Are you in Financial Stage 2: Stabilizing?
You are at Financial Stage 2, Stabilizing, once you have calculated your personal net worth, developed your financial plan and budget, and you are working on a positive money mindset. You will remain in this stage until you have achieved a few more financial milestones. Financial stability is when you have no consumer debt and have saved your Financial Independence Fund. You have some breathing room and have taken control of your money.
Goals for this Stage
In this stage, you will establish a proven track record of being able to live day-to-day following your budget and overall financial plan. Create it, refine it, live by it. Once you are living your financial life by following your budget, you will be able to determine if your expenses are too high, if your income is too low, or both. This is your time to readjust your lifestyle to meet your goals. Take a hard look at all of your expenses. Read more on negotiating your expenses to be lower. No expense is off limits at this stage. If you are in this stage your lifestyle should be at a level where it is not excessive or lavish. Your budget at this stage should include a certain amount of entertainment/slush money, an amount that will cause you to actually follow the budget for the long term but not so high it’s lavish in correlation with your income and your projected time needed to pay off all consumer debt.
To graduate to the next financial stage, you will need to be accomplishing more than just paying your minimum mandatory expenses. You should be saving for your financial independence fund and then pay off all consumer debt. In other words, you will no longer be living paycheck to paycheck and you will be on the path to increasing your personal net worth.
Payoff all Consumer Debt
At this stage, you are not investing in retirement, saving for your kids college, setting aside money for a down payment on a home, saving for a new car, etc. You will pay your minimum mandatory expenses per your budget, save up cash for your financial independence fund (see how much to save for your financial independence fund and also on where that should be kept), and pay off all of your consumer debt. See the page on how to payoff debt.
I’m sure you are wondering what exactly is included in consumer debt. Consumer debt is debt incurred to purchase something that is most likely going to go down in value over time, or instantly after you buy it. It includes any debt that doesn’t contribute to an increase in your personal net worth over time. This could also include debt that is used to fund a lifestyle. So this includes such things as personal loans, credit cards, payday loans, debt consolidation loans, lines of credit, vehicle loans, loans on recreational vehicles/toys, etc. I do not include student loans in this category because it is not consumer debt. Any other debt you have should also be considered for payoff while in this stage if it has a variable interest rate. Otherwise, look into all options available to make any variable interest rates into fixed interest rates. If you are curious on which debts to payoff first, see this page on debt payoff. Aggressive debt payoff does not stop at this stage, so we will continue this topic further in the next stage as well for any debts you have that aren’t consumer debts.
Keeping High Energy
You should be entering the stabilizing stage with a high level of awareness and commitment. You will have the energy to really put a plan into motion. Use caution that the energy may diminish rather quickly. How do you plan for your success to move from stabilizing to thriving? You make a plan, stick to it, and keep regular track of your progress. You keep your energy high by knowing you are making progress toward your goal. When you aren’t making progress you are accountable to why and move on from that to once again make progress. To track your progress you should calculate your personal net worth every 3 months. Also, re-assess at the same time how long it will take you to reach financial stability and explore any and all available additional income possibilities.
In this stage you should be starting to be generous with your money because at this stage you can afford to give. Build generosity into your budget as line item 1 to ensure it maintains as a focus for your plan. You should start to feel a sense of joy from your giving. Do not give if it feels like a chore or a sense of obligation (if this is the case still be sure to check out the series on Generosity to see where your mindset is currently on this).
Moving to Stage 3
You graduate to the next stage once you have no consumer debt and have saved your Financial Independence Fund.