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If you suspect that you might be heading for trouble with money, then it’s not a situation to be taken lightly. Several studies have shown that there’s a definite link between financial worries and mental health problems such as depression, anxiety, and substance abuse.
When there’s a problem with our health, there’s usually a tell-tale sign. It might be a cough or some strange bumps that provoke us to seek the attention of a doctor.
But the challenge with money is different. There might be cracks forming underneath us that we don’t even realize are there until we fall inside. And by then the damage may already be done.
Fortunately, there are plenty of sanity checks that you can use to test your financial standing. To see if you’re on the right track, here are seven important questions you can honestly ask yourself that will help to spot potential problems.
We’ll also explore some follow-up strategies you can use to start fixing those issues immediately.
1. What’s Your Relationship Status with Money?
There’s nothing more powerful about how we manage our money than how we “think” about it. And if you and your money’s relationship has been on the rocks, then it could be a slippery slope that leads to even greater problems.
This guy I used to work with named John is a perfect example. John was that stereotypical coworker who was just a miserable S.O.B. to be around. Everything was always a problem and he loved to play the victim telling everyone how the world was out to get him.
As you might guess, these attitudes towards life spilled over into his work performance and finances too. John was constantly getting passed over for promotional opportunities due to his negativity.
That only fueled his disdain as other coworkers were flying up the ranks around him earning more money; some with far fewer years than John had.
John was also always talking about how he was on the verge of being broke. He was a little older and quite frankly should have been at a point in his life when he would be looking forward to retirement. But according to John, he was sentenced to “work until he was dead” because that was “just his luck”.
What You Can Do to Fix This
There’s no nice way to say this: Don’t be like John!
In John’s mind, he thought his lack of money was the root of his problem. But in reality it was the other way around. He couldn’t see that his negativity was ruining his relationships with everyone and everything, including money.
The problem with this type of outlook is that it’s a crutch. It’s a way to shift the blame off of yourself to anyone or anything else you can. Why? Because it’s easier to blame others than it is to reflect inward and accept responsibility for your actions.
The other extreme can be just as harmful too. You might love money and how it makes you feel! But basing your self-esteem and worth on the size of your bank account or how many things you have. This can also be a bad mindset to have.
Money is great, but we need to ask ourselves what it does for us and why we want more. We don't want to be obsessive, and we also can't hate it. We need to understand the role it plays within our own life.
This is an influential yet often overlooked step when it comes to how we think and feel about money. We need to realize that we’re the ones who use money, and that money doesn’t use us.
Whatever good is going to happen in our lives has got to come from you and the progress you work towards producing it, not anyone or anything else.
If you find yourself acting like John from time to time (we all do), then stop and think about it for a moment. Truly ask yourself:
- What have I done recently to improve my finances?
- What do I have that would make someone want to pay me more money?
- What aspects of my life can I control to give myself the best chances for success?
Understand that you’re the one in the driver’s seat. If you want to take your finances someplace that they’ve never been, then it’s time you take responsibility for that role and start making it happen.
2. Do You Always Seem to Be Running Low on Money?
Do you get paid and then wonder where all of your money went a week or two later? Do you find yourself often flirting with a zero balance in your bank account?
You’re not alone. It’s been reported by CNBC that as many as 63 percent of Americans are now living paycheck to paycheck. And that’s only going to get worse as the cost of nearly everything keeps rising due to inflation.
I was in this predicament when my wife and I were first married. We’d receive our paychecks and then watch them slip through our fingers almost as fast as we got them.
It was never anything luxurious either. Between rent for the apartment, food, and a few other necessities, it didn’t take long before the old money-well ran dry.
This is a particularly dangerous situation to be in because it’s only a matter of time before an unplanned expense or higher-than-expected bill comes due. That means you’ll be in danger of dipping into the red which can result in expensive and unnecessary overdraft fees.
What You Can Do to Fix This
If you’ve been feeling this way about your finances, then it's time to get out of the dark and start paying more attention to where your money is really going. How? By putting together a budget starting immediately.
Budgeting is the act of planning out your expenses relative to the amount of income you’ve got available. By forcing yourself to think ahead and anticipate your bills, you’ll do a better job of preparing for them.
Budgeting also forces you to cut those expenses which are unnecessary. Things like eating out at expensive restaurants or impulse shopping trips will quickly start to stick out.
It’s these kinds of money-saving opportunities that you’ll want to seize so that you can reprioritize your income towards better, value-added goals.
Don’t get me wrong, buying a nice meal every so often can be a great treat, if you can afford it. However, unnecessary expenses like shopping at Gucci and eating at steakhouses are luxuries, and cutting down on how much you spend at places like this could save you some serious cash over time.
I remember once I started budgeting how eye-opening it was for me. I became much more mindful of our spending habits, and that allowed me to zero in on those areas where the greatest amount of improvements could be made.
Not only did this give me better control over our finances, but it also gave me a true sense of security.
There are many different ways to get into the habit of budgeting. You could:
- Use a spreadsheet like Excel or Google Sheets (this is how I do mine)
- Download a helpful app that monitors your bank and credit card accounts
- Write everything down on paper (if that works best for you)
What’s important is that you’re checking in on your progress regularly and making sure that you’re on track. The more disciplined you can stay to the plan you’ve laid out, the better you’ll feel about your finances going forward.
3. Has Your Debt Gotten Out of Control?
Once you reach adulthood, it’s amazing how many opportunities there are to buy nearly anything you can imagine on credit. And that’s a habit that can get out of hand really fast if you’re not careful.
In our 20s when my wife and I started to need new things for our home and children, we quickly found this out all too easily. In addition to a mortgage, we were paying off balances on:
- Our vehicles
- New furniture
- New appliances
- New carpeting
- A fence around the yard
- A home equity loan
- And so many others!
At the time, no single expense seemed like that big of a deal … $100 here, $200 there. But when you keep stacking up one expense after another, it doesn’t take long before you’ve committed yourself to paying thousands of dollars every month that you may or may not have the means to support.
What You Can Do to Fix This
If you suspect you might be taking on more debt than you should, then use this little test that the banks use all of the time. It’s called the 28-36 rule, and it essentially says two things:
- No more than 28 percent of your gross income should be housing expenses (principal, interest, taxes, and insurance)
- No more than 36 percent of your gross income should be revolving debt (which also includes your housing expenses)
In particular, check yourself against that 36 percent figure. For instance, if your gross monthly income is $5,000, then no more than $1,800 should be spent on your mortgage as well as the other debts (like those we listed above).
If it is, then it’s time to make paying down your debt a priority. Take a hard look at your budget and see where you can free up some of your cash flow to pay off those balances as quickly as possible.
Cut mercilessly the things which aren’t going to bring you any closer to this goal.
The best way to pay down your debts is to be as strategic and systematic in your process as possible. Two really good approaches that have worked well for thousands of people are:
- The debt snowball method – Pay off your debts in order of smallest balance to largest balance.
- The debt avalanche method – Pay off your debts in order of largest interest rate to the smallest interest rate.
With each approach, as you pay off each one, roll that payment towards the next subsequent debt. For instance, let’s say you were paying $200 towards debt A and $300 towards debt B. As you pay off all of debt A, roll that $200 payment into your $300 debt B payment for a total of $500 per month.
As you keep repeating this cycle with each subsequent debt, you’ll be putting more and more towards the principal each time.
That will accelerate your payments and help you become debt-free much sooner than you would have under a normal schedule and will leave more money in your pocket for the things that you can actually afford, want, or need.
4. Are You Having Trouble Finding Money to Save?
Do you feel as though no matter what you do, you just can’t seem to come up with any money to spare to save towards your important financial goals?
I can remember a few years into budgeting, I thought I was doing everything right! I was prioritizing our expenses, tracking my progress, and working diligently to cut out any expenses that we didn’t really need. However, there was still very little if anything leftover at the end of the month.
That’s when I realized that budgeting and spending were just two pieces of the puzzle. I had taken care of those issues but neglected to work on something just as equally important: Our income.
What You Can Do to Fix This
Income is a tricky concept because most people believe they are only worth as much as their current job says they are – case closed. But that’s not true at all!
Over my career, I’ve been fortunate enough to see my salary increase by three times what I made in my first year. That’s thanks to being a good employee as well as strategically taking steps every so often to get to the next place I want to be.
But outside of work, there’s also a whole world of potential too. I’ve spent the last decade getting involved with side hustles and experimenting with different ways to make some extra money on the side.
Some of these ventures have resulted in hundreds or even thousands of extra dollars per month of additional revenue for our family. And the great thing is that they’re all things I like doing anyways like blogging and writing, so it barely even feels like work.
If you’d like to do more to build up the income side of your financial equation, then there are two areas you’ll want to focus on.
The first is to maximize your career potential. Honestly take a hard look at where you stand currently and ask yourself:
- Am I in the right job? Am I being paid a fair market rate or to the level of my ambition?
- Is there something more or another position I could take to earn more than what I am right now?
- Would I be better off changing jobs or industries altogether?
I’ve always found it helpful to have an open and frank discussion with the boss about potential opportunities.
Not only does it open doors that you might not have previously known even existed, but it also shows your employer that you’re ambitious. That might help you get on their radar and fast-tracked for whatever next big role or responsibility comes along.
The other area where you can really boost your income is to start getting into the world of side hustles. Just check out this list of great suggestions here and see if any of them seem fun or interesting.
Remember, most side hustles can be done on your own schedule and right from the comfort of your laptop. So, there’s really nothing to lose. If anything, the longer you hesitate, the longer you put off potentially adding a few extra thousand dollars to your bottom line every month.
5. Are You Afraid You'll Never Retire?
Do you have any doubts that you won’t be able to come up with enough money to retire? If you do, then you’ve got plenty of company.
In a survey reported by USA Today, over 50 percent of U.S. adults aged 40 to 65 said they’re worried that they won't be able to retire. And what’s even more astonishing is that this was a group where each of the participants had an annual household income of over $100,000!
I can’t tell you how many times I’ve had this exact conversation with so many of my co-workers.
A lot of them, no matter which range of the income spectrum they’re on, feel that their retirement savings just won’t add up to where it needs to be – no matter how many more years they intend on working.
What You Can Do to Fix This
Often when I hear people doubt their retirement future, it’s not because they aren’t saving enough. It’s typically because they haven’t fully taken the time to understand what their target should be.
I had a friend who thought that she was going to need at least $3 million to retire successfully someday. So, we dug into the numbers a little bit.
A great rule of thumb for sizing up your nest egg target is to take the annual income you think you’ll need and then multiply it by 25. This is just the mathematical inverse of the 4 Percent Rule.
What we found with my friend was that she and her husband would likely only need $60,000 per year. Multiplying that number by 25, we determined that she’d really only have to shoot for $1.5 million to finally be able to retire. And the good news was that they were already not that far off!
Once you use this simple calculation and see if you’re on track or not, the next thing to do is bump up your retirement savings as needed.
Take full advantage of every tax-advantaged retirement account you can such as your 401k and IRA. In particular with your 401k, be sure to get every dollar of employer matching that you can if that’s something they offer.
While you’re saving for retirement, remember to also invest for long-term growth. Putting your money into all bonds or cash investments will produce stable returns, but they won’t make a lot of progress in terms of overall growth.
If you want to get as close as possible to potential double-digit returns, consider putting at least 50 to 75 percent of your nest egg into stocks. You can take all of the guesswork out of picking the right ones if you just pick a simple index fund.
6. Would You Have Protection Against an Emergency?
If something big were to happen to you or your family, would you be able to cover it? If you’re like 61 percent of most Americans, then the answer is unfortunately “no”.
In a poll from Bankrate, fewer than 4 in 10 people have enough savings to pay for an unexpected $1,000 expense. That’s particularly devastating because we all know, like it or not, bad stuff is going to happen.
I can’t tell you how many times I’ve to deal with:
- A medical bill that wasn’t covered by insurance
- An unexpected car repair
- Needing to buy a new appliance because the old one suddenly stopped working
- And the list just goes on and on!
The tough part about these kinds of emergencies isn’t so much that we don’t know when they’re going to happen, but rather that we fail to anticipate or expect that they will. And that’s when things can quickly go from “OK” to really bad financially.
What’s even scarier is when something really major happens and you don’t have enough insurance to cover it. I remember when I unexpectedly had to stay in the hospital for a week, I took a look back at the medical bills and insurance was paying over $10,000 for me to be there.
Can you imagine what that would mean for someone with no insurance? They’d be legally responsible for paying that bill out of pocket. And at a rate of $10,000 per day, they’d be on the fast track to financial devastation.
What You Can Do to Fix This
There’s absolutely no reason to leave yourself one accident away from potential bankruptcy. By putting the right provisions in place ahead of time, you can fend off about 99.99 percent of all the possible bad things that could ever come your way.
First and foremost, be sure that you’ve got adequate levels of insurance for all the major areas of your life:
- Health – medical, dental, vision
- Auto – for you and everyone in your house who drives
- Home or Renters – get full replacement coverage for all your items
- Life – at least 10 times what you and your spouse earn
- Disability – in case you’re ever hurt and out of work for an extended period of time
The other major way you can protect yourself is to make an insurance policy of your own by creating what’s called an emergency fund.
An emergency fund is a reserve of cash that you can access quickly in case something big and unexpected occurs. That could be anything from calling the plumber about a leaky pipe to losing your job and looking for a new one over the next three months.
Most experts recommend that your emergency fund be at least 3 to 6 times your monthly living expenses. The larger you can make that number, the better off and protected you’re going to be.
7. Afraid You're Not Doing Enough with Your Money
Have you started to notice that other people seem to be in better financial shape than you? Maybe they’ve got better things, go on more exotic vacations, act more confident, or show less stress about money than you do.
When I first was introduced to the world of personal finance blogs, it was a happy accident. I was looking for tips on how to access my retirement savings before age 59-1/2 and it led me to discover hundreds of stories of people who had successfully retired in their 50s and sooner.
As I read through what they were doing, it occurred to me that there were so many things I wasn’t fully taking advantage of.
Tips like maxing out my retirement accounts, getting involved with side hustles, and optimizing our expenses were new concepts to me. It became clear that I had a lot to learn from these stories.
Whether your goal is early retirement or just simply getting on track, if you’re worried you’re not doing everything you can to get ahead, then you’ve already taken the first important step: Realizing there’s a lot to be learned out there.
What You Can Do to Fix This
Nothing has helped my financial journey more than to work on developing my financial literacy. Though learning everything I can about money, I’ve gained a sense of confidence about what works, what doesn’t, and what’s the best course of action for me.
There are so many great ways to absorb good information about money:
- Reading books
- Digesting blog posts
- Watching YouTube videos
- Listening to podcasts
The fun thing about money is that it’s both a mile wide as well as a mile deep. The more areas you choose to dive into, the more places you’ll find that you can take your knowledge as deep as you’d like to go. And that just inspires you to become curious about other related topics!
What I’ve come to find is that the more I challenge my own knowledge of money, the stronger it makes me in my ability to excel and overcome any obstacles that stand in the way.
No one cares about your money the way that you do, and so the sooner you take charge of where you’d like to be with your finances, the faster you’ll get there.
The Bottom Line
Don't wait for problems in your financial life to become so big that they seem beyond repair. You can start identifying them right now while they're still small by learning how to spot the warning signs early on and then putting the work in to fix them.
By focusing on things like improving your relationship with money, developing a budget, and systematically eliminating your debt, you'll be able to fix the cracks where most financial leaks start.
Then by increasing your income, planning for the future, and protecting against emergencies, you'll find more ways to keep the money you've earned and shield it from outside influences.
Finally, by developing your own financial literacy, you'll not only increase your awareness of potential opportunities, but you'll have more confidence when it comes to where you want to be going forward.
From personal experience, I can tell you that this is an investment that pays you back over and over again. And there’s no greater feeling than knowing for certain that you’re on the path to financial bliss.
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