When you think of financial stability, what comes to mind? Most people consider financial stability as being debt-free, being able to afford your living expenses and having money left over. Is that the case for you? No matter how one looks at financial stability, it is a lifetime journey. It is something you will need to regularly put work into because our spending and saving will change in various seasons in life. In order to create stability, you need to build a strong foundation. Here are the first two steps toward establishing this foundation.
Step one: Identify your money beliefs
The first step in creating financial stability is to identify and unpack your money beliefs. What you believe impacts what your emotions and feelings are about money, and those things determine your behavior when it comes to spending and saving. Ask yourself, “What do I believe about money, and where did that belief come from?”
Common sentiments about money
Many people grew up hearing a phrase about money, likely from their parents. Examples include:
- “Money doesn’t grow on trees.” This phrase comes from a scarcity mindset, which leads to emotions of fear and anxiety of not having enough money.
- “Rome wasn’t built in a day.” This phrase promotes the belief that we have to work hard for our money. And while it’s true that hard work can create an income, money can also work for you — through investing!
- “There’s more to life than money” or “Money can’t buy love/happiness.” These phrases are based on the belief that you may not be worthy of money.
- “You can’t take it with you” or “You only live once.” These phrases reflect a denial of responsibility to create wealth.
Take some time to reflect on what you observed about money growing up, even if you didn’t understand it at the time. Go back to your earliest memories of money. Perhaps you remember money being tight, and your parent(s) living paycheck to paycheck. Or, you might have grown up never having to wonder if there would be food on your plate or clothes in your closet. Our childhood has a profound impact on the way we see the world in general, but it also specifically ties into how we handle our money.
Change your money mindset
We all experience a range of emotions with our money. Sometimes those emotions are positive: I saved up, and now I can afford college! But it’s also common to experience negative emotions. We have all experienced regret at some point with how we’ve handled our money. If regrets are a pattern, some of the emotions you might be experiencing are shame, guilt, overwhelm, or anger at yourself.
If you find yourself stuck in those emotions, it’s a good time to ask yourself. “What spending decisions have I made that have led to these emotions? What would it look like if I had saved instead, and that led to positive feelings such as secure, calm, and confident?”
Try to identify one positive emotion that is an outcome of your money management, and use that as a guidepost for every decision you make. You’ll soon notice your finances aligning with that positive emotion.
Be careful of your inner dialogue with money, especially around spending decisions. Every financial decision we make is emotionally based. Retailers design their stores and websites to convince us to spend money! We justify our spendings because we’re told we need certain items. Be aware of the justifications like, “I deserve this.”, I’ve been working hard.”, and I just got a bonus.” Don’t be swayed by clever marketing! Remember that YOU are in control of your finances.
Step two: Leverage your numbers
Another way to create financial stability is to leverage your numbers which means you have to have a plan. In order to have a plan, you have to know what your numbers are.
First, you need to have a clear example of where your money is going. Use your budget to develop a plan for how you will spend and save your money. Your plan should account for bills as well as the spending that we take for granted: going out to eat, getting your nails done, getting your hair done, etc. Make your plan based on how you actually live your life.
Another way to leverage your numbers is to know your credit score. You can check it for free once a year at myannualcreditreport.com. You should also take a close look at your bills and make sure you’re not going over your credit limit. Paying your bills on time and not having other inquiries on your credit will keep your score from going down. Keep in mind that applying for new credit affects your score!
Third, you should understand and calculate your net worth. Your net worth is your assets minus your liabilities. Reviewing this annually will provide you with a great understanding of your progress. It provides a litmus test for how you’re doing. Start increasing your net worth today by adjusting your budget to allocate more funds towards credit card debt and paying off your home.
Stay tuned for three more ways to create financial stability! We’ll be going over areas of saving you shouldn’t ignore, how to set and keep financial goals, and why it’s important to discuss money with your family members.