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Everyone wants to be financially happy; however, what does that actually mean? Is it having all your debt paid off? Is it having lots of money in a savings account? Is it having many investments? Is it being in a higher socioeconomic class?
Finances can be improved in two ways: with financial stability or economic mobility. When you're financially stable, you have the means to pay your current bills as well as cover emergencies that may crop up, all without damaging your financial situation. Your current lifestyle remains stable. Economic mobility, on the other hand, means that you can change your financial position on the income ladder for the better.
So, which is better? Which will make for a happier financial life?
Every day in the news, we hear about the "1%, "the 1% of Americans who own more wealth than the bottom 99%, while the bottom 99% own most of the debt. In a country where the rich get richer and the poor get poorer, it may seem futile, but it's not. Becoming financially stable is achievable, and it's entirely in your hands. Your financial behavior is what will lead to a stable economic existence.
Financial stability is measured differently by each individual. In 2016, Pew released research on how 7,800 households were able to handle financial emergencies. It found that 50% of households hadn't recovered from the financial emergency six months after it occurred. The survey also found that although high-income households may have spent more on their emergencies, the emergencies consumed three times more of the lower-income families' monthly income.
For financially unstable households, one emergency can have a long-lasting effect. The study showed that even people with greater wealth have trouble finding financial stability.
Having an emergency fund is one of the best ways to achieve financial stability. If you don't have an emergency fund set aside for times of need, you only have a few available options in the event of a financial problem.
- Cut expenses: Get rid of any unnecessary expenses.
- Borrow money: Putting the unexpected expense on a credit card will cost a lot in terms of interest, and borrowing from a friend or family member rarely turns out well.
- Earn more: Whether you get a second job or you hit your boss up for a raise, having extra money coming in will help you recover quicker.
How to achieve stability:
- Have extra money on hand: Having $1,000 available will help cover most small emergencies.
- Look to the future: Putting away money for retirement or money for college for your children will help you become more financially stable.
- Get rid of debt: Carrying even a small balance on credit cards each month can really add up. It's important to maintain a good credit score, and you can help this along by charging only as much as you can afford to pay off each month.
- Start an emergency fund: This isn't the same as having $1,000 set aside for vehicle repairs. An emergency fund should be enough money so you and your family are supported if you can't work for a few months or more. Ideally, you should save six months' worth of your income. This fund would be for an emergency or illness that could keep you from being able to work for an extended period. It would also be protection against being laid off and having to find a new job.
- Save for things you may need: If you have a vehicle or an appliance that you may need to replace soon, start setting aside money now.
- Invest: Investing your money will help build financial stability. Make your money grow by investing in stocks, bonds, and mutual funds. Most investments come with a level of risk, though, so always seek the help of an investment professional before diving in.
- Diversify your income: If you only have one stream of income, you'll have nothing left if you lose it. Other sources of income could come from a side job, a rental property, or investments.
Economic mobility is the ability to change your wealth, that is, move up or down in your socio-economic standing. It's calculated by looking at your income, total earnings, or wealth.
Mobility in this area can be difficult depending upon the socio-economic status you were born into, as well as where you were born into it. Research has found that children born into poverty (the bottom 20%) in many southeastern metro areas have only a 2.8% chance of moving into the top 20%. In essence, depending upon where you were born, your chances for upward mobility may be poor.
The hope for many parents is that their children will make more money than they did. The trend, however, has been declining. Of people born in 1940, 92% earned more than their parents had. For children born in 1984, that number declined, with only half of those children earning more than their parents had. While there are other factors at play, such as The New Deal boosting the middle class, over the years, the middle class has shown the greatest declines in mobility.
One of the best ways to improve your mobility upward is through education. With a college education, it's possible to start on a higher rung with a higher income right out of the gate. Unfortunately, college has become more and more expensive; thus, if you're not already in the upper-middle or upper class, paying for a college education may seem out of reach.
Which Is Better?
With financial stability, you begin with what you have and create your own stability through dedication. Stability and self-reliance can come no matter where you are on the income ladder. However, people who have a college education can earn $1 million more in their lifetimes than people who do not. With a college education, you can improve your stability as well as your mobility. The key is to try to get a college education without taking on too much student loan debt by doing things such as working while in school, taking classes at a community college, taking a gap year to earn as much as you can for school, participating in work-study programs, and applying for as many scholarships as you can find. Without huge student loans hanging over your head, you can achieve financial stability sooner and have the economic mobility you'd hoped for.