Signs You're Financially Stable (or Not)

Most people think they’re financially stable.

And yet most Americans have less than $1,000 in savings—one of many indicators that they are not, in fact, financially stable.

Creating true financial stability is the first step on the ladder to becoming wealthy. Here are seven signs that you’re financially stable, plus three signs that you still have some work to do.

7 Signs of Financial Stability

1. Your Savings Rate Is at Least 15%

For a standard, 40- to 45-year career followed by 20 to 30 years of retirement, financial advisors typically recommend a 15 percent minimum savings rate for a secure retirement.

The key word there is “minimum.”

But if you want to build real wealth and potentially retire young, you need to be doubling, tripling, or quadrupling that savings rate.

For example, you can be sure that these two twins who reached FIRE in five years weren’t spending 85 percent of their income. They were living on a fraction of it and putting the rest toward new investment properties.

Start by attempting to live on half your income and getting serious about your savings rate.

2. Your Emergency Fund Can Cover a Couple Months’ Worth of Expenses

Personal finance experts disagree over how much cash to keep in an emergency fund. As a regular columnist for several personal finance publications, I argue that the ideal emergency fund varies based on the stability of your income and expenses.

If you have a regular 9 to 5 job with strong job security and your expenses remain even month-to-month, I believe an emergency fund of one or two months’ expenses is sufficient, so long as you have additional resources you can draw on when in need (a credit card, a stock portfolio, etc.). If your income is erratic or your expenses vary wildly, then aim for closer to six months of expenses.

It’s worth noting that your personal emergency fund is completely separate from your rental cash reserves. As a landlord, you should be keeping a hefty cash reserve to cover rental property expenses.

3. You’re Protected Against Health & Other Emergencies

Part of being financially stable is being prepared and protected against major shocks and emergencies.

That starts with comprehensive health insurance. No matter what kind of health insurance you have, just make sure you can answer this question: if the absolute worst happens—say, a major health catastrophe like a cancer diagnosis—would I be able to afford high-quality treatment under my current healthcare plan?

Beyond health insurance, you should also consider life insurance, especially if you have a family and one spouse earns significantly more money than the other. The worst does sometimes happen, and the last place you want to find yourself is wondering how you’ll pay the bills should you lose a spouse.

4. You Know Your Target FI or Retirement Date & Amount

Whether you know it or not, the monetary goal of your working life is to become financially independent.

You have a window of time during your healthy adult years in which you can earn money. It’s not indefinite; the day will come when you are no longer able to work or no longer want to work.

Start orienting yourself toward the goal of financial independence, meaning the ability to pay your bills solely from your investment income. When you reach financial independence, working becomes a choice.

It’s necessary to know how much you’ll need in order to reach it, and you should have a target date for it. All goals should be specific, measurable, and time-oriented, right?

If you’re new to the idea of financial independence or retirement planning, read up on the 4 percent rule as a starting point for the conversation and how rental properties can impact it. And if you’re interested in retiring early, try these retirement accelerator steps to get you there faster.

5. Every Year You Add More Passive Income

Financial independence and retirement take years—usually decades—to reach. Yes, you should have a target nest egg and a target date, but it’s such a big goal that it feels distant and intangible for most of us.

To make it more real, set a target for annual passive income growth, such as “I have $150/month in passive income right now. By the end of the year, I want $300/month in passive income.”

Passive income can come from rental properties, of course, but it can also come from stock dividends, REITs, bonds, crowdfunding websites, peer-to-peer lending websites, private notes, even royalties. When you plan how to grow your passive income, decide on a target asset allocation, as well.

6. You Know Your Target Asset Allocation

There’s an economic study I love (more specifically a joint study between the University of California, the University of Bonn, and the German central bank) that found that rental properties have delivered higher returns than stocks over the last 145 years.

But that doesn’t mean you shouldn’t invest in stocks. Rental properties generate income well, but they tend to not appreciate as fast as stocks. In contrast, stocks grow well but do not have a tendency to deliver high yields for dividend income.

Best of all, they don’t move in unison. Sometimes the stock market does well when housing markets flounder, and vice versa. (Read: diversify.)

Asset allocation is a fancy term for the percentages of different asset types in your portfolio. For example, you might invest in 45 percent stocks, 45 percent real estate, and 10 percent bonds. Or it may be 70 percent stocks, 30 percent real estate, and no bonds. Or something else entirely.

The point is that you should decide on a target asset allocation as a loose investing strategy. Then, execute it with vigor.

7. Your Spouse Enthusiastically Shares Your Financial Goals & Priorities

If you and your spouse have different financial goals, you’re going to be pulling in different directions, working against each other rather than in synchrony.

I’ve struggled with this myself. My wife wants a breezy lifestyle somewhere between “comfortable” and “rich.” I want to pump all our money into investments so I can retire young. Those goals do not mesh well.

The compromise we found was moving abroad, where we’re provided with free housing and we can live a comfortable lifestyle and still have a high savings rate. But it’s an ongoing conversation, believe you me.

If you’re married, or considering getting married, make sure you’re in sync with your spouse. Talk about your financial goals and priorities. There’s a temptation to sweep it aside and say, “Sure, sure, we both want more money. Great.”

But if one partner gets a raise, what do you do with the money? The partner who got the raise might want to go buy a new car, while the other partner wants to invest it in real estate. Or what happens if one partner wants to take a 70 percent pay cut in order to pursue their dream career? That happened in my marriage.

Talk about money in great detail. Talk about real estate investing with your spouse to gauge their interest or opposition. Otherwise you might find yourself as one of the 25 percent of couples who lie to each other about money, which is about the furthest point from financial stability that there is.

3 Signs of Financial Instability

In addition to the signs above of financial stability, here are three signs you should pay more attention to your finances.

1. You Carry Credit Card or Other Unsecured Debt

Like any tool, credit cards are useful, but they’re also dangerous. They can be used to help you earn money (through rewards), in addition to serving as a safety net for true emergencies.

But they can also cost you a massive amount of money in interest.

The simple litmus test for whether you’re using credit cards properly is whether you pay off your balance in full every month. If you don’t, they’re costing you money, not earning you money.

Make a solid attempt to pay down your credit card debt if you have a balance.

2. You Don’t Stick to a Budget

You have a budget… right?

And I don’t mean a vague idea of a budget in your mind. I mean a written budget on a spreadsheet, with line items not only for regular expenses, but also for variable expenses and irregular expenses (like holiday, birthday, and wedding gifts) that arise in some months but not others.

Write out a budget including all three types of expenses: regular, variable, irregular. Start with your high savings rate as your No. 1 expense, before writing any other expenses, and adjust your expenses to meet your savings rate, not vice versa.

3. You Don’t Track Your Net Worth

Quick, what’s your net worth?

At any given moment, you should have a sense of your net worth. It doesn’t need to be to the penny, of course; at any given moment, your equities might be swinging by hundreds or thousands of dollars. That’s what stocks do.

Still, you should know your approximate net worth, along with your asset allocation. When you watch your net worth grow over time, it makes becoming wealthy real and tangible, rather than merely conceptual. Set up an account with Mint.com to track your net worth and your monthly progress in growing it.

Final Word

Wealth doesn’t just happen. It takes a strategic approach, it takes patience, and it takes discipline to keep pumping money into savings and investments, paycheck after paycheck, month after month, year after year.

But the more of your income that you devote to becoming first financially stable, then financially secure, then financially independent, the faster you’ll reach the finish line. When you can pay your bills with income from your investments, you can literally do anything you want with the rest of your life, from traveling the world to writing novels to staying home and raising your kids.

It all starts with financial stability.

Where do you fall on the financial stability spectrum? What indicators do you think matter most?

Share in a comment below.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.