When it comes to financial stability, both millennials and Gen Xers are falling short. Roughly 25% of Americans in their 20s, 30s, and 40s are financially vulnerable, according to a new report by the Society of Actuaries. And it's not only hurting them at present, but also impeding their ability to plan for the future. That's because 60% of Americans who are highly financially fragile can only plan on a paycheck-to-paycheck basis. As such, they're more likely to focus on covering everyday bills than on saving for emergencies or building a nest egg for retirement.
If you're in a place where you're living paycheck to paycheck, and a single unplanned bill could easily throw your finances for a loop, you'll need to break that cycle if you want a shot at financial stability in the future. Here's how.
1. Start following a budget
Without a budget in place, you'll have no idea where your money is going and where there's room to curb some spending. Therefore, review your various bills (including monthly expenses and one-time expenses that pop up randomly during the year), figure out how much you generally spend on a monthly basis, and select those categories you're willing to reduce or eliminate.
For example, you might downsize your home and free up money that way. Or, if you don't want to uproot your life by moving, you might instead dine strictly at home over meals prepared in your kitchen, and cancel your cable plan for additional savings. The choice is yours as to what to cut back on, but the key is to do something if you're spending down your paychecks consistently and don't have any sort of financial cushion to fall back on.
2. Save for emergencies
Without an emergency fund, you'll have no choice but to rack up loads of debt the next time an unplanned bill falls in your lap. Once you've freed up money in your budget, use it to build emergency savings. Ideally, you want at least three months' worth of living costs in the bank so that if you lose your job or encounter a whopping expense, you won't have to charge it on a credit card and rack up costly interest in the process.
3. Get out of debt
There's a link between financial fragility and debt. In fact, in the aforementioned report, 64% of Americans who are highly financially vulnerable carry some sort of credit card debt -- one of the least healthy types to have. If you're one of them, you'll want to start chipping away at that debt once your emergency fund is complete. You can do so by banking the extra cash you free up in your budget, and also by taking on a side job to earn additional money. While working a second gig on top of a full-time job might not seem so appealing, it's a reasonable short-term arrangement if you're facing high levels of debt you want to pay off quickly.
4. Begin building a nest egg
Once you're in a more stable place financially in the present, you'll need to start thinking about the future. Ideally, you should aim to sock away at least 15% of your income for retirement if you want to live comfortably during your golden years. That said, starting small and working your way up is better than doing nothing, so if you can't part with 15% of your earnings, save what you can and then bank your future raises, bonuses, or whatever additional money comes your way. Even if you only manage to set aside $200 a month for retirement over a 30-year period, you stand to accumulate $227,000 if your investments earn you an average annual 7% return during that time. And again, that's far better than nothing.
The longer you allow yourself to exist in a financially fragile state, the more you'll struggle not just now, but also in the future. Follow the above steps to break that unhealthy cycle, and you'll be much better off for it.