Have you ever met someone who doesn’t seem worried about money? They might always have extra cash for the things they want, or, they always have the money to pay their bills in full — even the unexpected ones. This person is likely financially stable.
What does being financially stable mean? It can look a little different to everyone, but someone who’s financially stable usually doesn’t have to worry about making ends meet each month.
They might also have extra money for things like spontaneous purchases. The great news is you can learn how to become financially stable with a little bit of work. Keep reading to learn the nine steps you can use for financial stability.
What does being financially stable mean?
Being financially stable means being confident in your financial situation. Generally, people with financial stability live below their means.
That means they spend less than they make each month, leaving enough money to pay their expenses and save for the future.
Financial stability can be different for everyone. For example, you might consider yourself financially stable when you can stop living month to month. Perhaps you think of stability as being debt-free and having a large emergency fund.
While your definition of financial stability is unique, it’s important to be aware of your financial situation. Before you work to be more financially stable, you need to know where you stand.
A good place to start is taking a financial health assessment. The Consumer Financial Protection Bureau, for example, offers a quick quiz you can use to gauge your financial well-being.
What causes financial instability?
Knowing the definition of financial stability is only one-half of the equation. You also need to consider what causes financial instability.
Financial instability comes from any event, habit, or circumstance that causes someone to overextend their income.
Your instability might be self-inflicted. For example, you find yourself unable to quit an expensive shopping habit. You may be unstable financially because you took on too much debt, such as buying a luxury car with unaffordable monthly payments.
However, a lot of financial instability comes from events outside of our control. Financial emergencies are often the cause of financial instability.
For example, you lose your job due to corporate downsizing. You still need to pay your mortgage, car insurance and payment, and credit card bills.
Yet, now you don’t have the income from your job to cover these expenses. You’ll likely feel financially unstable because you’re worried about how you’ll pay your bills.
Remember, however, that financial instability doesn’t have to be a life sentence. It is possible to change a pattern of instability and build healthy, long-term financial habits that promote stability.
How to become financially stable
Anyone can learn how to become financially stable. For most, it starts with a mindset shift. It’s easy to look at your financial situation and see it as something that is happening to you.
Financially stable people, however, are in control of their finances—even if an emergency changes their immediate plans.
And now that you know the answer to "what does financially stable mean?" you can get started using these nine tips.
1. Get to know your current financial situation
You’ll never be financially stable if you don’t know your current financial situation. You might even be surprised and you’re more stable than you thought!
Take stock of your spending, saving, and income so you have a better idea of your financial situation. This will show you if you’re living within your means or outspending your income.
Keeping track of where your money goes each month is vital to stability. Use a budgeting app or keep a spreadsheet of your spending for a few months.
You can divide your spending into categories and create graphs or charts to show how much of your money goes into each. Visualizing where your money goes makes it easier to determine where you should start cutting expenses.
Additionally, your mental state also plays a big role in financial stability. As you track your spending, make notes on how you’re feeling when you spend money.
For instance, you go shopping after work and spend more than you want to on new clothes. You realize you were stressed when you went shopping and used the purchases to try to destress from work.
Make a spending priority list
Some expenses, like rent, are necessary. Others, like going out to eat for lunch, aren’t.
However, just because an expense isn’t necessary doesn’t mean it’s something you want to give up. Being financially stable doesn’t mean completely giving up on fun. It just means you may have to prioritize where you spend your money.
A smart idea is to take your spending tracker and list all your spending categories from most important to least. Necessary expenses like rent and insurance should be at the top. As you go down the list, however, you can decide what you want to spend your money on.
Say you like going out to dinner with friends on weekends. You know this isn’t an expense you’re willing to completely cut out. On the other hand, you hardly ever use your Netflix subscription.
Dining out would rank higher than Netflix on your priority list. When it’s time to cut out expenses, you know you can get rid of the streaming service first.
Create a budget
Building a budget is a great place to start improving your financial stability. A budget lets you allocate your money each month. You’ll have a better idea of where you spend your money and how much you can save.
Budgeting might seem complicated, but your budget can be as simple as you like. You can start by listing out your income and expenses to see if you’re spending more than you make each month. From there, follow budgeting best practices to create a budget that works for you.
Contrary to popular belief, budgets don’t have to be rigid. In fact, the best budgeters regularly adjust their budgets to meet their changing financial needs.
If you find your budget is too restrictive, consider tweaking it to better fit your current spending habits. As you work on lowering your expenses and spending less, you can adjust your budget with more room for savings.
2. Use goals to become financially stable
Setting financial goals sets you up for financial success. Your goal gives you a tangible object or event that you can only reach by working towards it. This helps you stay focused and discourages frivolous spending.
Plan to set both short-term and long-term financial goals. Short-term goals generally take place within the next few years. Saving $1,000 in six months, for example, is a short-term goal.
Long-term goals take place over a much longer time—from a few years to decades. For example, saving up money to buy a new car in five years is a long-term goal. Saving for retirement in 30 years is also a long-term goal.
You can increase your chances of reaching your financial goals by following the SMART goal process:
- Specific: Be specific when explaining your goal.
- Measurable: You should be able to quantify your goal, such as a dollar amount.
- Achievable: Make sure your goals are realistic.
- Relevant: Create goals that are important to your financial situation.
- Time-bound: Specify the length of time to reach your goal.
Short-term goals are usually smaller than long-term goals because you have less time to reach them. They may even be a smaller part of a bigger goal.
For example, you want to get out of debt. Your short-term goal is to pay off one of your debts in the next year.
Other types of short-term goals include:
- Savings goals
- Purchasing goals, such as buying a new car or making a down payment on a house
- Debt repayment
Unlike short-term goals, long-term goals may take decades to achieve. It’s important that you create and follow a financial plan to help you reach long-term goals.
For example, your plan may include saving for retirement by automatically depositing part of your paycheck into a 401(k)-retirement plan.
Some common long-term goals include:
- Saving for retirement
- Paying for your children’s education
- Paying off your mortgage
Keeping up with long-term goals year after year isn’t always easy. Try setting mini goals within your long-term goals to help you stay on track.
3. Adopt a frugal lifestyle
A key factor in financial stability is living within your means. This simply means not spending more than you make.
When you spend less money than you make, you have leftover funds. This money can go toward savings or help you pay off debt faster.
However, frugality doesn’t have to mean you deprive yourself of fun or frivolous spending. If it did, you’re sure to burn out quickly.
Instead, include fun money in your budget and financial plan. That way you won’t feel bad if you go on an unexpected shopping trip or out for an expensive dinner.
4. Avoid unnecessary debt
While no one likes dealing with debt, some debt is necessary for many people. Taking out a mortgage, for example, lets you own a home without paying the full price upfront. Likewise, student loans could help you get a degree that gives you more career opportunities.
Debt becomes a problem, however, when it’s used for unnecessary reasons. For example, you wouldn’t want to go into credit card debt to pay for a vacation. Even if you want to go, the vacation isn’t a necessary expense.
You can determine if new debt is necessary or not by asking yourself one simple question:
Is this new debt critical to maintaining and improving my future financial situation?
Taking out a loan to afford a dream wedding is probably not going to help your finances in the future. However, taking out a loan to help you start your own business could set you up for future financial success.
5. Build emergency savings
Emergency funds are cash savings you can use to pay for unexpected expenses. When a financial emergency hits, you have the money to cover the bill.
Most people put their emergency funds in a savings account at their bank. This makes it easy to transfer to a checking account or withdraw from an ATM.
When you face an emergency, you simply withdraw the money you need from the account. Don’t forget, however, to replace the money you take out so you still have enough in case of other emergencies.
Consider these best practices when creating your emergency fund:
- Keep your money in cash so you can access it quickly.
- Save at least three months of living expenses.
- Make regular contributions to your fund.
- Focus on building your emergency fund before saving for other goals.
6. Pay yourself first
When you’re financially stable, you have healthy savings for emergencies, debt repayment, and future needs. A great way to build your savings is to pay yourself first. This means you put money into savings before spending it on bills or purchases.
For example, your paycheck is $3,000 and you plan to save $500 each month. The first $500 out of your paycheck goes directly to your savings account. Then you can use the remaining $2,500 on rent, gas, groceries, and other expenses.
This helps you stay on track when building savings. It also cuts down on unnecessary spending, because the money won’t be in your account long enough to spend it. Over time, paying yourself first is a great way to build healthy financial habits.
It’s generally recommended to use automated savings to pay yourself first. By paying yourself manually, you may be tempted to skip saving in favor of spending.
Many employers allow you to split your paycheck via direct deposit so a portion automatically goes into your savings. You can also set up an automated transfer to your savings account on the day your paycheck deposits.
7. Improve your financial literacy
How do you feel when you encounter a new topic?
Maybe you feel overwhelmed by new information or confused by complex ideas. These feelings can leave you discouraged.
However, as you learn more and better understand the topic at hand, your confidence grows.
This is true for personal financial literacy. Learning about your money and how to manage it can certainly be overwhelming.
Over time, however, you’ll find yourself more confident in how you save and spend. You’ll start making your money work for you, instead of just getting by.
The only way to learn how to become financially stable is to start trying. If you’re reading this article, you’ve already taken the first step.
Additionally, the Clever Girl Finance resource library has over 30 personal finance courses to help you improve your financial literacy. The best part? They’re completely free!
8. Make financially stable career moves
Financial literacy and career literacy go hand-in-hand. Your job is probably where most—if not all—of your monthly income comes from. By leveling up your career, you give yourself a better shot at being financially stable.
Watch out for lifestyle creep
A word of caution when earning more money: don’t let lifestyle creep take over your increased income. As you make more money, it’s tempting to spend more. After all, you can afford it!
Lifestyle creep can quickly cancel out any extra income you’re earning. For example, your new job increases your monthly income by $2,000. You decide to leave your $ 500-a-month apartment and buy a house with a mortgage of $2,500.
On the surface, you haven’t outspent your new income. However, you also haven’t improved your savings.
You may even have to spend more per month for the upkeep of your new home. Overall, you’re actually less financially stable than before.
Take advantage of new opportunities
Each new opportunity you encounter could be the next step in your career. This might mean a higher salary or a better work-life balance.
Keep your eyes open for new opportunities in your career, such as
- Applying to a higher-paying job
- Going after a promotion
- Moving to a more enjoyable career field
If you’re not sure where to find different opportunities, the first step is to be open. For example, you can tell your boss you’re interested in taking on new projects or learning new skills.
You might also want to reach out to professional contacts and let them know you’re open to new opportunities.
Start your own business
Do you dream of being in charge of your career? Starting your own business might be for you. The Small Business Administration’s guide to starting your own business breaks down the process into simple steps.
You don’t have to start with a fully-fledged business, either. A side hustle that takes a few hours each week lets you ease into business ownership.
Driving for a ride-share platform, delivering groceries, or pet sitting are a few common side hustle options.
I won’t sugarcoat it: working for yourself can be a lot of, well, work. However, being a business owner comes with a lot of rewards, such as:
- Unlimited earning potential
- Independence from traditional 9-5 work arrangements
- Learn all aspects of business management
- Personal satisfaction of working on something you created
Learn new skills
Whether you want to move into a new industry or just want to move up in your current company, learning new skills is a smart way to make yourself more valuable.
In addition, learning something new can help you feel fulfilled in your career. It also improves your adaptability.
For example, your current position is being terminated. Thanks to the skills you learned on the job, however, you can step into a different role at the company without losing your job.
Remember to work on both technical and soft skills when learning. Technical skills refer to techniques, processes, and knowledge that helps you do a specific job or task.
For instance, a nurse takes a certification class for a new type of treatment. After graduating, she can administer the treatment to patients.
Soft skills, on the other hand, are personal attributes that help you interact with coworkers, customers, and leadership. These skills aren’t limited to one job title or industry. For example, critical thinking and teamwork are applicable in any career field.
9. Save room for fun
I said it before but one of the most important steps in learning how to become financially stable is realizing living below your means doesn’t mean cutting out fun or enjoyment.
Anyone who’s financially stable knows the importance of taking a break and letting off steam once in a while. They do this by factoring frivolous spending and fun money into their financial plan.
You can still make smart money choices when spending for fun, as well. Let’s say you budget $300 a month for dining out, but you don’t want to spend it all at once. You can use the envelope method when you go out.
For example, you put $50 cash in an envelope when you go to dinner. You’re only allowed to spend what you have in the envelope. After dinner, you still have at least $250 budgeted for additional dining.
Get on the right track to being financially stable
Reaching financial stability often takes dedication and time. You might even make a few mistakes along the way.
That doesn’t mean you shouldn’t try, and you will eventually succeed! Even a small step in the right direction can help you become financially stable.
Each smart money choice you make puts you another step closer and, eventually, you’ll find yourself well on the way to steady finances and wealth building.