Creating true financial stability is the first step on the ladder to becoming wealthy<\/a>. Here are seven signs that you\u2019re financially stable, plus three signs that you still have some work to do.<\/p>\n 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.<\/p>\n The key word there is \u201cminimum.\u201d<\/p>\n But if you want to build real wealth and potentially retire young, you need to be doubling, tripling, or quadrupling that savings rate.<\/p>\n For example, you can be sure that these two twins who reached FIRE in five years<\/a> weren\u2019t spending 85 percent of their income. They were living on a fraction of it and putting the rest toward new investment properties.<\/p>\n Start by attempting to live on half your income and getting serious about your savings rate.<\/p>\n Related:\u00a0<\/strong><\/em>6 Tips to Live on Half Your Income (& Invest the Rest!)<\/em><\/a><\/p>\n 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.<\/p>\n 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\u2019 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.<\/p>\n It\u2019s 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.<\/p>\n Related:\u00a0<\/strong>Visualizing Cash Flow: How to Accurately Budget Expenses<\/a><\/em><\/p>\n Part of being financially stable is being prepared and protected against major shocks and emergencies.<\/p>\n 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\u2014say, a major health catastrophe like a cancer diagnosis\u2014would I be able to afford high-quality treatment under my current healthcare plan?<\/p>\n 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\u2019ll pay the bills should you lose a spouse.<\/p>\n Whether you know it or not, the monetary goal of your working life is to become financially independent.<\/p>\n 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<\/em> to work or no longer want<\/em> to work.<\/p>\n Start orienting yourself toward the goal of financial independence<\/a>, meaning the ability to pay your bills solely from your investment income. When you reach financial independence, working becomes a choice.<\/p>\n 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?<\/p>\n If you\u2019re new to the idea of financial independence or retirement planning, read up on the 4 percent rule as a starting point for the conversation<\/a>\u00a0and how rental properties can impact it. And if you\u2019re interested in retiring early, try these retirement accelerator steps to get you there faster<\/a>.<\/p>\n Financial independence and retirement take years\u2014usually decades\u2014to reach. Yes, you should have a target nest egg and a target date, but it\u2019s such a big goal that it feels distant and intangible for most of us.<\/p>\n To make it more real, set a target for annual passive income growth, such as \u201cI have $150\/month in passive income right now. By the end of the year, I want $300\/month in passive income.\u201d<\/p>\n 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.<\/p>\n There\u2019s 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<\/a>.<\/p>\n But that doesn\u2019t mean you shouldn\u2019t 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.<\/p>\n Best of all, they don\u2019t move in unison. Sometimes the stock market does well when housing markets flounder, and vice versa. (Read: diversify.)<\/p>\n 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\u00a0percent bonds. Or it may be 70\u00a0percent stocks, 30\u00a0percent real estate, and no bonds. Or something else entirely.<\/p>\n The point is that you should decide on a target asset allocation as a loose investing strategy. Then, execute it with vigor.<\/p>\n If you and your spouse have different financial goals, you\u2019re going to be pulling in different directions, working against each other rather than in synchrony.<\/p>\n I\u2019ve struggled with this myself. My wife wants a breezy lifestyle somewhere between \u201ccomfortable\u201d and \u201crich.\u201d I want to pump all our money into investments so I can retire young. Those goals do not mesh well.<\/p>\n The compromise we found was moving abroad, where we\u2019re provided with free housing and we can live a comfortable lifestyle and still have a high savings rate. But it\u2019s an ongoing conversation, believe you me.<\/p>\n If you\u2019re married, or considering getting married, make sure you\u2019re in sync with your spouse. Talk about your financial goals and priorities. There\u2019s a temptation to sweep it aside and say, \u201cSure, sure, we both want more money. Great.\u201d<\/p>\n 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\u00a0percent pay cut in order to pursue their dream career? That happened in my marriage.<\/p>\n Talk about money in great detail. Talk about real estate investing with your spouse<\/a>\u00a0to 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<\/a>, which is about the furthest point from financial stability that there is.<\/p>\n In addition to the signs above of financial stability, here are three signs you should pay more attention to your finances.<\/p>\n Like any tool, credit cards are useful, but they\u2019re also dangerous. They can be used to help you earn money (through rewards), in addition to serving as a safety net for true emergencies.<\/p>\n But they can also cost you a massive amount of money in interest.<\/p>\n The simple litmus test for whether you\u2019re using credit cards properly is whether you pay off your balance in full every month. If you don\u2019t, they\u2019re costing you money, not earning you money.<\/p>\n Make a solid attempt to\u00a0pay down your credit card debt<\/a> if you have a balance.<\/p>\n You have a budget\u2026 right?<\/p>\n And I don\u2019t 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.<\/p>\n 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.<\/p>\n Quick, what\u2019s your net worth?<\/p>\n 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\u2019s what stocks do.<\/p>\n 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<\/a> and your monthly progress in growing it.<\/p>\n Wealth doesn\u2019t 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.<\/p>\n But the more of your income that you devote to becoming first financially stable, then financially secure, then financially independent, the faster you\u2019ll 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.<\/p>\n It all starts with financial stability.<\/p>\n7 Signs of Financial Stability<\/h2>\n
1. Your Savings Rate Is at Least 15%<\/h3>\n
2. Your Emergency Fund Can Cover a Couple Months\u2019 Worth of Expenses<\/h3>\n
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<\/p>\n3. You\u2019re Protected Against Health & Other Emergencies<\/h3>\n
4. You Know Your Target FI or Retirement Date & Amount<\/h3>\n
5. Every Year You Add More Passive Income<\/h3>\n
6. You Know Your Target Asset Allocation<\/h3>\n
7. Your Spouse Enthusiastically Shares Your Financial Goals & Priorities<\/h3>\n
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<\/p>\n3 Signs of Financial Instability<\/h2>\n
1. You Carry Credit Card or Other Unsecured Debt<\/h3>\n
2. You Don\u2019t Stick to a Budget<\/h3>\n
3. You Don\u2019t Track Your Net Worth<\/h3>\n
Final Word<\/h2>\n
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