Six questions to test your money savvy
Matt Kelly knows a thing or two about financial stress. He and his wife married in the mid-1990s and proceeded to try to keep up with their friends by regularly dropping $200 on dinners and drinks when getting together with them in their Chicago neighborhood. The problem? Combined, the couple was making around $80,000 per year. Add in a high-cost mortgage and pretty soon they were in debt.
They decided to start over—financially and geographically—by selling their Chicago condo and moving into a small apartment in Colorado. It took years to get their debt (more than $160,000) paid down, but with discipline, they did it and today are living frugally and finally saving money. Kelly even started his own finance company: Momentum Personal Finance Coaching in Durango, Colorado.
Kelly’s story is not unique. In November 2013, the U.S. personal savings rate fell to just 4.2 percent, one of the lowest rates in recent memory, according to the U.S. Department of Commerce.
This sobering number (and Kelly’s story) shines a light on the struggle that many of us experience when it comes to money. The good news: There is hope. We can all make small changes to create healthier financial lives. Take this quiz to see just how savvy you are and learn what you can do to change dysfunctional money patterns.
Do you know how much you bring in and spend every month?
A. I know how much I make and have a good idea of how much I spend, but I don’t know the number down to the dollar.
B. I have no idea.
C. Yes, I meticulously track my money on a daily/weekly basis and try not to spend more than I make.
Many of us know what we make and have a rough idea of what we spend, but are often disappointed when the end of the month arrives and there isn’t anything left. This lack of awareness continues the cycle of mindless spending.
“In order to figure out a realistic budget, you need to know where you are spending your money,” says Annalee Leonard, founder and president of Mainstay Financial Group in Pensa-cola, Florida. “I had a client who made really good money but wasn’t saving anything because she didn’t know where she spent her money.”
Leonard tasked her client with writing down exactly what she spent money on (down to the penny) for a full month. “She came back, and it was like a lightbulb had gone off; she never realized she was throwing so much money away,” Leonard notes.
While you may want to jump in and build a budget right away, try this step first. It will tell you exactly where you stand—a good thing to know for any budgeting exercise.
Do you plan for one-off expenses?
A. Yes. I think ahead to what might be coming and am almost always ready for it.
B. I live paycheck to paycheck; there is no way I can do that. When something comes up, it goes on my credit card.
C. I have a small emergency fund, but it seems to get liquidated often, and I have a hard time replenishing it.
One-off expenses can feel like the bane of our existence—unless we plan for them. Kelly and his wife do this by keeping what they call a “momentum” account. “We tried to factor in what our life really looks like, and we stopped having emergencies,” he says. This meant not worrying when their car needed new tires ($600) or when his wife needed a colonoscopy ($3,000) that insurance may not cover.
“We know the tires will last about three years, so we divide $600 into 36 months and try saving month by month,” he says. “My wife will need another colonoscopy in five years, so we’ve started saving to have $3,000 by then.”
Kelly’s momentum account is dedicated to other-than-monthly expenses, and while it doesn’t always pay for every unplanned occurrence, it does help. “I recommend getting started by giving your life some thought,” says Kelly. “For example, if you are 25 years old, you will most likely have a summer in the next five years that will include seven weddings. It is something to think about and plan for.”
How do you account for impulse purchases?
A. I spend money on things I think are fun when I want to.
B. I work hard, so I feel like it is okay to go shopping every once in a while. I don’t really track that spending, though.
C. I save cash for fun purchases. When it’s gone, it’s gone.
About 25 years ago, Edrie Pfeiffer found herself feeling increasingly frustrated. When she and her husband were newlyweds, they never went on a date because “he didn’t know if we had enough money to go out,” she says. To solve this problem, the couple instituted a system of cash in envelopes.
“We have a safe in our house, and inside the safe we have envelopes for entertainment money, clothing money, vacation money, etcetera,” says Pfeiffer, owner of and attorney at Hampton Roads Legal Services in Virginia Beach, Virginia. “Whenever we got a raise, we would increase our savings in those envelopes. It has worked really well.”
The envelope method is a well-respected mode of saving in many circles, primarily because it involves cash. “One way to control impulse buying is with actual cash,” says Coleen Pantalone, professor at Northeastern University’s D’Amore-McKim School of Business in Boston. “And by cash, I don’t mean debit cards. If you have to wander off to an ATM to withdraw money, that wandering gives you time to think about what you really want.”
How much money should be in your emergency fund?
A. What emergency fund?
B. Equivalent to six months’ salary, after taxes.
C. $10,000, no matter how much money you make.
An emergency fund is a pot of money that is accessible at all times. It could be sitting in a savings account, checking account, or money market account. It’s there in case you lose your job, fall ill (or a family member falls ill), or the like. This is the money reserved for true emergencies (not those involving fashion).
Establishing an emergency fund is more important than any other fund. Saving six months’ salary can be a daunting task, but it is possible. “Start with $50 per month,” recommends Leonard. “Next year, go to $55 or $60, if you can handle it. Go up from there.”
How much of your salary are you saving for retirement?
A. The maximum that my company matches—10 percent or more.
B. I’m going to wait until I get a better job to save for retirement.
C. I’m relying on my trust fund to buoy me during my later years.
“People tend to spend what they earn—out of sight, out of mind,” says Carol Khouri, CFP, CDFA, principal at Wingate Wealth Advisors in Lexington, Massachusetts. “Therefore, it is so important to maximize the amount you can contribute, especially if you have a matching retirement plan at work.”
If your company doesn’t have a matching retirement plan (or if you are self-employed), plan to contribute at least 10 percent of every paycheck, recommends Khouri.
Have you ever evaluated your “fixed” costs?
A. Why would I? Fixed costs never change; I can’t do anything about them.
B. Yes, I recently reevaluated my fixed costs and realized that very few of them were actually fixed. I changed several costs and now spend less.
C. I’m too busy to evaluate my fixed costs. What value would it add to my life, anyway?
Ellen Rogin, financial advisor and president of Strategic Financial Designs in Northfield, Illinois, recommends people subscribe to a “values-based spending plan.” This is where a person looks at her spending based on her personal value system and decides if what she is spending money on really matters to her.
“For example, parents spend a ton on kids for things like lessons and soccer, but then wonder why they don’t have the money to save for college,” she says. “If they looked at what they value, they may make different spending decisions.”
So how does this affect fixed costs? Rogin explains that a cost is only fixed if you make it that way. There are exceptions to this—legal fees for pending litigation are one exception—but most things can be changed, including insurance and mortgage costs. “Maybe traveling the world is what would make you happy but you have a mortgage to worry about,” says Rogin. “You can change that so-called fixed cost and downsize or rent. It is all up to you.” DW
Katie Morell is a San Francisco–based independent journalist who specializes in business, travel, and human-interest topics. Read more of her work at katiemorell.com.