What is financial stability? It’s something everybody wants, but few know how to define it. That’s because the meaning of financial stability is in the eye of the beholder.
For some, financial stability might be having a big salary and a fat bank account. But even if you earn what seems like a lot of money, you can still feel overwhelmed by debt or struggle to pay bills. As a result, you might feel financially unstable.
In reality, you could be financially stable even if your resources are modest. You may reach a point where you don’t worry about paying your bills. You can live within your means and save consistently. You could pursue your hobbies without going into debt.
Today’s economic uncertainty might make you think that taking steps for financial stability is impossible. High inflation and continuing talk of a recession have many people feeling on edge.
Learning what you need to do to become financially stable—and stay that way—may help you deal with economic uncertainty. And it could help you stay focused on the future.
Table of contents
- Why is financial stability important?
- Financial stability during economic uncertainty
- Financial stability vs. financial security
- Six steps to financial stability
Why is financial stability important?
Being financially stable not only impacts your financial health. It also has a big effect on your mental health. Studies show that financial worries lead to psychological distress.1 They can even cause physical symptoms like lower immunity and heart disease.2
When you feel financially stable, you don’t worry about paying your bills and handling your debts. Financial stability is when you:
- Can pay your loans and credit card bills without sacrificing the fun things you enjoy doing.
- Don’t worry that one unexpected expense will upend your financial well-being.
- Can take career risks because you have a cushion in case a job change doesn’t pan out.
- Can afford “wants” like vacations or dining out without going into debt.
Unfortunately, that’s not how many people live. According to research from the Federal Reserve, 18% of Americans have a hard time paying their monthly bills3 and 37% say they would struggle to cover a $400 emergency expense.4
Financial stability during economic uncertainty
Even in a thriving economy, it can be hard to achieve financial stability. In fact, a 2022 research report found that just 31% of Americans say they feel financially healthy, down from 34% in 2021,5 People still feel uneasy despite the fact that, unemployment has been low6 and wages have gone up since 2022.7
Because of inflation, many people’s salaries are not keeping pace with higher prices. Many people feel that their money doesn’t go as far as it once did. And higher interest rates have also increased the cost of debt, further straining budgets.
Inflation and interest rates are beyond your control. But that doesn’t mean you can’t protect your finances with healthy financial habits. This can be true even during periods of economic uncertainty.
Financial stability vs. financial security
Financial stability and financial security sound similar, but they are not the same. Both are important for your financial well-being.
Think of financial stability as the first step on the road to financial security. Financial security, on the other hand, is more focused on the future.
Being financially secure means that you can look beyond your day-to-day finances. Instead, you aim to achieve the same sense of stability throughout your life.
Of course, financial security feels different for each person. But for many people it means knowing that your retirement planning is sound, that you can afford to send your children to college, and that you’re on track to paying off your mortgage and other debt.
According to Bankrate.com, most Americans say they don’t feel financially secure. But it doesn’t have to be that way. Practicing healthy financial habits now may ultimately lead to financial security. And, building financial stability, even if the economy feels shaky, could reduce stress. To make headway toward that goal, follow these six steps.
Six steps to financial stability
1. Spend less than you earn
Living within your means is a cornerstone of financial stability. That can be hard to do if you’re not sure where your money goes each month.
A budget can help you see what you’re spending each month and where you can cut back. Many people don’t like budgeting because they feel it might constrain them. Try the 50/30/20 rule to simplify your budgeting. Here’s how it works.
- Spend 50% of your budget on necessities like rent, groceries, and utilities.
- Direct 20% of your budget toward savings goals and paying down debt.
- Spend the remaining 30% any way you like.
2. Save for a rainy day
You might have the best of intentions to live within your means, but then life throws a curveball. You get into a fender bender or your roof leaks. Suddenly, you’ve got major expenses you didn’t anticipate. Aim to build up your emergency savings to cover three to six months of living expenses so you can handle any unexpected expense that comes your way.
3. Invest for the future
To turn financial stability into financial security, keep an eye on how to create wealth that will last decades. Retirement saving vehicles like a 401(k) or individual retirement accounts (IRAs) can help grow your money while lowering your tax burden. Consult a tax professional to learn more.
4. Pay off debt fast
It’s hard to feel financially stable if you are stressed about debt. Consolidating your higher-interest debt into a personal loan could make your debt more manageable. You might also be able to pay it off sooner. Unlike a credit card bill, a personal loan is an installment loan, so you’ll know the exact date the personal loan is paid in full.
5. Invest in yourself
Budgeting carefully and cutting back could help you become financially stable. Another way is to try to boost the amount you earn. For example, improving your job-related skills and knowledge may lead to career growth or advancement. Or consider working with a career coach to hone your interviewing skills or revamp your resume which may help you land a higher-paying position.
6. Boost your credit score
Some of life’s expenses, like medical bills, are too big to fit comfortably into your budget. If you learn to borrow wisely, they won’t undermine your financial stability. Lenders check credit scores to understand each borrower’s creditworthiness and decide what interest rates and loan terms to offer. The higher your score, the better the interest rate you may be offered.
Here are some ways to improve your credit score:
- Pay your bills on time.
- Use only a small part of your available credit.
- Pay down debt.
- Avoid applying for too many loans in a short period of time.
The bottom line
Financial stability is all about feeling in control of your money, even amid economic uncertainty. It means being able to pay your bills without worry and having some extra left over for saving and for fun.
And when you need a little extra help, a manageable amount of debt that you can pay off in a reasonable time frame may help you maintain your financial stability.Learn More About Personal Loans
