Updated: January 10, 2023
How do you know if you’re financially stable? If you have a high-paying job, does it automatically mean that you are? What if you own a house and drive your own car, would you say that you are financially stable already?
For many, that’s how they define financial stability – and sadly, this is wrong. Today, you’ll learn the more accurate way to know if you’re standing on quicksand or on stable, solid ground.
It’s actually easy, and all you have to do is to ask yourself three questions.
Am I saving money?
You should spend less than what you earn.
To be more accurate, consider all your expenses for one year, which includes car registration fees, real estate taxes, etc., and then subtract all your income for a year, which includes 13th-month pay and other bonuses.
Am I liquid?
You should have enough cash to pay your short-term debts.
Cash refers to all the money in your wallet and bank savings accounts. Short-term debts refer to money you owe which needs to be paid within a year or less. Your credit card debts and personal loans belong to this.
Am I solvent?
You should have a positive net worth.
Assets refer to the present cash value of all your properties, investments, and cash. Meanwhile, liabilities refer to all your short-term debts plus the total remaining balance of your car loan, housing loan, and other long-term debts.
If you answered YES to all three, then congratulations – you are financially stable. If not, then do your best to change that by:
- Decreasing your spending – eliminate your unnecessary expenses.
- Increasing your cashflow – find extra income.
- Paying off all your short-term debts – stop using your credit cards.
- Acquiring income-generating assets – invest your money.
- Avoiding more liabilities – no more loans for now.
Remember that achieving financial stability is a necessary step towards reaching financial freedom. If you don’t have a solid financial foundation, then the wealth you’re building is at risk of falling to the ground.
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I agree with this.
What if you said yes to 3, but your net is too low to be considered “stable”?
Great roundup , sir! If I may add..
If you comply to point #1 (Income > Expenses), then point #3 wouldn’t matter.
Even if your liabilities is greater than your assets, you’re still safe as long as the the income (coming from the assets) can cover for the expenses incurred by the liabilities.
@Carlo, No 3 is still important the point of Financial stability is not just your current situation, but your ability to absorb unpredictable events and still be able to answer to your financial obligations. What if your income goes away or is reduced for a short amount of time (answered by no 2) or a longer amount of time (this is where no 3 comes in).