The Federal Reserve is the central bank of the United States. Those folks know a little something about financial stability. They talk about it in terms of an economic system that can absorb all the ups and downs in nation’s economy at any moment: “It isn’t about preventing failure or stopping people or businesses from making or losing money. It is just helping to create conditions where the system keeps working effectively even with such events.”
Same goes for your own personal financial stability.
Sure, we’d all love to win the lottery or otherwise amass fortunes enough to never worry about money problems again. That’s improbable at best, but that doesn’t mean we aren’t financially stable in our own right. Remember, stability means you have the ability to “roll with the changes” – enjoy plenty of good times and successfully rebound after the bad.
But how do you know if you’re financially stable? Well, consider these signs. If you can agree that they apply to you, you’re in good financial shape.
You have health insurance.
Health insurance is a must. None of us is invincible: Even if you never face a devastating illness, the odd tumble on a patch of ice, a cycling mishap, or untreated bronchitis-turned-pneumonia could rack up quite a bill for uninsured (or under-insured) patients. If you don’t have employer-sponsored health coverage, there are still a multitude of options for self-insuring yourself and your family.
While you’re at it, disability insurance and life insurance would be additional steps to add, especially if you have dependents. If you don’t have enough squirreled away to cover costs if you can’t work (or die), your family will need a support net.
You have renter’s or homeowner’s insurance.
If you rent, you might think you’re exempt from this need. Well, you might not own your home, but you still own everything inside it. And your landlord sure isn’t covering your stuff under her insurance policy! The good news is that renter’s insurance policies are relatively cheap – so there’s no excuse to live with this hazard.
Homeowner’s insurance is basically nonnegotiable. Many mortgage companies will not extend a loan if you don’t have a policy. Technically, you may legally own a home without insurance, but it’s extremely risky – and lenders don’t like so much risk. The harsh reality is, if you lose your house (think: fire or tornado), you’re out on the street… and your lender has lost their investment. For the peace of mind and coverages you get, homeowner’s insurance is worth every penny.
You have car insurance.
After your house, your car is likely one of your biggest-ticket items. What’s the sense in driving off the lot without protecting it? Depending on where you live, you might be required to carry some auto insurance. Even if your state has a free-for-all mentality, that’s not a wise move. You might think it’s a waste of money: You’re a great driver, and you live in a low-stress driving environment. But considering everything you might be responsible for in case of an accident – repairs to your or others’ vehicles, your or others’ health care, to name a couple – auto insurance is a good financial decision.
You have a bank account.
Do you have one centralized place for your money? Can you draw from it to pay for your bills? And can you do so without bouncing your checks? Most importantly, do you keep track of your account by using the statements the bank distributes every month to make sure you know exactly where your account stands?
In the same vein, a second bank account – in the form of a high-yield savings account – can generate interest as you save. Granted, rates aren’t super high and fluctuate based on the current economic climate, but your money will compound just by sitting in there. And you really need to let it sit and accrue: This savings account should be used for true emergencies only! The recommendation is a savings fund with enough reserves to cover three to six months of expenses.
You have credit cards – and you use them responsibly.
If you’re a financially stable consumer, you use funds from your very-solvent checking account (see above!) to pay for most necessities. Sure, you swipe your card at the gas station or type in your account number for an online purchase – but then you’re careful to pay off your card balance in full, each month and always on time. If you find that you rely on your credit cards to extend your paycheck, you need to rethink your spending.
You have a retirement account (with money in it).
Most of us aspire to retire. Even workaholics will likely want to enjoy their “Golden Years” away from the daily grind. But don’t expect to fund those years with Social Security. It was never intended to be the only source of retirement income (and its solvency has been questioned for years anyway!). Have you enrolled in your company’s 401(k) plan? Does your employer provide a match for your contributions?
If the answer to either is “No,” you need to investigate your own tax-sheltered plan like an individual retirement account (IRA).
Your kids have college savings accounts.
Kids these days – and their university tuitions – are growing so fast. And if you have children, you should start planning today for how you’re going to afford college tomorrow.
Think your kids are too young for a college fund? Think again: If you wait to fund an education account until college is on the horizon, secondary education might be a dream you can’t fulfill. Annual tuition for a private four-year school exceeds $30,000. Keep in mind, that’s per year – and that’s at current prices. Look into plans that give tax benefits for a college fund, like a 529 and a Coverdell.
Do you often lose sleep over your finances? Financial stability can bring you an essential non-monetary benefit: peace of mind that comes from solid financial footing. Of course, we’re not saying that all your troubles will go away, but being clear of money matters can ease the burden. And the team at American Credit Foundation can help you scale those hurdles with attainable solutions.