If you put $100 in your wallet on Monday and only spend cash, it's easy to calculate how much you have left on Friday. But, of course, most of us don’t do that. Instead, we buy by swiping, clicking, inserting, waving; and, in some cases, doing nothing at all, thanks to auto-debits. We receive income just as magically, direct deposited into our accounts. All this movement is convenient; but it’s risky, too, because it means you probably have no clue how much you spend, save or have in the bank. That makes it hard to get—and keep—a good grasp on your financial life. How much do you really know about your money situation? The five questions below are designed to help you find out. You’ll be tempted, but don’t look up the answers. Knowing where to find the right response isn’t enough. Getting to know these numbers well enough to recite them regularly is the best way to make sure they’re what you want them to be.
1. What’s the balance on your credit cards?
Swiping a piece of plastic instead of handing over cold, hard cash makes it much easier to overspend without thinking about it. Your best defense is to stay on top of what you owe. That’s also a surefire way to make sure you aren’t unpleasantly surprised when your statement arrives. Don’t want to keep looking it up? Most credit card issuers allow you to sign up to get transaction and balance info texted to you. That could also be just the nudge you need to keep from over-swiping.
2. What’s the interest rate on your credit card(s)?
Of course, it’s best to pay your bill in full on time every month and avoid revolving debt roulette. But reality can sometimes get in the way. Knowing the interest rates for your cards can help you prioritize which card to use when a surprise expense comes up (the one with the lowest rate). And knowing the interest you’re paying on your balances, if you’re still carrying more than one, can also help you prioritize which one to pay off first. Be sure to check the rates frequently, as they can change—and usually not for the better.
3. How much money was left over last month after you paid your bills?
When you add up your paychecks and subtract the bills you had to pay, what was left? Your answer reveals your “discretionary” spending for the month, which is important for many reasons: If things go sour at work, it gives you a clear picture of what’s expendable versus your mandatory monthly expenses (like rent and utilities). That, in turn, informs the minimum amount you should set aside in savings (enough to cover at least three months of expenses). This also tells you how much cash you might be frittering away on nights out that could be saved toward a new car, a down payment on a home, or something else that’ll probably mean more to you in the long run than another round of drinks.
4. How much money is in your savings account right now?
That's a boring way of asking one of life's most fundamental questions: How free are you? If your apartment is a fourth-floor walkup, but you have no savings to upgrade, you’re going to be climbing stairs for awhile. If you break up with a live-in boyfriend (or girlfriend) and have no savings, you won't be able to move out, which can make for an affordable but awkward situation. Having enough money to have options is essential to de-stressing your financial life and allowing you the opportunity to get out of an undesirable situation quickly. The money doesn't have to be in a traditional bank account. In fact, it can usually earn more in a high-yield account at an online institution, which tends to offer higher rates. Once you have enough to cover at least three months of essential expenses (a.k.a. your emergency fund), start putting money toward other goals.
5. How many years and months will it take to be debt-free?
It’s not enough to know how much credit card, student loan, or car loan debt you hold. You want to have a plan—and timeline—for wiping it out, including how you’ll increase your income and adjust your spending until there’s nothing left hanging over your head. If you have a lot of student debt, it may be awhile before it’s all paid off. That’s okay. Having a plan can help keep you from feeling overwhelmed in the meantime and ensure you end up where you want to be: free.
January 4, 2016