In 2018 alone, the number of bankruptcies filed was 751,186. This number is lower than in the previous years but still alarming. Bankruptcy means that you are unable to manage your finances appropriately, which makes you financially unstable.
It is more than how much money you make or what your bank balance is. It is about how comfortable you are spending to meet your day-to-day expenses without having to borrow. To measure your financial stability, you need to analyze yourself on the following parameters.
Your Debt Is Manageable
Debt is the most significant and easiest way to dig a large hole of financial instability. With credit cards and loans available quickly and with attractive offers, it can be luring to fall into the debt trap. So, the first parameter to consider is how much you owe.
This includes all credit cards, loans, and mortgages. If the monthly installments for these payments together are not more than 30% of your monthly income, then you can consider it manageable. The rule is, the lesser the debt, the more financially stable you are.
You Have a Substantial Emergency Fund
Life doesn’t always pan out as planned. Unexpected events can burn a large hole into your savings, wobbling your financial condition. Therefore, you must have a substantial emergency fund. While it may not cover all the expenses, it can cover a large part of it.
We recommend that you contribute 10% of your monthly income towards an emergency fund to build a large pool over time.
Your Retirement Fund Is Regularly Funded
Old age can be difficult, and you may not have anyone to take care of you. A retirement fund can be your trusted partner in such trying times. It allows you to hire the best help possible to make life comfortable towards the end.
Here too, we suggest that you contribute toward a retirement plan regularly. Many private and government plans offer attractive returns and regular pension on retirement.
You Can Pay Your Bills Comfortably
Monthly expenses such as utilities, gas, groceries, and rent should not be difficult to pay. Your income should be able to meet these expenses and allow you to save as well. When you can make these payments without cringing, then you have truly achieved financial stability.
Have a Budget
Making a budget is not all about knowing how much you can spend each month, but it is a mindset. When you begin to budget your monthly expenses, you can achieve real financial stability. It puts your financial position into perspective, therefore, allowing you to decide what you can spend on without using your credit card.
Have Financial Goals
Financial goals can be as simple as taking a vacation abroad, or more complex like buying a house. At various stages in life, you will have different financial needs, and having a 5-year, 10-year, and 20-year plan is a good idea. This way, you can start saving for all these goals simultaneously.
Financial stability is about your attitude towards money. When you get your paycheck, how you use it is what determines your financial balance. Wise people make investments, while foolish people spend it all.