By Rebecca Lake ·November 21, 2023 · 10 minute read
We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey.We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide.We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right.
Am I financially stable? That’s an important question to ask if you’re wondering how your money management skills measure up.
Financial stability can mean different things to different people, and there’s no single way to measure whether someone is financially secure. There are, however, certain money behaviors that can indicate when you’re on the right track.
Knowing how to recognize the signs of being financially stable can help you to fine-tune your money plan.
Key Points
• Financial stability can be defined differently for each person, but there are some common indicators of being financially secure.
• Signs of financial stability include following a budget, living below your means, saving money consistently, prioritizing debt repayment, and paying bills on time.
• Financially stable individuals typically have clearly defined financial goals, regularly invest, have the right insurance coverage, make decisions based on their own needs vs. FOMO, and stress less about their finances.
• Achieving financial stability can take time and effort. In additon to making smart money decisions, you may find advice from a financial professional helpful as well.
What Is Financial Stability?
If you search online for a definition of financial stability, the results are usually geared toward organizations or governments, not individual people. For example, the Federal Reserve defines financial stability as “building a financial system that can function in good times and bad, and can absorb all the good and bad things that happen in the U.S. economy at any moment.”
That’s an institutional way to define financial stability, but it’s possible to adapt that to fit personal finance. For instance, creating a budget and adding money to an emergency fund can help you manage money wisely during the good times. It can also allow you to be prepared for the unexpected, such as a job layoff or an emergency expense.
The best way to define financial stability is in a way that has meaning for you. For instance, you might create a personal financial mission statement that outlines your ideal money vision for yourself. For some people, that vision might involve having six months’ worth of expenses in an emergency fund. For another, it might involve meeting savings goals for retirement.
Why Does Financial Stability Matter?
Being financially stable is important because it can influence your overall financial health. When you feel financially secure, it may be easier to pay bills without stress. Or you might have developed the discipline to save money and be excited about it, versus spending everything that you make.
In a nutshell, being financially stable can help you to:
• Have the money that you need to cover day-to-day expenses while working toward financial goals
• Avoid costly debt
• Manage your money without it feeling like a chore or a cause for anxiety
If you’re interested in how to become financially free, then becoming stable with your money is likely an important first step.
Signs That You’re Financially Stable
We started off with this question: Am I financially stable? Now, we’ll answer it by sharing some of the most common indicators that you’re in good financial health.
Chances are, you might be doing some of the things on this list already. And if you’re not, then these moves could help you to overcome your personal financial challenges.
1. Following a Budget
A budget is the foundation for your financial plan. When you make a budget, you’re dictating where your money goes instead of simply spending without a plan. If you don’t have a budget yet, then making one should be a top priority.
There are a number of budgeting methods you can use, including:
• Cash envelope budgeting
• Zero-based budgeting
• The 50/30/20 rule
Experimenting with different budget systems can help you find one that works for you.
2. Living Below Your Means
Here’s one of the secrets to how to have financial freedom: Live below your means. This simply means spending less than you earn. Making a budget is central to living below your means because without one, you may not have a clue how much you’re spending each month.
Tracking expenses can be a great way to determine if you’re living below your means. You can write each expense down in a notebook, use a spreadsheet, or link your bank account to a budgeting app. It’s a good idea to track expenses for at least one month to get a realistic idea of what you spend, which can help you to better define your budget.
3. Saving Money Is a Consistent Habit
You may have heard the expression “pay yourself first,” and it’s a wise move. This simply means that before you spend any money on payday, you first deposit some of your earnings into savings. Paying yourself first is a sign of financial stability as it suggests that you have money reserved for emergencies and are also saving for longer-term financial goals.
Setting up direct deposit into savings or scheduling automatic transfers from your checking account each payday are easy ways to automatic savings. When the money is directed to savings automatically, there’s no opportunity for you to spend it.
4. Paying Down Debt Is a Priority
Debt can be a roadblock to reaching your financial goals and too much debt could make you financially unstable. Making an effort to pay down debt (or avoid it altogether) is a sign that you’re committed to living within your means instead of spending money unnecessarily.
If you have debt, consider the best ways to pay it off. For example, the debt snowball method involves paying off debts from smallest balance to highest. The debt avalanche, on the other hand, advocates paying off debts from highest APR to lowest in order to maximize interest savings.
When choosing a debt repayment method, consider how much of your budget you can commit to it. If you’re only able to pay the minimums to your debts, you may need to review your expenses to see where you can cut back or look into debt consolidation.
5. Bills Get Paid On Time
Paying bills late can trigger nasty late fees. What’s more, late payments can lower your credit scores.
A good credit score is a sign of financial stability because it means that you’re responsible with how you use credit. On-time payments can work in your favor while late payments can hurt your score.
If you’ve fallen behind, getting caught up on late payments as soon as possible can help you turn things around. From there, you can commit to paying on time each month. Scheduling automatic payments or setting up payment reminders is an easy way to keep track of due dates.
6. Financial Goals Are Clearly Defined
Setting financial goals can help you to make the most of your money. Financial goals can be short-term, like saving $10,000 for an emergency fund. Or they might be long-term, like saving $1 million for retirement.
Someone who’s financially stable understands the value and importance of setting goals and how to set them effectively. For example, they may follow the SMART rule for goal setting and create money goals which means they are:
• Specific
• Measurable
• Actionable or achievable
• Realistic
• Time-bound
If you’re not setting financial goals yet, consider what you want to do with your money or what kind of lifestyle you’d like to have. If you created a personal financial mission statement that can be a good guide to deciding what kind of goals to set.
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7. Regular Investing Is Part of Your Financial Routine
Investing money and saving it are two different things. When you invest money, you’re putting it into the stock market. Investing can help you grow your money faster and build a higher net worth thanks to the power of compounding interest.
There are different ways to invest. If you have a 401(k) or similar retirement plan at work, for example, you may defer 10%, 15%, or more of your income into it each year. At a minimum, it’s a good idea to contribute at least enough to get the full company match (which is akin to free money) if one is offered.
You might also open an Individual Retirement Account and a taxable investment account. With an IRA, you can save for retirement on a tax-advantaged basis. A taxable investment account, on the other hand, is useful for trading stocks, mutual funds, exchange-traded funds (ETFs), and other securities without restrictions on how much you can invest.
Recommended: A Beginner’s Guide to Investing in Your 20s
8. You Have the Right Insurance
Insurance is designed to protect you financially. There are different types of insurance a financially stable person might have, including:
• Homeowners or renters insurance
• Car insurance
• Health insurance
• Disability insurance
• Life insurance
Having the right coverage in place can help to minimize financial losses in a worst-case scenario. If your home or apartment is damaged because of a fire, for instance, then your insurance policy could help you to rebuild or replace your belongings.
Life insurance is also important to have, especially if you have a family. Life insurance can pay out a death benefit to your loved ones if something should happen to you. That means they’re not in danger of becoming financially unstable after you’re gone.
9. FOMO Doesn’t Drive Decision-Making
FOMO, or fear of missing out, can be a threat to financial stability. It’s the modern-day equivalent of keeping up with the Joneses: What it means is that you make financial decisions out of peer pressure or societal pressure. Trying to mimic the lifestyle of social media influencers, for example, can wreck your finances if you’re going into debt buying things that you can’t afford.
Someone who’s financially stable, on the other hand, is immune to FOMO. They don’t buy things on impulse (or at least not often). And they don’t make financial decisions without considering the short- and long-term impacts.
Recommended: Guide to Practicing Financial Self-Care
10. There’s No Worrying About Money
Worries about money can keep you up at night if you’re fretting over the bills or debt. Financially stable people don’t have stress over money because they know that they’re in control of their situation. They approach money with a calm, confident attitude.
So how do you reach that zen state with your finances? Again, it all comes down to making smart money decisions like sticking to a budget, saving, and avoiding debt. The more proactive you are about making your money work for you, the faster money worries may fade away.
If You’re Struggling to Become Financially Stable
If you recognize that your financial situation isn’t as stable as you’d like it to be, it’s important to consider how you can improve it. Working your way through this list of action items is a good starting point but what if you’re overwhelmed by debt or struggle to make a budget?
In that case, you may benefit from talking to a nonprofit credit counselor or a financial advisor. A credit counselor can help you come up with a plan for budgeting, paying down debt, and getting into a savings routine. And once you begin to gain some stability, you can think about things like investing or insurance.
In addition, you can consult these government sources for more insight:
The Takeaway
Achieving financial stability can take time, but it’s possible if you’re using the right approach to managing money. Taking small steps, such as setting one or two money goals or changing bank accounts, can add up to a big difference in your situation over time.
If you’re tired of throwing money away on banking fees, for instance, you might consider opening a bank account with SoFi. You can get checking and savings in one convenient place and easily manage your accounts online or through the SoFi mobile app. When you open an account with direct deposit, SoFi doesn’t charge any fees, and you can earn a competitive APY, which can help your money grow faster. A bonus for qualifying accounts: You can get paycheck access up to two days early.
FAQ
How much money is considered financially stable?
The amount of money needed to be considered financially stable is subjective and depends on a person’s individual situation. But generally, having a net worth of $1 million or more can indicate that someone is financially stable or secure and has a good grasp of money management.
What are the signs of a financially stable person?
The most common signs of a financially stable person include having little to no debt, being able to make and stick to a budget, having a healthy amount of money in savings, and having a good credit score. Financially stable people tend to see their net worth increase year over year. What’s more, money generally isn’t a source of stress or worry.
At what point are you financially stable?
Someone could be considered financially stable when money is no longer a cause for anxiety or frustration. A financially stable person isn’t necessarily measured by how much money they have. Instead, their stability is based on their overall financial situation and their approach to managing money. They are likely to have savings for emergencies, as well as short- and long-term goals.
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