Everyone wants to be financially independent, stable, responsible or happy; however, what does that actually mean? Is it having all your debt paid off? Is it having lots of money in a savings account? Is it having many investments? Is it being in a higher socioeconomic class?
As Robert Kiyosaki said, “The key to financial freedom and great wealth is a person’s ability or skill to convert earned income into passive income or portfolio income”.
The lack of financial understanding by consumers has been signaled as one of the main reasons behind personal financial problems faced by the majority of people. Too many people just don’t have knowledge for savvy financial decision-making, and that does not bode well for families, their communities or the country.
Financial stability might sound confusing but it’s just a way of describing the financial system when it’s fulfilling its basic roles. Becoming financially stable is achievable, and it’s entirely in your hands. Your financial behavior is what will lead to a stable economic existence and depending on how you look at it there are several components to follow for financial freedom:
- Control your expenses: Keep an accurate list of the money coming in and going out. Add up each cent for a month so you actually know your budget and where it comes from and goes. Get rid of any unnecessary expenses.
- Emergency fund: Financial stability begins with knowing you can handle an unexpected expense with ease and not panic. The most common advice is to have 3-6 months of all your expenses stashed away.
- Credit/Debt management: Having debt does not mean you are financially unstable. Those who handle debt well are most likely building good credit history and increasing their credit score. It’s important to maintain a good credit score, and you can help this along by charging only as much as you can afford to pay off each month.
- Consumer Protections. Protecting your assets, future investments and your personal information against scams, tricks, and traps is another important aspect of financial stability. Knowing your rights and consumer protection is a vital part of keeping your finances in order.
- Diversify your income: If you only have one stream of income, you’ll have nothing left if you lose it. Other sources of income could come from a side job, a rental property, or investments.
- Plan your future: Putting away money for retirement or money for college for your children will help you become more financially stable. Avoid impulse purchases. These are one of the most negatively affecting aspects of your financial stability. Fix this problem and you’ll notice immediate and positive effects.
- Invest: The best investment you can make is investing in yourself; it will pay you dividends for a lifetime. First of all build up a strong financial background in order to jump into investments pool. Investing is an ever-evolving, complicated process that requires knowledge, vision, and intuition. Although we claim to be rational decision makers, we are emotional human beings affected by our moods, values, crowd psychology, past experiences, fear, and greed. Investing is also a science because to succeed, you must understand and apply scientific principles like diversification, asset allocation, valuation, correlation, probability, and much more. Staying ahead of the market and studying emerging vehicles for investment is also critical. For example, the latest investment boom in cryptocurrencies has left many experienced investors scratching their heads and missing out on colossal returns. It’s normal to fear what we don’t know, but no successful investor can afford to miss an opportunity of that magnitude for their lack of knowledge. Investing your money will help build financial stability. Make your money grow by investing in stocks, bonds, and mutual funds. Most investments come with a level of risk, though, so always seek the help of an investment professional before diving in.
- Make a goal: Making a goal for the future is very important to mark for the agile financial literacy, and it will give you something to work towards. Small and large goals both work to motivate you. Try setting a goal to earn an extra €100 a month. Or just try to set a goal to be debt-free in 18 months. Both give you something you can actually focus on.
Financial stability can mean different things to different people. In part, the way you feel about money or personally obtained experiences may affect your comfort level of financial stability and mobility.
Economic mobility is the ability to change your wealth, that is, move up or down in your socio-economic standing. It’s calculated by looking at your income, total earnings, or wealth.
Mobility can be difficult depending upon the socio-economic status you were born into, as well as where you were born into it. Research has found that children born into poverty (the bottom 20%) have only a 2.8% chance of moving into the top 20%. In essence, depending upon where you were born, your chances for upward mobility may be poor.
The hope for many parents is that their children will make more money than they did. The trend, however, has been declining. Of people born in 1940, 92% earned more than their parents had. For children born in 1984, that number declined, with only half of those children earning more than their parents had. While there are other factors at play, such as The New Deal boosting the middle class, over the years, the middle class has shown the greatest declines in mobility.
One of the best ways to improve your mobility upward is through education. With a college education, it’s possible to start on a higher rung with a higher income right out of the gate. Unfortunately, the college has become more and more expensive; thus, if you’re not already in the upper-middle or upper class, paying for a college education may seem out of reach.
Financial knowledge is the capability how to manage the money in different usage, including the monitoring of day to day financial matters in the market and make the right choices for “financial literate” people’s needs.
But can financial knowledge be linked conceptually to financial stability? Let's review some of the stylised facts in this modern and exciting literature:
- Individuals who are more financially literate have been shown to make more economically rational decisions pertaining to real estate purchases, insurance purchases, investing, saving, tax planning, retirement planning, pension, and insurance planning. More generally, people who are more financially literate make better financial decisions (Lusardi Annamaria and Olivia S. Mitchell 2014).
- From an institutional perspective, increased financial capability can contribute to client protection and social performance target assessment by financial institutions.
- Recent evidence shows that financially literate individuals in the US are more likely to start their own business, and also perform better while in business (Klapper Leora F, Lusardi Annamaria, and Georgios A. Panos 2016).
- At the macro level, and in view of looming debt and retirement crises around the world, salient political choices − recently involving voting in referendums − are determined by attitudes towards redistribution, immigration, austerity, as well as the working of economic partnerships and monetary and fiscal unions, etc. Such attitudes are likely to depend upon the understanding of the basics of macroeconomic accounts and public finance. Recent evidence shows relationships between financial literacy in the UK and attitudes to the Scottish referendum, the EU referendum, and towards immigration (Montagnoli Alberto, Moro Mirko, Panos Georgios A, and Robert Wright 2016).
- Evidence shows that financial knowledge is a key determinant of wealth inequality. 30-40% percent of retirement wealth inequality in the US is accounted for by financial knowledge (Lusardi Annamaria, Michaud Pierre-Carl, and Olivia S. Mitchell (2016)).
Ultimately, financial knowledge can contribute to increased levels of overall well-being, along with higher levels of satisfaction relating to income, retirement, housing, and financial situation.
Investing may sound like a daunting task. First, most people live day-to-day and do not have extra money to invest. Second, there are so many options it can be difficult to choose. In recent years FinTech Startups like FAST INVEST has made investing a lot easier.
Like with any other undertaking, investment skills are honed through experience. But instead of learning from your own mistakes, you could take advice from those who’ve been there and done that:
- Having no plan leaves you vulnerable to emotional triggers and panic decisions. And as the old saying goes, if you don’t know where you’re going, any road will take you there. To remain grounded and adhere to a sound long-term investment strategy even when the market conditions are unsettling, you need to have a personal investment plan that addresses the following aspects: your investment goals and objectives; your risk appetite; the benchmarks you will use to assess the performance of your investment portfolio; asset allocation; portfolio diversification.
- The point of diversification is to help you manage the risks that can hurt your portfolio. However, it is only valuable if the new asset added to the portfolio has a different risk profile. For example, adding another P2P consumer loan from the same market or category to your P2P investment portfolio can cause your investment performance to replicate the averages. Looking from a more high-level perspective, it is smarter to add an independent and even an opposing source of return to your portfolio than to load it with more assets with a similar risk profile. Never put all your eggs in one basket and never spread them across so many baskets that your investment returns become average.
- You should never trust anyone more than you trust your own research and due diligence. There are many honest, knowledgeable investment advisors who are doing the best they can with the knowledge and information they have, but that doesn’t mean they know what the future holds. Investing is a gamble, no matter where on the risk scale your assets are. It’s always best to operate from the assumption that the investment advice you receive is biased (because everyone is biased). You are the only person who doesn’t have a conflict of interest with your wealth.
- Not many traits can benefit an investor as much as good temperament does. To succeed in the long run, you must be able to tune out the noise and hop off the emotional roller coaster. So don’t go chasing the crowd and changing the direction of your investment strategy every time a new fad comes along. Build resistance to the emotional triggers and don’t try to time the market -- you are an investor, not a Wall Street trader.
- The thought of failing induces fear in many of us. It is sometimes so strong that it puts us off from even trying. But letting fear get the best of us can have crippling effects in the long-run. It may hinder our ability to learn, to be present and to give it our best effort. And in the case of investing, it curbs our potential to amass wealth over time. The secret to successful investing is not higher IQ or financial education; it is usually self-control. Procrastinating on your decision to invest is costing you money every day.
You might think that simply clicking your finger and winning the lottery would solve all your problems. It’s been proven that instant money isn’t the problem solver you once thought–recall the stories that come out of lottery millionaires going bankrupt after a few years or even months. But more than just having money, you must also know how to be stable with it. Having financial stability doesn’t mean being wealthy, but it does mean no longer living pay-check to pay-check. You have actual control over your spending and you might not have millions in your bank account, but you don’t have worry either.