We all know what financial instability is like—living paycheck to paycheck, trying to figure out which bills can and can’t be taken care of this month and trying to save money wherever possible. Trying to define financial stability, on the other hand, is a bit more difficult. Are you financially stable when you have millions of dollars, or do you just need to make sure you can pay the bills on time?

As it turns out, financial stability isn’t an “all or nothing” concept. There are four tiers of financial stability, and you can gauge how financially stable you are by the tier you’re on.

Financial Stability Tier 1: Your Income Covers Your Basic Needs

The bottom tier of financial stability is making sure your income covers your basic needs. In other words, can you pay your bills on time?

You can tell if you’re at the first tier of financial stability simply by being able to pay for your basic necessities, like rent or mortgage, food and utilities. Another way to tell you’re at this level is if you don’t overdraw your checking account and don’t rely on credit cards to make ends meet each month.

If you’re not at this level, the first thing you should do is make a budget. List your monthly expenses, then add them up and subtract the total from your monthly income. If you get a negative number, you’ll need to figure out how to reduce your expenses until they’re less than your income.

You may also want to stop using your credit cards, if not destroy them altogether. Using them can sometimes provide an illusion of financial stability, but it only lasts until you hit your credit limit and you realize just how much you owe.

Financial Stability Tier 2: Maintaining a Buffer Zone

Once you know your income can cover your basic needs, you’re ready to tackle the second tier of financial stability: creating and maintaining a “buffer zone.”

Most of the time, a financial “buffer zone” refers to an emergency account, money that you don’t touch unless you have an unexpected expense, such as a major car repair or a medical emergency. While most financial experts recommend having at least three months’ worth of salary in your emergency account, the fact is that even a small emergency account is a safety net that will help stop you from sliding into debt should a crisis occur.

However, another good buffer to have is simply money left over in the budget at the end of each month. It doesn’t have to be much, but if you have any money left over, it not only means you can afford the basic necessities, it also means you have some extra cash that you can use for other financial goals. You can add it to your emergency fund, save it for special occasions like birthdays and holidays or even put it aside for a big-ticket item like a new car.

Financial Stability Tier 3: Eliminating Bad Debt

When you have enough money for your basic needs and have a bit of money left over as a buffer zone, you can focus on getting rid of your debt.

Make sure you know how much you owe and who you owe it to, then use some of the extra money you have in your budget to start paying down your debt. Your best bet is to pay off your debt with the highest interest first, then move on to the next. You might also want to look into getting a debt consolidation loan, which will reduce the number of payments you have to make each month to one and potentially lower the interest you have to pay on your debt.

Once you have your debts under control, you should make sure to avoid taking on debt unless it’s “good debt.” Good debt isn’t so much debt as it is making an investment in something that will help you generate more income and improve your net worth. Student loans, buying a house and starting a small business are all examples of good debt.

Here are some ways to tell if you’ve arrived at the third tier:

• You know exactly how much you owe on all your debts
• You’re able to pay for cars or make sizeable down payments on big-ticket items instead of going into debt
• You don’t have a high credit card balance.
• You only use a credit card to take advantage of the rewards program, and not because you need it to pay for necessities

Financial Stability Tier 4: Saving and Investing

While the first three tiers of financial stability were about making sure you were keeping your head above water, the final tier is all about growing your net worth. This is the tier where you look into the future and start to plan out some long-term financial goals, like sending your kids to college, buying a house, planning for retirement or even buying something big you’ve always dreamed of, like a boat.

You can make your financial goals more achievable by making them S.M.A.R.T. goals—goals that are Specific, Measurable, Achievable, Realistic and Time-Bound. You can access a free S.M.A.R.T. goals worksheet here.

Here’s some signs that you’ve achieved the fourth tier of financial stability:

• You have several goals for which you’re saving
• You’ve already made plans for which financial goals you want to achieve first
• You have multiple ways to save, from certificates of deposit to an IRA.
• After months of practice, saving comes naturally to you

Build Up All Four Tiers of Financial Stability With First Alliance Credit Union

Feeling financially stable is one of the best feelings in the world. You feel like you have options instead of demands, and you don’t worry about how you’ll get through an emergency without going deeply into debt. All you have to do is work your way up through the four tiers of financial stability.

If you want to kickstart your journey to financial stability, become a First Alliance Credit Union member today. You can create a budget using the My Money feature of our online banking platform, use our traditional savings accounts to start up an emergency fund, and even download a S.M.A.R.T. goals worksheet from our resource center to help you plan out your financial goals.

Want more information about financial stability? Listen to episode 54 of our Good Money Moves podcast. It goes in-depth into the tiers of financial stability and how to know if you've achieved them.