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Getting a Grip on Your Finances Doesn’t Have to Be Scary (and It’s Worth the Work)

During the recent government shutdown, many news stories focused on government employees struggling to pay critical bills like their rent or utilities. This issue highlighted an uncomfortable truth – many Americans have little to no emergency savings.

A Federal Reserve Board study found that 40 percent of Americans would be unable to cover an unexpected $400 expense. Another found that 78 percent of Americans live paycheck to paycheck and that 56 percent of people save $100 or less each month. The National Foundation for Credit Counseling reported that only 41 percent of people have a budget and keep track of how much they spend on things like food, housing and entertainment.

Clearly, millions of Americans struggle with spending, saving or both. Some of that discomfort could be due to how people feel just talking about money. Unless it’s about potentially winning the lottery or how much our favorite sports team just paid to sign a new player, most people aren’t that comfortable talking about money. We’re taught from an early age that money, along with politics and religion, is a topic that’s best avoided. As we become adults, we might avoid talking about money with a spouse or partner because it’s a source of stress, especially if money is tight or you and a loved one aren’t on the same page about spending habits.

While it can be uncomfortable to talk about, having a handle on your finances is important. Unfortunately, it’s an area where many Americans could stand to improve. A study from FINRA, the Financial Industry Regulatory Authority, found that two-thirds of Americans failed a basic financial literacy test that included questions about topics such as credit cards and mortgages. That same study found that 18 percent of Americans spent more each month than their income, and 32 percent of credit card users only paid their minimum balance each month.

With April being Financial Literacy Month, there’s no better time to improve your understanding of your finances. How would you rate your financial literacy? The list below may help identify strengths and weaknesses in your financial awareness. Consider whether each statement is “true” or “false” for you and your family. Any time you answer “true,” that’s a good indication of strong financial literacy.

  • You have an emergency fund (or are actively building one) that could cover your expenses for three months.
  • After your monthly bills, paying down debt, especially high-interest rate credit cards or auto loans, is your top priority.
  • Your spending habits on non-essentials (e.g., entertainment, eating out) still allow you to save money each month.
  • You’ve tallied your average monthly expenses compared to your average monthly income and are comfortable with the results.
  • You’ve spent time thinking about your future financial goals and discussed them with your spouse or partner.

The Results of Financial Stress

If you answered “false” to all or most of the statements above, there’s a good chance you’re feeling some level of financial stress in your life. Financial stress can take both a mental and a physical toll on a person, affecting their quality of life overall and especially their relationships at home and at work. About a third of adults report that money is a source of conflict in their relationships; over 80 percent of couples under 30 cite money as the primary reason for divorce.

Research suggests that financial stress contributes to employee turnover, workplace accidents, absenteeism and use of employee assistance and disability programs. Risky behaviors such as substance abuse, gambling, excessive spending and an unhealthy relationship with food (overeating or undereating) are all common coping mechanisms for people under stress, including financial stress.

Keeping an emergency fund or “rainy day fund” is one of the best ways to reduce financial stress. “Life is full of unexpected financial emergencies,” says Carol Kaplan, a spokeswoman for the Consumer Federation of America. “Your car breaks down, your refrigerator dies, a family member gets sick. Life has enough stress as it is. Having a savings cushion relieves a lot of that stress and protects us financially.”

Unsure how to build that rainy day fund? Almost all financial experts recommend setting a monthly budget and doing your best to stick to it. Popular sites like Mint and You Need a Budget can help you get started. Creating and following a spending plan may not seem like fun, but it’s possible to make a budget that’s effective and still fits your life. Having a budget, even if you don’t always stick to it, is better than having no budget at all. As a bonus, examining how you spend your money may help you realize which activities you truly value in life and which things are simply taking up space in your life.

[Nick Fox]

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