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What does Financially Sound really mean?
If someone asked if you were financially sound, would you know how to answer? Even more so, could you explain how to get there?
First, let me help you out by explaining what financially sound means:
Being financially sound means that you consistently make good financial decisions that increase your net worth, and you’re able to maintain this state for the foreseeable future.
The term can refer to the state of your overall financial status, or it can be used to describe individual decisions with your finances. Either way, being financially sound results in a secure and stable financial life and future.
In order to reach this coveted status, you must be aware of your finances and how they affect your day-to-day life. Being in control of your money and making wise decisions will get you on the right path toward becoming financially sound.
You can make your financial future more secure by applying the steps outlined below. Keep reading to learn what it means to be financially sound and how you can get there.
11 Steps To Become Financially Sound
Achieving a high level of financial security takes diligence, sacrifice, and patience. The good news is, no matter what your circumstances may be, you can start today to make better decisions with your money. With each financially sound decision you make, you’re one step closer to greater security and stability.
Here are 11 steps to help you get on the road to being financially sound.
Step 1: Know your finances
You should know how much money you have coming in every month and where this money is going. Take the time to calculate your normal life expenses and average monthly income.
If you are unsure, start by using a budgeting app – such as Mint or Personal Capital- to help keep track of all the different resources that may be available to you. This will give you an idea of what you spend your money on and will go a long way in helping establish good habits.
Getting on a budget will also help you understand your finances better, as well as guide you in your savings goals (step 2). Budgeting allows you to track your spending and incorporate savings into your spending plan. Sticking to your budget will help you pay your bills on time and manage your money better.
You should also stay informed of your credit score. Your credit score is a number that tells lenders how likely or unlikely you are to default on a loan. Keeping your credit score healthy will help when applying for any form of lending in the future, and can be achieved by monitoring credit card spending habits and always paying accounts on time.
If there is anything wrong with your credit score, work on fixing the mistakes before applying for a loan.
Step 2: Create some goals
Setting goals will help you take control of your finances. You should set short-term, medium-term and long-term future goals so you can achieve them within a specific period of time. Make sure they are attainable from where you currently stand financially.
Keep in mind, the overall goal is to increase your net worth over time, and setting a range of different types of goals can be helpful in achieving this!
A few goals that will help you achieve financial security and become financially sound are:
- Increase your savings to a certain percentage of your income
- Reduce your credit card debt, home loan and any other types of loans
- Build an emergency fund (see step 3) for those unexpected expenses
- Increase your income and establish a passive, steady income stream that you can rely on in the future
- Save for retirement and set up automatic contributions so it’s done automatically each month
Once your goals are set, research what to do next! Create a financial plan that aligns with your goals and your values.
Step 3: Build an emergency fund
Once you’ve created a budget, it’s time to make savings a priority. After all, if you don’t have some kind of financial cushion, you’ll continue to rely on debt to pay for financial emergencies that inevitably pop up.
A lot of people find that they’re unable to save money because they spend all of their income. This is where a budget can really help you manage your spending. As you track what you spend, find expenses that can be reduced or eliminated.
Remember: becoming financially sound takes some sacrifice. Ask yourself what expenses you’re willing to give up so you can save more money.
Determine a certain amount you want to save out of every paycheck. Then, treat your savings like any other bill you have to pay. This way, you pay yourself first, instead of hoping there’s something left at the end of the month.
Make your emergency fund the priority if you don’t have one yet. This is a step that should be done before saving for retirement or other long-term financial goals. Focus on building enough savings to cover 3 to 6 months of your basic expenses.
Here are 5 steps to build an emergency fund:
1. Track your spending for 30 days
Your first step to building an emergency fund is to get on a budget and start tracking your spending. Doing this will help you identify those budget leaks that are keeping you from saving money.
You can create your own spreadsheet on a computer, write everything down with pencil and paper, or just keep your receipts from every transaction you make.
The method doesn’t matter. What’s important is to write down where every penny is going so you can see how you’re really spending your money.
2. Reduce or eliminate expenses
Once you know where your money is going, review your priorities and decide to make some lifestyle adjustments.
If there are any expenses that can be eliminated, or swapped out for cheaper alternatives, it will help free up funds for savings. This could mean cutting down on dining out or canceling memberships in order to save money, etc.
The money you free up in your budget can then be put toward your emergency fund.
3. Make more money
The best way to quickly build your emergency fund is to increase your income. You might feel like you don’t have the time or energy to take on another job, but even bringing in $50-$100 more a week can make a huge difference.
You don’t have to get a traditional part-time job either. You could start a small side-gig offering a service you enjoy doing. You could drive for Uber or Lyft on the weekends, or rent out an extra bedroom in your home.
Making more money doesn’t need to be a huge inconvenience in your life. Find something that can easily and quickly bring in more cash, and you’ll reach your savings goal in no time.
4. Automate your savings
Once you’ve decided on a savings goal, include it as a weekly or monthly payment in your budget. A great way to make this a habit is by automating your savings transfers.
You can set up a split direct deposit with your paycheck, with some going in your checking and the rest into savings. Or you could create a weekly automatic transfer from your checking account to savings account.
Removing the decision to put money in savings makes it easier to live on what’s left over. You never see that money in your checking account, so you never miss it!
5. Be intentional with financial windfalls
How many times have you come into extra money, just to wonder 6 months later where it went?
Whether it’s a tax return, a birthday gift, or a substantial dividend, those extra, unplanned funds that seem perfect to spend on a new widescreen could be much more useful if applied to your emergency savings.
Decide ahead of time how you will manage any financial windfalls you receive. This way, you won’t waste it on stuff you don’t really need.
Okay, once you’ve built up your emergency fund, you can move on to step 4: paying off debt.
Step 4: Pay off your debt
Paying off your debt should be your next priority. The more you have in student loans, credit card debt, or any other personal loan, the less money will be available for saving and investing which could lead to problems further down the line!
Of course, your progress will be slow if you *continue* to create debt. It’s not enough just to pay your minimum balances every month while you continue to charge those shopping sprees!
Get rid of your credit cards (at least lock them up or hide them!), and come up with an aggressive plan to get out of debt. Give yourself a time limit (be realistic) and calculate the debt payments you’ll include in your budget.
There are several ways you can attack debt. Two popular ones are the debt snowball and avalanche methods. Find a strategy that works for you and one you can stick to.
You can create your own debt payoff plan by following these 5 steps:
- Create a budget so you can effectively decrease expenses and free up more income to apply towards debt.
- Set aside an emergency fund. Having at least $1000 in savings will prevent you from falling into more debt if an emergency arises.
- Make minimum payments on all balances except for the one you want to pay off first. For this debt, apply the largest payment you can each month.
- When you pay off a balance, apply its larger payment to your next prioritized debt as you continue to make minimum payments on the rest
- Do what you can to eliminate triggers and temptations. Get rid of (or hide) the credit cards, avoid shopping without a list, and remove yourself from promotional email lists.
Always make your payments on time to avoid late fees. To speed up your progress, focus on the high-interest debt first and leave no-interest debt (like medical bills) last. Create a timeline to help stay on track to having little, if any, non-housing debt.
Then, you can focus on paying down your mortgage. With your consumer debt paid off, you may consider refinancing to a 15-year mortgage.
Step 5: Change your habits
For most of us, strengthening our financial security really comes down to exercising good financial habits. You can’t achieve the stability you want unless you’re making consistent, daily decisions that help you move toward achieving your goals.
Spend some time reflecting on how you interact with your money, and why you choose to sabotage your efforts to achieve financial freedom.
Then, write down a list of good habits you can build to replace the bad habits that aren’t serving you well. A few ideas are:
- Creating and sticking to a budget
- Practicing delayed gratification
- Paying yourself first
- Paying cash for everything
- Living below your means
- Setting financial goals
- Educating yourself on personal finance
All of these habits, done consistently over time, will help you become financially sound and achieve security in your financial future.
Step 6: Invest for the future
If the word “investing” intimidates you, it’s enough to know that it just means putting money into something with the expectation of achieving a financial return. There are many different types of investments, such as stocks, mutual funds, and real estate, so it’s important to figure out where your strengths and interests lie in order to choose the right one.
Any sound investment involves some risk, but there are ways to mitigate that risk with diversification. This simply means you’re not putting all of your eggs into one basket, and your investments have varied risks. This can help protect against market downturns by balancing them out across different types of stocks or investment products.
Investing can seem intimidating, but it’s important to remember that there are many different options available. The best way to determine what is right for you is by talking with a financial advisor.
Step 7: Sign up for your company’s 401(k)
Becoming financially sound is a critical goal to include in your plans for retirement. If you have access to a company retirement plan, such as a 401(k), make sure you take advantage of it.
You can make your retirement contributions automatic so you never even miss the money. This is an easy way to increase your savings for retirement.
If your employer offers a contribution match, try to contribute the minimum required to get the full benefit. This is free money, so take all you can get!
If your employer does not offer a 401(k), consider opening an Individual Retirement Plan with your local bank. An IRA allows you many of the same benefits as a 401(k), although there are some differences.
To learn more about both, read my post that compares the 401(k) and IRA.
Step 8: Protect yourself with the right insurance
You need to make sure that you have the right type of insurance to protect your health and financial assets. This includes life and disability insurance as well as health insurance.
The appropriate type of insurance for you is determined by a number of factors including age, occupation, family history, etc. Insurance can seem like a confusing topic, but finding out what’s available will help you make the right decisions for your financial security.
Start with talking to your insurance company to get some direction for protecting your family and finances against risk. Have your agent review your current insurance policy to determine what you may need to add or remove. Learn what standard coverage is versus supplemental coverage, and if increasing your coverage is wise for your specific situation.
Step 9: Create a will and other estate-planning documents
It is important to have a will in place and other estate planning documents. This includes powers of attorney, financial power of attorney, living wills, etc.
Communicating your intentions for your financial assets before you die will give your loved ones the direction they’ll need during a very difficult time. Nobody is promised tomorrow, so try to get your estate plan in order as soon as you can, even if it’s just a simple will.
The specific requirements vary by state so it’s best to consult an experienced professional for more information on what you need!
Step 10: Increase your income
One of the best ways to secure your financial future is to increase your income. Making more money will allow you to save more money and will help you reach your long-term goals faster.
You can increase what you earn by getting a better-paying job, negotiating a higher salary, or starting your own side business. Also, getting a side hustle is an easy way to make a little extra cash to put towards your long-term goals while still working full time.
A few side gigs that can increase your income quickly are:
- Driving for Uber is a great side hustle because all you need is your phone and car to get started. You don’t even have to invest in any equipment upfront! The best part about driving for Uber? It’s flexible, meaning that you can set your own hours so it won’t interfere with your current job or school schedule!
- Using a skill you have to offer a needed service can generate extra money in a short amount of time. Whether it’s graphic design, copywriting, catering, or sewing – there are plenty of freelance opportunities out there for people with the right skills.
- Answering surveys can get you quick cash. Sign up with several, and complete them in your spare time. You won’t make a lot of money with surveys, but every dollar counts!
- Being a landlord is a (mostly) passive and easy way to make some extra income. Rent out a room, a basement, or even dive in as an investor and start renting out properties.
Step 11: Learn about personal finance
The final step is to become a master of personal finance! Most people never get a handle on their money and achieve financial freedom because they don’t have the knowledge they need. Take control of your financial future by educating yourself.
A few ways you could learn about money management are:
- Reading personal finance books (they’re free at the library!)
- Subscribing to financial blogs (like this one!)
- Joining the Personal Finance subreddit
- Using online resources to (many are free!)
If you feel you need more support, talk to a financial planner. An expert will give you the assurance that you’re on the right track to achieving financial security.
The benefits of being financially sound
If you’ve ever lost sleep over finances, you know how stressful money problems can be. It’s easy to worry about unpaid bills, making your mortgage payments, paying off those heavy debts that are piling up and other financial burdens you might be carrying. Not to mention how far behind you are in your retirement planning, and the lack of options in life you have to save money and build for your future.
When you make the right changes to your financial life, such as building savings, eliminating debt, and increasing income, you can achieve a greater sense of security. Breaking bad money habits, adopting a frugal life, and decreasing your monthly spending will help you get on the right path to financial freedom.
Once you’ve become financially sound, you will experience several benefits that can make life much easier for you, such as:
- Reducing stress and anxiety
- Having more options in life
- Giving your family more stability
- Securing your future retirement
- Increasing your ability to give and be more generous
If you’re currently having a tough time with your finances, just know that you can have more security if you take the right steps.
Successful people who have become financially sound know that it takes time, patience and diligence, but it is an achievable goal. The key to a prosperous financial life is being aware of how you’re managing your finances now, and making sound financial decisions based on your values and long-term goals for the future.
Here is my encouragement for you: it’s never too late to change your direction and start moving toward financial security.
Follow the steps outlined above and create a financial plan you can commit to. Yes, there will be challenges along the way. You might get discouraged at times. But just keep your eye on the future you dream about, and don’t give up! Every step forward is one step closer to living it.
Other posts you may enjoy:
- 17 Powerful Benefits of a Budget
- 50 Ways To Stretch Your Food Budget
- Money Values: How To Align Your Priorities With Your Spending
- The Cheapest Way To Live: Best Tips For 2022
- Why Is Money Important? Here Are 5 Ways Money Makes Life Better
- 50 Ways To Save Money On A Tight Budget
- 9 Powerful Benefits of Setting Financial Goals
- How To Build A 6 Month Emergency Fund In 5 Simple Steps
- How To Escape Debt With A DIY Debt Management Plan
- The Essential Retirement Roadmap For Late Starters
- How To Stay Motivated To Achieve Your Goals
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