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B. Jenkins

How Do I Know If I Am Financially Stable?

Updated: Aug 21

Previously, we covered the concept of financial health. In this article, we want to answer the question of “How Do I Determine If I’m Financially Stable?” and what practical steps you can take to figure out a baseline financial stability measure. It’s crucial you determine your financial stability, so that you can manage your finances effectively and make informed financial decisions.


A Comprehensive Guide on How to Assess Your Financial Stability

Start by tracking your income and expenses. This can be done using budgeting software, apps, or a simple spreadsheet. Categorize your expenses into fixed (e.g., rent or mortgage, utilities) and variable (e.g., groceries, entertainment). Calculate your total income and subtract your total expenses to see if you have a surplus or deficit.


Your net worth is a key indicator of financial stability. It's the difference between your assets (what you own) and your liabilities (what you owe). Common assets include savings accounts, investments, and property, while liabilities encompass loans, credit card debt, and mortgages. A positive net worth is a good sign of financial stability.


Emergency Fund

Determine if you have an emergency fund in place. Financial advisors often recommend having three to six months' worth of living expenses saved in an easily accessible account. This acts as a safety net in case of unexpected expenses or income disruptions.


Debt-to-Income Ratio

Calculate your debt-to-income ratio (DTI) by dividing your monthly debt payments by your monthly income. A lower DTI indicates better financial stability. Ideally, your DTI should be below 36%, but lower is better.


Savings Rate

Evaluate your savings rate. Aim to save at least 20% of your income for future goals, such as retirement, buying a home, or education expenses. The higher your savings rate, the more financially stable you'll be in the long run.


Credit Score

Check your credit score regularly. A good credit score (usually 700 or higher) not only gives you access to better financial opportunities but also reflects your ability to manage debt responsibly.


Insurance Coverage

Review your insurance coverage, including health, life, auto, and home insurance. Ensure you have adequate coverage to protect yourself and your assets from unexpected events.


Investment Portfolio

If you invest, review your investment portfolio. Diversification and a long-term perspective can contribute to financial stability. Ensure your investments align with your financial goals and risk tolerance.


Assess your retirement savings and contributions to retirement accounts like a 401(k) or an IRA. Use retirement calculators to estimate if you are on track to meet your retirement goals.


Consider your financial goals, both short-term (e.g., buying a car, taking a vacation) and long-term (e.g., retiring comfortably). Ensure your financial stability aligns with your goals and adjust your budget and savings accordingly.


Review Your Job Security

Evaluate the stability of your employment or business income. Having a stable job or income source is crucial for financial security.


If you're unsure about your financial stability or need guidance on improving it, consider consulting a financial advisor. They can provide personalized advice based on your unique circumstances.


Final Thoughts on Becoming Financially Stable

Remember that financial stability is an ongoing process that requires regular monitoring and adjustments. Life circumstances change, and your financial plan should adapt accordingly to help you achieve your goals and maintain stability.

 
 

*Not financial/legal advice

*All figures are for illustrative purposes only; actual figures may vary


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