10 Essentials to Building Financial Stability
I’ve been hearing rumors of a coming financial crisis ever since the last one ended. In case you’ve forgotten, that was the 2008/2009 housing collapse, which is now being referred to as “The Great Recession.” While I’m sure that some of these forecasts of doom and gloom were nothing more than fear mongering to sell either a product or a political point of view, at least some were honest evaluations by people who at least thought they had a grasp of our country’s finances.
There are two things which I think are truths here. The first is that our economy is so complex that I doubt anyone fully understands it, including economists who study it for a living. And the second is that our economy is much more fragile than any of us realize, even while being seemingly healthy.
I base this second observation on the effects the Coronavirus Pandemic has had on our country. As the various governors have issued “stay at home” orders, literally millions of people have been laid off or furloughed by their employers. At the same time, all the gains that have been made in the stock market over the last three years have been lost. While there are plenty of optimistic projections that the economy will be back on track and the losses will be recovered by the end of the year, at the moment, our economy is in a shambles.
My heart goes out to those who have lost their jobs due to the actions being undertaken to mitigate the effects of the COVID-19 pandemic. Nevertheless, most of us have been caught flat-footed while we should have had our finances in order, to the point where we could have survived the loss of our jobs for an extended period of time. Granted, a large portion of the now unemployed were low wage earners, making that extremely difficult to do; but we all need a plan to maintain our financial stability, no matter what happens. I hope this situation teaches us a valuable lesson to plan ahead, for the sake of ourselves and our families. Here are some essential things you can do:
Live on Less than You Earn
I don’t remember it so clear from my own youth, but I clearly remember how all three of my kids were when they got their first jobs, as teenagers. They had big plans for what they were going to do with their money, especially all the things they wanted to buy. It didn’t take long for them to find out that their paychecks didn’t go as far as they wanted.
The average American household lives on 10 percent more than they earn. That means that overall, we’re digging ourselves further and further into debt. When any sort of financial instability comes, those who are worst hit are those who are in debt.
We should be living on ten percent less than what we earn, not ten percent more. What I mean by that, is that our expected monthly expenses should be ten percent less. We need that extra ten percent, and sometimes more, just to take care of the unforeseen costs of life, like a flat tire, the need to go to the doctor’s office or that unexpectedly high electric bill.
Create a Budget
Speaking of how much we spend every month, only 41% of American families even bother to create a budget, even a simplified one. Yet that is the number one, most important financial tool we have. Creating a budget, and then using it as a guide for our spending, gives you control over your finances, rather than allowing life to control them without your input.
It’s actually not all that hard to create a budget and chances are you already have the beginnings of one in your mind. Put it down on paper and make sure you add in a monthly budget for things like clothing and entertainment, based on what you think you spend. That gives you a starting point. You can refine it later, as you see how well you hold to your budget.
Your budget is going to be a tool to tell you if you can afford purchase you want to make. At the same time, it gives you a way to figure out how to change your spending habits, in order to do things you want to do. You’ll be able to see where you need to cut back, so you can save the money for those purchases.
If You’re a Believer, Be a Giver
The most basic financial principle in the Bible is the tithe. If you’re a Christian and you want God’s blessing on your finances, then be sure to give tithes and offerings. You can’t expect God to bless you, if you don’t obey His commandments. God blesses us to be a blessing to those around us. We are conduits of His grace and blessings. If you choose not to be a giver, then don’t expect God to overwhelmingly bless you or use you for His great purposes.
Build Savings
Economic gurus all tell us that we should have at least three months worth of basic expenses (that’s bills & food) in the bank, as an emergency fund. That sounds all well and good, but where is that money going to come from?
There are two simple means of building up your savings. One is to have your bank automatically move a specified amount of money from your checking account to your savings account, either when you are paid or a set day every month. The other way is to take whatever amount of money is left in your checking account before your paycheck comes in and transfer that to savings. In addition , put whatever windfalls you receive, (taxes, overtime) into savings as well.
Once you have enough saved up for emergencies, you’re better off paying off debt, than saving additional money. Savings really isn’t all that good an investment and you actually gain more by getting rid of all those high interest payments.
Avoid Debt like the Plague
Borrowing money, except for major purchases like your home, is one of the worst financial decisions you can make. If you really look at it, anything you buy on credit ends up costing you exponentially more. So when you buy something “on sale” with a credit card, you will likely pay more than it would have cost at full price. Not only that, but having that credit card makes it all too easy to make the decision to buy something, just because it’s a “good deal” when you can’t really afford it. Credit card companies and major retailers push buying on credit because it is to their advantage, not yours.
While credit cards are bad, anything that even smells like a payday loan is worse. Watch out for the interest rates on things like this, as well as car payments and anything else that you might buy on payments. They usually hide that information and only show you the monthly payment, “proving” to you that you can afford it. But if you look at the interest rate, you’ll find that they’re robbing you blind.
Constantly Look for Ways to Lower Your Monthly Expenses
If you can’t afford the things you want (actually, even if you can), look at how you’re spending your money now. What are you paying for, that you don’t need? Most of us have recurring monthly expenses, for things we don’t use, like gym memberships, online subscriptions and subscription boxes. Check your bank statement on a regular basis as well, looking for reoccurring charges for things you didn’t know you were signing up for.
On top of that, we all have things we spend money on, just because we want to. Take a look at those things and ask yourself if they are really necessary. Chances are, you’ll find things you really don’t need to be spending money on; perhaps even things which surprise you.
Do it Yourself
One of the best ways of lowering your monthly cost of living is to do things yourself. Anything you’re paying someone else to do, you can do cheaper yourself, unless it requires specialized expensive equipment that you can’t rent for a reasonable price.
I’m a consummate do-it-yourselfer, who has worked on everything from remodeling my home to rebuilding the engines in my vehicles. Along the way I’ve gained quite a collection of tools, as it seems that many jobs require buying some special tool. But all those tools are investments, as they help me to do other jobs too. In the long run, I save thousands of dollars, each and every year and you can too.
How’s Your Job Stability?
Unexpected job loss is one of the hardest financial blows any of us can take. Yet it happens to people every day; companies go through rough financial waters and lay people off, contracts end, markets change or we get a virus that shuts down the economy. Whatever the reason, some people are more susceptible to job loss, than others.
There are two sides to this coin. The first is how secure your job is, generally speaking. Teachers, police officers, grocery store workers and anyone in the medical field are unlikely to lose their jobs, just because their jobs are so essential. But then there are the rest of us; we need to count on making ourselves indispensible to our companies, so that if they have to do layoffs, we’re the last person that they keep working.
How do you do that? By being the best employee the company has. Take on all the jobs that nobody else wants to do. Always be willing to work overtime, when needed. Make excellence your byword and your goal for everything, even in the most mundane tasks.
Develop Alternate Income Streams
If you only have one income stream, your paycheck, you are at risk of losing everything if something happens to that job. The solution, which many financial gurus are now pushing, is to diversify your income so that you have more than one income stream. That way if you lose your job you don’t lose all your income.
So how do you do that? One way is to become an independent contractor or freelancer and work for a number of different companies. This comes with its own challenges, like finding customers, but it is still a good option. Another is to get a part-time job, in addition to your regular work. But probably the best option, for most people, is to develop some sort of sideline business, which you can do in your spare time.
Have a Fall-back Plan
When all else fails, you need a fall-back plan. What do I mean by that? The same thing I shared with my kids, when they grew up. Rather than “downsizing” when they moved out, we kept the same house, telling them that if everything ever went bad and the economy crashed, they could always bring their family home and stay with us, until they got back on their feet.
Maybe your family can’t do that; but if you can, I recommend it. If what I’ve seen going on with the Coronavirus pandemic has shown me anything, it’s that we need a fall-back plan, specifically a financial fall-back plan. Families should be ready to help each other out.
At the same time, I don’t think that any of us have the right to take advantage of the generosity of our families, spooning off them, when we are capable of taking care of ourselves. I have helped out family members when they were in need, but I have also refused to help, when it was clear that they were being irresponsible and expecting me to make up for it. Prayer and wisdom must be applied in these situations.
