How to build financial stability on limited income
Have you ever spent the night tossing and turning over stress about money? Don't worry, you aren't alone. In fact, 77% of Americans are stressed about their current financial situation.
Financial instability can make it difficult to feel optimistic about the future. If you're living on limited income and feel as if you're barely making ends meet, your situation may feel hopeless, but it's not. With a bit of elbow grease and know-how, it's quite possible to turn things around.
The journey to financial stability looks different for everyone, but the end goal is likely the same— kicking those money issues that keep you up at night to the curb and achieving a new level of comfort with your finances.
Here, we’ll discuss what financial stability means and how to start achieving it.
What does financial stability mean?
Financial stability can be defined in many ways, but typically, it refers to being confident in your financial situation. For some, this means being able to comfortably pay the bills and maybe toss a little extra into savings.
Others may view financial stability as having the means to buy what they want the second they want it. New pair of shoes? Add them to cart now. Backpacking through Europe? Let's go next week.
You get the picture. Typically, people sometimes achieve financial stability through responsible money management and by living below their means. This can involve a number of approaches, such as spending less than what you make each month, moving away from having to live paycheck to paycheck, paying down debt, and saving for the future.
What causes financial instability?
To reach true financial stability, it's important to understand the forces you may be up against. For example, if you have a track record of impulse buying when you're having a bad day, this habit may be causing some degree of financial instability.
Building large debt balances can also cause financial instability, such as using a high-interest credit card to fund a luxury vacation you thought you'd be able to pay off in a couple of months.
However, financial instability isn't always self-inflicted. Unexpected events, such as a car breaking down or job loss, are usually the main culprits for financial hardship. Likewise, many people are impacted by socioeconomic factors that create a cycle of financial instability that’s hard to break free from. Although some of these factors may be completely outside of your control, the responsibility to deal with them will most likely fall to you.
Luckily, financial instability doesn’t have to be permanent. With a bit of practice, you can learn to establish healthy financial habits and dig yourself out of a financial hole.
How to become financially stable
First and foremost, financial stability is a skill that's acquired, not a talent you're born with. Instead of stressing over how much you need to pay, think about what your long term financial goals are instead. Then, create a plan to make them happen.
Of course, this is easier said than done for most of us. Let's dive into how to work towards financial stability by exploring nine steps that can help you improve your finances that will hopefully help you get a good night's sleep knowing your money is in order.
1. Set financial goals
It's hard to accomplish anything if you don't have clear goals. This means figuring out what you want to achieve financially, the obstacles that may be stopping you, and what you need to do to get there.
Before getting into the nitty-gritty, it's important to understand your current financial situation. Here are a few questions to ask yourself:
On average, how much are you spending each month?
What are you spending your money on?
What expenses should be prioritized vs. what shouldn't be?
Are there any expenses you can cut back on?
Take notes, pull out your calculator, and crunch some numbers until you have a clear picture of where you are and where you want to be, whether that's a week, month, or 5 years from now. You can then gain a better focus on how to get from point A to point B and what immediate changes need to be made.
2. Improve your financial literacy
Guess what? You're doing this right now. Financial literacy is being able to understand and effectively use financial skills, such as budgeting and managing personal finances, in your best interest.
You can gain financial literacy by reading about various aspects of finance and applying what you learn to your personal situation. If you don't know where to start, Varo’s Money 101 offers resources on everything from saving money to building credit.
The more knowledge you gain, the more confident you can become, enabling you to make smarter decisions as you take control of your finances. With this newfound expertise, achieving and maintaining financial stability may seem more like an attainable goal than an uphill battle.
3. Create a budget
Creating a budget is key to gaining financial security. A budget is a strategic plan that guides how you should direct funds in all aspects of your financial life, including necessary expenses, debt payments, personal savings goals, retirement investments, and rainy day funds.
This may sound complicated, but it doesn't have to be. Start by listing all your expenses and calculating the total. Compare this amount to your monthly income.
If your total monthly expenses are lower than your income, your life is in order, at least financially. If you're spending more money each month than you're making, well, that raises some red flags. You may want to evaluate your spending habits to see where things are going wrong and then adjust accordingly to get yourself back on track.
After necessary expenses are paid, see what's left over and decide how you want to allocate it. Stick to this plan for a few months to see how things go. One of the best parts about having a budget is that you can always revisit and improve it if it's not working.
4. Grow your emergency fund
An emergency fund is cash savings designed to bail you out during a crisis. It can provide a cushion to fall back on if a financial emergency occurs, such as income loss or a major expense. This may help you avoid having to use a credit card or loan and potentially rack up new debt.
Most people stash their emergency fund in a savings account. The Varo Savings Account lets you avoid the hassle of hidden fees or meeting a minimum required balance. Plus, you'll earn a high annual percentage yield (APY), which can help your savings grow even faster.
When building your emergency fund, consider following these best practices:
Aim to save 3 to 6 months' worth of expenses.
Make regular contributions within your budget.
Prioritize your emergency fund over other savings goals.
Keep your in an account that allows for quick and easy access in a pinch.
Remember to pay yourself back anytime you make a withdrawal, if possible. This money is meant to be used when you need it, but it's important to replenish it for future emergencies.
5. Eliminate debt
Most Americans have debt, so don't feel bad about yourself if you have outstanding loans or credit card bills. However, certain types of debt may be affecting your financial stability more than others.
High-interest credit cards and personal loans cause the heaviest financial burden. Every month you have to roll that debt over means more interest is being tacked on to your balance. The longer this happens, the more it'll feel like you're just throwing money away instead of doing something useful with it, like saving or investing.
Making just the minimum payment will drag this process out even longer. Until the debt is either paid off or at a more manageable balance, you may want to dedicate some extra money toward reducing that number.
6. Invest early
Investing won't grant you immediate financial stability, but can make life a whole lot easier later on. Let's be real, you don't want to work forever. The earlier you start investing in a retirement plan, the better off you'll be.
Starting early is so beneficial due to compounding interest, which is the interest you earn on interest. This interest snowballs over time, raising your retirement balance exponentially. If you have visions of yourself hanging out on the beach every day during retirement, investing can help make that dream a reality.
If your employer offers a 401(k), this may be the easiest way to invest. You can simply defer a portion of each paycheck to the account. If not, you can always invest in a traditional IRA or Roth IRA, both of which offer tax benefits that can help your money grow.
7. Live within your means
If you want financial stability, another key factor is to not spend more money than you make. The less money you spend, the more you'll have left over to save, invest, or pay off debt.
But that doesn't mean you have to be all work and no play. After all, is it really considered true financial stability if you're constantly depriving yourself of what you want? It's okay to sometimes spend money on fun or frivolous things, like going out to dinner with friends or buying new wall art for your living room. Try to incorporate those expenses into your budget ahead of time, so you don't spend money you don't actually have.
If you do accidentally go over budget or an emergency happens after you've already splurged on a luxury purchase, Varo Cash Advance can provide a safety net. The money will land in your account immediately, and the fees are minimal, which will reduce the burden on you of paying that money back. It can help to look at this option as a little boost to help get your finances back on track.
8. Pay yourself first
It’s important to prioritize your financial well-being, especially before using your hard-earned money for expenses that may not be necessary.
Automatically transferring money from your paycheck to your savings can help you reach your financial goals faster and ensure you always have an emergency fund in place. Make sure to allocate these funds in your monthly budget ahead of time so they’re already accounted for.
Paying yourself first is especially important if you aren't always trustworthy about having extra money hanging out in your checking account. Automatically sending it to savings can help you get into the habit of not utilizing those funds for your day-to-day spending and help you avoid overspending.
9. Boost your credit score
Remember those financial goals that were mentioned earlier? Many long-term goals, such as buying a house or car, involve applying for a loan. To get approved for a loan with a low interest rate, you generally need a good credit score.
Qualifying for lower interest rates can help with financial stability given that you'll probably owe less money in the long run, making it easier to pay off debt. Practicing good financial habits, such as making on-time payments and not borrowing large amounts, can also help boost your credit score.
If you've never borrowed money in your life and don't have a credit score, the Varo Believe Credit-Builder Card can be a good place to start. You won't be charged interest or annual fees, which means you only pay back what you actually owe.
Work hard now, play later
Achieving financial stability may seem like a lot of work, but as the saying goes, hard work truly does pay off. By getting a good grasp of your financial situation and creating healthier habits, you may no longer have to count down the days until your next paycheck because you have a better handle on your funds.
In a nutshell, financial stability means feeling confident about your money, and you can help build that confidence by creating practical goals and taking control of your finances.
Working with a bank you trust can also help. Varo is in the business of helping people get ahead financially by providing them with the tools they need to grow their money faster. That means no hidden fees and access to your money when you need it. Open a Varo Bank Account today and start your journey towards reaping the benefits of financial stability.
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