To be financially sound for me means that if I lose my job, I have enough available cash to cover my expenses until I find another job. For me, that is more than 12 months of cash in my emergency fund. This can be extended when supplemented by unemployment by reducing the amount I must take out of my emergency fund. This was not easy to achieve and took many years of dedication and hard work to make this happen. How did I achieve this level of being financially sound? – It started with here’s what it means to me.
Being Financially Sound – And What It Means To Me
When former President Clinton balanced the Federal Budget, it was a game-changer for me. I am not a fan of all of his policies but this one set me on a path to balance my budget. It meant looking at all my expenses and comparing them to my income. How much was I bringing in and how much was I sending out? After assessing where I was, I decided that I was not keeping much of the money I made. I was not saving as much as I wanted nor investing in my future. A change was needed.
The change consisted of creating a budget, paying off debt, cutting expenses, and learning to live within our means as a household. We had to learn to make sound financial decisions by changing our ideas about affording minimum payments versus saving to make a purchase. I have to admit learning to move in this direction required refusing to live by immediate gratification. Learn to be patient. I had to learn that waiting a few weeks or a few months was not a hardship. This was not easy. However, it did allow us to take satisfaction in our accomplishment to save and then buy. It meant when I made the purchase there were no long-term bills to look forward to. This is what being financially sound means to me and my family.
The United States and Debt
As of December 2020, the public debt of the United States was around $27.75 trillion. An increase of 4.54 trillion from the year before at this same time. As of the 3rd Quarter of 2020, total consumer debt stood at $14.35 trillion. Total credit card debt for the 3rd Quarter of 2020 was $807 billion with the average credit card balance of $5,897 and the average store card balance of $2,044 per fool.com. When I found out the former President Clinton could create a balanced budget and create a surplus for our nation.
I knew that I could do this too for my household. Unfortunately, many of my fellow Americans did not follow suit. From 1992 to 2001 consumer debt more than doubled per the Federal Reserve Board. This level of debt and history of debt increases does not lead to being financially sound.
The United States is far from a balanced budget today when the annual economic output is less than the current debt level per The Balance. A combination of recessions, defense budget growth, and tax cuts have raised the national debt-to-GDP ratio to record levels. A far cry from being financially sound. Hence, the U.S. cannot afford to default on its debt without major global economic consequences.
Financially Sound And Debt
Being financially sound does not mean to continue to increase debt to the point that more money is going out than is coming in. Where the size of your overall debt is higher than your assets. I and my family had to personally begin to look at the entire debt amount. We had to learn to save to afford the entire purchase. The minimum payments were just a game. A game we were losing.
Minimum Payment Game
The minimum payment is not the benchmark for affordability. I use to think if I can afford a minimum payment of $100 and still live my life, I was good. A friend of mine racked up $100,000 in credit card debt. I asked her “What is the minimum payment on that credit card balance?”, sadly she did not wish to answer. I found the non-answer to be a reinforcement of no longer wanting to chase minimum payment affordability for my household. Also, while out shopping, I overheard an elderly gentleman state to his friend. “Never paid a cent in interest to any of the credit card companies. I pay my bill off each month. I don’t buy what I can’t afford to pay for when the bill comes.”
These words also resonated with me. I needed to end my love affair with credit, debt, minimum payments, and interest. However, it is painfully obvious from the above reference reports that Americans are in love with debt. We decided to buck the norm and move towards becoming debt-free in the foreseeable future.
Being Financially Sound Means To Be Totally Debt Free
Being financially sound means having the ability to pay off your debt as quickly as possible. I have been credit card debt-free since 2007. I have been auto loan-free since 2018, only because I realized that I had enough to pay off the loan and still maintain 6 months of the emergency fund at the time. As we head towards retirement, we are working on a plan to pay off the mortgage. In my humble opinion, this is the ultimate level of being financially sound. I repeat, being mortgage payment-free is the ultimate meaning of being financially sound for me.
Being Debt Free When Life Happens
Getting out of credit card debt in 2007 was truly a blessing as the worst economic downturn called the great recession hit our nation super hard in 2008. Many lost their jobs including myself. I did not worry because our emergency funds were fully funded and we were debt-free. Luckily, I was able to find a new job within two weeks and did not have to touch any of our emergency funds. Many others were not as fortunate, as many lost jobs and their homes due to the subprime mortgage crisis. This crisis was primarily caused by deregulation in the financial industry per The Balance.
You can never predict when you will be hit with an emergency. You or a loved one can suddenly fall ill, you can lose a job, need to repair a vehicle, or need to repair your home. Life happens and we need to be prepared. Being debt-free is great during the good times and even better during the bad times. This is also what being financially sound means to me. It is being prepared for life’s challenges.
Benefits To Your Credit Score By Becoming Financially Sound
One of the benefits of paying off your credit cards is a bump in your credit score. By the time I had paid off my credit cards, I noticed for the first time my credit score was well over 800. In fact, it was 850. I never thought I would see that. I always had a pretty good credit rating to purchase a home and a car. This was just icing on the cake.
Consistently paying your credit cards on time, reducing your utilization percentage, having a long and good credit history, and credit diversity will always produce a good to great credit score. You don’t have to go into debt to keep your credit score high. I use my credit card for most of my everyday purchases to generate points to buy other things for free using the earned points. I pay off my credit cards monthly and have maintained a credit score between 835 and 850 depending on the size of the monthly purchase. Read my blog How to raise your credit score by 100 points in 45 days. Many tips to help you improve your credit score quickly.
Being Financial Sounds Means Building Your Net Worth
Building your Net Worth consists of investments, savings, and owning assets that appreciate and/or increase your income. Things like debt, loans, and assets that depreciate reduce your Net Worth. Here is a net worth calculator from Nerd Wallet. If your net worth is in the negative turn all your energies into paying off your debt.
Then you can start paying yourself first. This will increase your savings and investments. Be consistent with this goal to ensure that you are consistently growing this asset. Start slowly by saving $500 to $1000 for unexpected expenses. Then proceed to 3 months of living expenses then to 6 months and if possible 9 months. I recommend you go for 12 months if you are able. Read my blog Emergency Fund Savings for more details on the importance of being Financially Sound by having an Emergency Fund.
I would then work on investing to grow your assets to even larger goals like retirement and higher education for yourself or your children. I would make it a habit of having my money work harder for me than I do. However, this is a long-term plan, not a sprint. Compounding Interest takes time but it is well worth the effort when you are ready to attend a school or retire. Start as early as possible but remember it is never too late to save for your future. You can start with your job’s 401k but consult a financial advisor for a more detailed plan to meet your future needs. We have been with our financial advisor for over 20 years. Search until you find one you can trust.
Financially Sound means Having Insurance and A Will
Finally, planning for your future requires the inclusion of insurance. Insurance protects your loved ones if something were to happen to your income. This could be your one and sometimes the only source of income for your family. If they were to lose you today how would they pay rent or mortgage, and other living expenses without your income? My husband and I had children at a very young age so to have this peace of mind was important to us. Losing one or both of our incomes would be devasting to our family. Hence, at a very young age, we put our house in order. We got life insurance and drafted a Will that outlined in great detail how to distribute our assets and who would and how to care for our children.
However, the number one question was – How much insurance do I need for my family? Here is a handy Life Insurance Calculator from Bankrate for you to determine your needs. Consult an insurance agent to develop the best options for you and your family.
Steps For Reducing Debt
It all starts with a plan. I created a budget and stuck to it. First up we reviewed all our debt and created a plan with an end date for getting out of debt. As a family committed to never going back into debt and to save for any future purchases. We reviewed our credit card balances and committed funds to pay them off. Then we calculated how long it would take to get out of debt. That was the celebration date!!!
We preferred the Snowball Method of paying down debt. Paying off one bill at a time and adding the freed-up funds to the next bill. Others prefer the Avalanche method where you start with the credit with the highest interest rate and work your way down to the lowest interest rate. For a time, we even suspended our contributions to our investments to accelerate the payoffs by throwing these funds into the credit card debt we were currently working on. This allowed us to pay off our balances faster.
Steps For Reducing Expenses
I then began to review our expenses to reduce and eliminate and/or reduce household expenses. So, second on the list were our cable bills and phone bills to reduce products and fees that were not necessary. Next up were utilities and subscriptions. We then decided on what we would spend monthly on food and dining out. Finally, we reviewed our home, life, and automobile insurance policies and moved to cheaper carriers without compromising benefits.
Above are just some examples but you get the picture. Hence, as a family, we all agreed to live within our means. Lastly, we began to pay ourselves first by saving an emergency fund and investing for retirement consistently. Auto drafts are your friend. Therefore, I suggest you set them up immediately. Set it and forget it and before you know it you will have several nest eggs growing.
Listing of steps to becoming financially sound:
1. Create a budget
2. Review your debt
4. Reduce expenses and decide to live within your means
5. Begin to save up an Emergency Fund
6. Review and/or purchase life insurance coverage
7. Seek legal counsel for a Will
8. Concentrate on your Net Worth
9. Invest and build wealth
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