Financial Stability does not have a simple definition in terms of the American household. We polled friends, family and clients to see how they would define it. Most of our responses alluded to having enough money to cover your bills and being able to address emergencies. One response was very direct and simply stated, “Uncommon.” My favorite response was, “when your kids move out of the house.”
All kidding aside, the initial inquiry leads to another set of questions. What are acceptable bills and what constitutes an emergency? I’ve read several articles that have been written over the past couple of years regarding the idea of savings and financial independence. What does financial stability mean and why do Americans typically seem to be lacking it?
I’ve been working with individuals, families and small business owners for more than 20 years. Not one of my clients is identical to another. Everyone has different careers, interests, incomes, expenses, discipline levels, and priorities. Some of my clients have been extremely committed to preparing for their future needs -- to the point that I have to encourage them to take a vacation! Some of my clients take almost no interest in their future needs. These clients keep me awake at night wondering what will happen to them if they experience a job loss or a medical emergency.
While clients often come to us to give them advice about the numbers that impact their lives, much of what we do is financial counseling. We encourage clients to think about their various financial concerns as several pieces in one very important puzzle.
While we can throw all kinds of percentages and recommendations at you, what works the best is to simply go over your actual numbers with you and be very disciplined with a plan.
- DO Use a Written Budget. We all assume we spend less than we actually do. If you do not keep a monthly budget on a spreadsheet or software program, go back 3 months and honestly record all of your spending. What surprises did you find?
- DON’T Use Credit Cards. If you cannot trust yourself to pay off a credit card on a monthly basis, don’t use one at all. Credit cards give you a false sense of security that rears its ugly head two months down the road when interest begins to compound. By then, you now have to earn twice as much as you did the first time you used it to pay it off.
- DON’T Spend Money You Do Not Have. Enough said.
- DO Plan Ahead. Putting new tires on your car is not an emergency. That is a routine expense that should already be covered in your budget. Emergency savings should equal no less than 3 months of your living expenses. Preferably, you have 6 months of expenses socked away in a savings account and/or brokerage account (you can buy T-bills!).
- DO Save for Retirement. We cannot stress enough how much money you will need to live on when your income stops. You never know when that will be. Social security will very likely NOT cover your needs. If you think money is tight now when you have cash coming in, it will be even worse when you have almost nothing coming in. You must make retirement savings a priority in your budget.
- DON’T Overspend. Our country is consumer-driven, but you do not have to own everything you desire. Almost nothing you buy for your personal pleasure will make you any money. When you have to buy a car, don’t buy a brand new one that costs half of your annual salary. Don’t eat out every night of the week. Don’t buy ten pairs of shoes.
So how do we get there? Like a lot of things that are good for you, it’s a lifestyle choice. That doesn’t mean you can’t splurge once in a while, but it should not be your typical way of spending. What can you do to make financial stability an attainable goal?
- Start savings with young children: Do you pay your young child a weekly allowance? Open a bank account. Most banks offer some kind of student savings account. Set up a system for your child to deposit regularly. Down the road, they will have money to help buy a car, a computer, go on that senior trip, etc.
- Start retirement savings as soon as you graduate from college: Twenty-somethings typically have the least amount of bills and the most money, relatively speaking. Before you get married and have children, SAVE. It will get you through the toughest periods of your life.
- It’s Never Too Late and It’s Never Too Little: Save what you can, when you can. This is not a race that you can win.
- Maximize your Earnings: Have you been at your job for a long time? It may be time to explore your options. Do you like your job but need a raise? Ask for one in a respectful manner, explaining why you’re worth it. Is there a small business you’d like to conduct in your free time? Now might be the time to research that further and get started. It may be easier than you think.
- Use the resources available to you: Our team members at Propel are financially responsible people with lots of experience! We are happy to talk with you about any of the items in this article. We are also happy to do a formal Financial Plan with you (fees apply).