid-term goals to hit along the way. A few short to mid-term goals might include a fun trip, a new vehicle, a wedding, or a down payment on a house.
Everyone has short to mid-term goals that will require some kind of funds. So take a look at the next ten years.
If you have big plans, start saving for those goals now. With a focus on saving, you can push your finances forward.
Use sinking funds to help you save
One way to save is by including a sinking fund in your budget. In other words, you’ll choose to save a set amount of money toward a specific goal each month.
For example, if you want to pay for a $12,000 wedding in two years, then start saving $500 per month.
8. Don’t forget proper insurance
Insurance is an often overlooked area of personal finances. You might carry some type of insurance, like health insurance or car insurance.
But it’s crucial to take a look at the big picture when buying the appropriate amount of insurance. Without the right insurance, you might not be as financially sound as you think.
Insurance you might need
A few different types of insurance include:
- Life insurance
- Long-term disability insurance
- Renters insurance
- Pet insurance
- Personal article insurance
- Homeowners Insurance
- Identity theft protection
- Umbrella Insurance
- Health insurance
- Dental Insurance
- Long-term care insurance
In general, most of us hope to never file an insurance claim. However, many have to unexpectedly rely on their insurance policies to cover the costs after an unforeseen event.
With that, it never hurts to pay for the peace of mind that proper insurance can give you.
9. Build financial literacy
Financial literacy gives you the tools you need to make smart financial decisions. You can get control of your financial situation by learning the basics of personal finance. A little bit of information can go a long way toward helping you reach financial freedom.
A few ways to beef up your knowledge include reading books and exploring personal finance blogs. You may be surprised by all the things you learn along the way.
It’s possible to become financially sound!
While it might not happen overnight, consistently making smart financial choices should push you closer to understanding the financially sound meaning and living this type of lifestyle.
As you work toward this stability, don’t be afraid to take action to move the needle toward your goals.
When you follow the steps above, you'll have a rock-solid plan to create a financially strong future. In the meantime, you can also learn about building generational wealth and the secrets to gaining wealth.