Content of the material
- 1. Track Your Spending
- 3. Set saving and expense budgets
- 16. Youre Generous With Money When it Comes to Charities or Helping Others
- Step #4: Start and follow a budget
- 25. You Pay Your Credit Cards in Full Each Month
- 4. Save for emergencies and retirement
- Motley Fool Returns
- Step #10: Stick with your long-term financial plan
- All Three Levels Of Financial Independence Are Good
- How Much Money Do You Need to Be Financially Secure?
- How To Increase Your Savings
- Tips to Become Financially Stable With A Low Income
- Part I
- Part II
- Will I ever be financially stable?
- + 1. Create an additional stream of income
- 3. Dont Borrow to Finance a Lifestyle
- Making smart financial decisions on a budget
- 7. Plan for retirement
1. Track Your Spending
Knowing how much you spend and on what keeps your spending in check. A free budgeting app like Mint can help you do this.
You might discover that ordering in food several times a week costs more than $300 a month, or recurring charges for streaming services and subscriptions you never use are a waste of your hard-earned money. If you can afford to spend hundreds a month on ordering in—great. If not, you’ve just discovered an easy way to save money in addition to canceling those streaming services you forgot you had.
3. Set saving and expense budgets
Recording your expenses regularly is necessary. This is to monitor your spending pattern and use it for further financial planning. For the basic cost of living such as housing, utilities, food, and transportation, this should to be controlled to not over 50% of monthly income. Saving and emergency budgets should be set at least around 10-20% a month. Lastly, other expenses should be less than 30% of income.
16. Youre Generous With Money When it Comes to Charities or Helping Others
You have certain charities that you support on a regular basis, and you’re generous with the people around you who are in need. You’re able to do this because you never sense that giving money to others in need will in any way negatively impact your financial position. You give with ease, and you feel good about it.
Step #4: Start and follow a budget
That’s right, budgeting. You’ve most likely heard this advice before. Budgets aren’t as bad as they may sound though. A budget is just a tool to help you spend money on the things you want to spend money on.
First of all, why is a budget important? When you keep a budget, you can track where your money is going. It’s easy to spend more than you should if you don’t actually know how much you’re spending. So more than anything else, a budget helps you keep track of your money.
Once you know how you spend your money, you can make a plan. There are always essential things that you have to spend money on. That could include your rent or mortgage, utility bills, food, car payments or transportation to and from work. These essential things should make up about half of your spending. (Experts generally recommend that your rent/mortgage not make up more than 30% of your monthly spending.)
Then you should try to put 10% to 20% of the remaining money toward your future. That means your retirement account, emergency fund and other savings accounts. Once you do all that, you can live off the remaining money. To make sure you don’t overspend, you might want to figure out how much you should spend each month on common things like eating out or buying clothes. Regardless of exactly what you spend money on, try to spend purposefully. Put your money toward the things that are important to you. Then cut back on the rest.
25. You Pay Your Credit Cards in Full Each Month
Since you don’t use credit cards as an extension of your paycheck, you simply pay the balance in full each month as the bill comes in. There are no lingering debts in your life and none of the worries that are attached to them. Every month, you have a clean slate going into the next month. See #3 again. 🙂
4. Save for emergencies and retirement
After you’ve eliminated all high-interest debt, it’s time to turn your sights on savings.
Although a Bank Account Buffer™ can insulate your finances from small unexpected expenses, it’s no substitute for a full emergency fund: A savings account that contains at least three months of expenses (preferably six months).
An emergency fund should be stored in an FDIC-insured high yield savings account that’s separate from your primary bank so you won’t be tempted to spend it.
At the same time as you build your emergency fund, you should be increasing your retirement savings until you’re saving as much as you comfortably can each month. Putting away 10% of your savings is a good start, but if you really want to build wealth, you should strive to eventually be able to save 25% or even a third of your income.
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Step #10: Stick with your long-term financial plan
In an ideal world, you would stay within your budget every month. Your car would never need repairs and you would never lose your job. Unfortunately, we don’t live in an ideal world. Unexpected things come up and sometimes you just spend more money than you anticipate. Try not to get discouraged when things don’t go as planned.
Even when things aren’t going well, follow through. Stick with it even if you fall off for weeks, months or years. Don’t worry about doing things perfectly. Do your best and try to get just a little better every day.
If you find yourself struggling to follow the plan you’ve laid out for your finances, a financial advisor can help. SmartAsset’s free matching tool can pair you with up to three financial advisors who serve your area.
All Three Levels Of Financial Independence Are Good
Even if you find yourself in the Budget FI category, it’s still better than working at a soulless job. Just getting rid of a long commute or a terrible boss makes Budget FI worth it. Just make sure your financial independence number is real enough to take action. Otherwise, you’re probably not even in the Lean FIRE / Budget FI category.
Most people who find themselves in Budget FI are either on the younger side (<40), don’t have kids, or are forced to live frugally. I’ve found that in many cases, folks in Budget FI long to lead a more comfortable life. Therefore, they either get back to work, do some consulting, or try to build a business within three years to move up the pyramid.
The only way I’ve found to successfully overcome the fear of not working is by either negotiating a severance, building enough passive income to cover all your living expenses for at least 12 consecutive months, or trying out FI living first while your partner still works. Feeling comfortably FI doesn’t just happen with a snap of the fingers.
There is this natural urge to still make financial progress by continuing the good financial habits that got you there in the first place. And wonderfully, the progress you make is like finding loose diamonds after you’ve already found a pot of gold.
How Much Money Do You Need to Be Financially Secure?
The first step to financial independence is financial security. To be financially secure is to be confident that you have enough income to comfortably support your current lifestyle, as well as a large enough savings pool to cover emergency and unexpected expenses. Essentially, it is being able to live without worrying about how to save money on a daily basis.
CNBC reports that, as an average, Americans considered themselves financially secure when they had at least $500,000 saved. This comes from an average of responses from adults with a variety of backgrounds across multiple age and demographic groups.
How To Increase Your Savings
Boosting your savings doesn’t have to be hard or painful.
Here are a few suggestions on how you can get started:
Take advantage of automation: Start small with an automatic savings plan by transferring money from your checking account to a savings account regularly. Consider asking your human resources department to deposit a part of your paycheck into your savings account and then put the rest into your checking account.
Use your bonuses and tax refunds: If you’re lucky enough to get bonuses at work, use that toward savings instead. Or if you happen to get a tax refund one year, you can use that towards your savings as well.
Increase savings 1% at a time: Setting aside an extra 1% of your income toward savings will likely not make a big difference in your spending habits. Once you’re used to not having that amount of money, increase your savings by another 1% and so forth.
Start a side hustle: If you find your income just isn’t enough, consider a side hustle to earn a bit of extra cash. Many don’t even require you to leave your home and with most you can work around your busy schedule.
Tips to Become Financially Stable With A Low Income
If you’ve made it this far, I thank you and hope it provided some clarity for you.
Yet after all that, you may be a bit discouraged. It can be a hard trap to breakthrough if you are battling low income, especially as expenses keep rising every year.
I’m not going to sugarcoat it, it’s much more challenging to achieve financially stability with a lower income. But, it’s not impossible either if you put a plan together and stay patient.
But out of all the steps mentioned above, your focus if you are struggling with making money, should be finding ways to earn more.
Low income can also vary from person to person as it depends on where you live and current expenses.
One priority is to change your income status relative to your personal situations. Before you yell at me and say “No Duh!” hear me out.
With the internet and gig economy, everyone has a chance to make money on the side. Not everyone is going to get rich doing this, but getting extra cash can be a game-changer to your plan.
Yes, side hustles might be challenging if you have a full-time job and family to take care of currently.
So your other two options are for your full-time job/career:
- To ask for a raise at work (or find out what you need to do or show in order to get a raise)
- Work on improving your salary worth (certifications, shadowing others at work, switching jobs, networking, etc.)
Part two of this, is to cut back expenses mercifully.
I’ve never been a fan of pushing extreme frugality, but if financial stability is a priority for you and your income growth is challenging, this is step is a must.
Where to cut back hardcore:
- Living expenses
You’ll be making some sacrifices now that aren’t fun, but the long-term payout and reaching your financial goals will be worth.
Your temporary cutbacks might only last a year or maybe a few, but can have dramatic and lasting impacts.
But only you can determine how committed you want to be to these areas.
Will I ever be financially stable?
If you are willing to learn and be patient with your money, financial stability is achievable for anyone. While it may be more challenging or easier for some, it’s possible to become financially stable in less than a year. However becoming fincnially sound may take longer, but just keep going!
+ 1. Create an additional stream of income
Follow the six steps above and you WILL achieve financial freedom. But depending on how much debt you have an how much you earn, it may take a long time. If you’re serious about accelerating your wealth, the “Plus 1” step in the 6 + 1 System is the most important. The Plus 1 Step is creating a side hustle: Another source of income outside your day job.
Earning more money will always be a quicker way to your financial goals than trying to spend less.
For some, your side hustle could grow into a business that will earn you more money than you ever could as an employee. But a full-time business doesn’t have to be your goal.
Lots of millennial are getting ahead by freelancing or working second jobs. Some do it because they have to, but others do it because they know they’re knocking down financial goals in half the time.
When I was 25, I was $80,000 and had a day job that paid about $35,000 a year. At that salary I was keeping my head above water, but it was going to take 10 years or more to get out of debt. So I got side hustles. First, I started working nights and weekend at Starbucks. Later, I learned how to earn money from my hobby as a blogger. With not one but three sources of income, I got out of debt in about three years instead of 10.
Anybody can pursue a side hustle. Here are nearly three dozen ideas to get you started.
3. Dont Borrow to Finance a Lifestyle
Borrowed money should be used when your gain will outrun your borrowing costs. This might mean investing in yourself—for your education, to start a business, or to buy a house. In these cases, borrowing can provide the leverage you need to reach your financial goals faster.
On the other hand, using credit for a lifestyle you can’t afford is a losing proposition when it comes to building wealth. And the added interest expense of borrowing further increases the cost of the lifestyle.
Making smart financial decisions on a budget
If money is tight, you may be most concerned with immediate financial needs, like putting food on the table and paying the bills — not saving for retirement. But even if you’re earning less than $60,000 per year, you can still make smart money decisions to improve your financial health.
First, consider how much money you have to put toward your financial goals, like paying down debt or saving for retirement. Comb through your budget and figure out exactly where all your money is going each month. Are there certain things you can live without or with less of? You don’t need to take a machete to your budget, but even small cuts across various spending categories can add up.
Next, once you have some extra money each month, figure out how you want to distribute it among your various financial goals. It’s a good idea to put at least a little toward retirement each month to avoid having to save a lot more later. And high-interest debt like credit card debt can be incredibly expensive, so paying that down as quickly as possible can save you a lot of money in the long run.
Establishing an emergency fund is another option when determining where to park your extra cash. Although creating this “rainy day” fund may take money away from your other goals temporarily, it saves you money in the long term. If an unexpected expense pops up, you can pull the money from your emergency fund rather than racking up credit card debt or taking the cash from your retirement account (and possibly paying penalty fees for withdrawing the money early).
Managing money might seem easier if you’re earning fatter paychecks, but ultimately, financial security comes down to making smart money choices regardless of how much you’re earning.
7. Plan for retirement
Some may think it is too far to plan. However, the earlier you can save for retirement, the faster you can be financially free. This is because the savings and returns can be accumulated and continuously reinvested for longer period of time. For office employees, it is recommended to save as much as allowed by the company in provident fund. In case of moving to new companies, it is better to transfer this fund with you, not withdraw it before the retirement for your own utmost benefit. Additionally, pension insurance is another interesting saving tool for retirement, since it will guarantee your regular fixed income when you retire. Moreover, you can get a personal income tax deduction benefit too.