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To create financial stability, you'll need to spend less than you earn and set money aside for savings. Of course, that's easier said than done. You can start laying the foundation for financial stability by budgeting for housing and other needs, deciding how much to spend on discretionary purchases and building your emergency fund. Here's how.
1. Set Financial Goals
Building financial stability comes down to creating systems for spending, saving and investing your income. But before you get granular and create specific habits, take some time to consider your overall financial picture and set your financial goals.
What's your financial life like now? Where do you want it to be a week, month or five years from now? Jot down where you're at and where you'd like your finances to take you.
Next, start thinking about specific, achievable goals. For example, "I want to buy a home one day" becomes "I'll set a dollar goal for a down payment and reach it in five years by dialing back discretionary spending." And "I want to retire one day" becomes "I'll begin planning for retirement now and set up an IRA or 401(k)."
2. Create a Budget
Controlling your cash flow is a key first step for building financial stability. A budget is a plan for how you'll direct funds toward all areas of your financial life, such as necessary expenses, discretionary purchases, debt payments, personal savings goals and investing for retirement.
Before you create a budget, remember that the best budget is one you can stick to. For example, some people do well with a highly structured zero-based budgeting system, while others like the flexibility of the 50/30/20 budget, which directs half your income toward necessary expenses, 30% toward discretionary spending and 20% toward saving, debt payments and other financial goals.
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3. Pay Yourself First
If you wait to save until after you've paid your bills and done your shopping, you may have little left to sock away. Instead, you can better reach your savings goals by automatically transferring money into savings each time you get paid—in other words, pay yourself first.
To start saving, open a dedicated account and set up automatic transfers into the account at a regular cadence. You can base your savings goal on your budget plan: For example, if you plan to direct 20% of your income to savings and you make $1,400 bi-weekly after tax, you can transfer $280 into savings.
4. Grow Your Emergency Fund
Building up your emergency savings can help you weather a financial crisis, such as a loss of income or a major expense, without taking on debt. Knowing you can cover your expenses in an emergency can help you feel more stable and confident in your finances overall, so the benefits of flush emergency savings can't be oversold, even if you are fortunate enough to never have to use them.
Experts suggest keeping between three and six months' worth of necessary expenses in a savings account, but you can start with a goal number that works for you—such as $1,000—and go from there.
5. Invest Early and Often
The key to building a nest egg large enough to live on in retirement is to start investing regularly as early as you can. Even if you're working part time or can only afford to put a small amount into your retirement account each paycheck, that money will go a lot further if you start now. That's thanks in part to compound interest, which is the interest your interest accumulates.
If you have a 401(k) available to you at work, consider deferring a portion of each paycheck into the account. This is an especially good strategy if your employer offers a contribution match.
You can also invest in a traditional IRA or a Roth IRA, both of which offer distinct tax benefits to help you grow your money faster.
6. Eliminate Debt
If you're shouldering high-interest debt, such as a credit card balance or a personal loan, paying it off ASAP will do a lot of good for your full financial picture. Making only the minimum payment means paying more in interest over time, and the money you're throwing toward the debt could be serving you elsewhere—for example, you could be investing it.
Consider these tactics for paying off debt:
- Use the avalanche method to pay off your debt with the highest interest rate first.
- Use the snowball method to eliminate your debt starting with your smallest balance.
- Use a debt consolidation loan or a balance transfer card to pay less in interest while you aggressively pay down debt.
- Try gamifying your debt payoff or using a savings challenge to add incentive to getting out of debt.
7. Track Your Credit Score
On top of managing money with an eye to the future, you should keep an eye on your credit score and ensure that your financial habits align well with your credit goals too. Building your score can help you achieve important financial goals like homeownership down the line, and it can also help you further your financial stability by qualifying for lower interest rates when you need to borrow, such as for an auto loan.
Sign up for free credit monitoring through Experian to view your score and receive alerts when there are changes to your credit report. You'll also see insights into how your score may impact how lenders view your creditworthiness, plus tips on how you may be able to grow your score.
The Bottom Line
Achieving financial stability ultimately comes down to living below your means, saving what's left, effectively managing debt and investing for retirement as early and often as you can.
Another way to protect your financial stability is to ensure you're putting up defenses against identity theft and fraud. Consider Experian's identity theft protection services, which include identity theft insurance and dark web surveillance, plus credit monitoring with real-time alerts.