The word “bubble” is pretty popular in the world of finance. If you were to turn on the news right now, you’d probably hear at least one of the following terms: stock market bubble, housing bubble, tech bubble, student loan bubble… As important as it is to understand the meaning of each of these and the effects they could have on your financial well-being, there’s one bubble that might just be more important: your financial bubble.
Unless you work in a field that directly impacts any of these bubbles or the economy in general, then the best thing you can do to mitigate the financial risk of any of them popping is to protect your own. It’s worth repeating: the most control the majority of us have is to make sure our own finances are prepared to handle the aftershock of a financial downturn when it happens.
So how can you test the health of your financial bubble? It’s not as easy as it sounds. Many of us think we’re smooth sailing one day when suddenly life throws a curveball and everything grinds to a halt. Below, I’ll talk about how to truly understand the state of your finances and create solutions to ensure that they’re as secure as can be.
First, A Description of “Bubble”
Bubbles, by definition, are “a thin sphere of liquid enclosing air or another gas”. Bubbles are fragile, can float, expand, and are extremely easy to pop.
So how did the beautiful and delicate floating circles I used to love chasing as a kid become a metaphor for something so opposite of all that – finance?
Because finance is just as delicate. Your finances can also grow and grow and, given the right pin prick or amount of pressure, burst and disintegrate into thin air. Not exactly what you’d want your finances to do, right?
Is Your Bubble Close to Popping?
The scary thing about a bubble is that it’s pretty hard to tell when it’s about to burst. But if you look really closely, you’ll see the perimeter getting stretched just a little bit, then a little more, then a little more before pop… it’s gone.
Your finances are exactly the same. Things might look okay on the surface. You’ve got some extra money left over every month. You’re slowly building a retirement fund. Maybe you’re even on track for your debt payoff plan.
Then one day you get sick. Or you lose your job. Or you find that you have to move across the country. How do your finances look now?
It’s not enough to just be meeting your goals every month or even having some money left over after you do. You (well, we all) need to be ready for emergencies. We have to make sure that pin prick or extra pressure doesn’t disintegrate our finances in an instant.
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How to Build a Buffer
Here comes the hard part – how to prepare for an emergency. After all, the money we can put aside based on what we earn is finite, whereas the debt that can incur due to certain life events seems to be truly limitless. (If you’ve ever gone to the hospital, then you know what I’m talking about). The truth is, building a buffer isn’t going to be easy. But it’s absolutely necessary.
No matter what stage of life or finances you’re in, there are many steps to take to build your savings buffer. Consider trying them all – even if you think your finances are in good standing. Here are just a few to get you started:
Audit your budget. Already have a budget? Great! I’ll bet there are ways you can still improve it. Never written a budget or find that you can’t stick to one? Don’t worry – we all need a few attempts and failures to find the budget that really works for us. Whatever the case, take your budget (or create one) and audit it carefully. There’s a good chance that there are some expenses you can reduce in frequency or cut altogether. A dollar saved here and there may not feel like much, but it adds up fast. Bonus: you might find that you enjoy saving money even more than having the things you reduced or cut.
Look for ways to earn more money. If your schedule is already stretched to the max, this may not be possible. But if you have some free time in the evenings or on the weekends, consider doing something to earn extra money. You could go the traditional route of finding a part-time second job, the newer route of freelancing or selling goods on the internet, or the investor route of looking for ways to earn passive income. Figure out if any of these could work for you and you’ll not only improve your finances, you’ll also have more streams of income to fall back on if something happens to your day job.
Get insurance. Paying for insurance really stinks. But having insurance when disaster strikes can be a lifesaver. There’s no getting around it, insurance is a vital piece of the puzzle of securing your financial future. I’m talking health insurance, car insurance, rental insurance if you rent, and home insurance if you own a home. If you have pets, you may even want to consider getting pet insurance. The costs that can incur when things go wrong is frightening – use insurance to your benefit, even if it eats up more of your monthly budget than you’d prefer.
Create a targeted financial plan. Lack of focus is a prominent (but much less noticeable) culprit in killing progress. This isn’t to say you’re not working hard to achieve your goals. Rather, it could mean that your financial plan needs more of a targeted focus so you can achieve them more efficiently. Think about what you want and then apply all the extra income you can to it until you reach a point in which you feel comfortable to move onto the next goal. This will help you knock those goals out one at a time and gain some important wins as you go.
I wish I could simply say, “here’s how much you need to save to make sure your financial bubble doesn’t pop.” It would be a lot easier for all of us! Unfortunately, securing your finances requires a more holistic viewpoint. Once you see how all the pieces of the puzzle work together, then you’ll be able to better understand what’s necessary to keep it your bubble from popping. And if all of us do this with our own finances, the better the economy as a whole will be.
Image Credit: Will Montague