Much of middle America’s money troubles can be summed up in a single word – denial. Despite having a decent income, many mid-income families spend carelessly, rack up debt, and carry on like the bill will never come.
But the chickens will come home to roost – at least, eventually. As Forbes contributor Andrew Biggs noted earlier this year, nearly half (45%) of working-age households have no retirement savings at all. Worse, average household credit card debt reached an all-time high of $16,061 earlier this year, according to an analysis from Nerdwallet.
Sooner or later, these decisions will catch up to those who fail to plan. Not saving for retirement, for example, means getting by on nothing more than social security in old age. And that credit card debt? If nothing is done, it’s only bound to grow.
To change things up – to improve your finances – you have to face these issues head on. Instead of living in denial, you need to get real no matter how much it hurts.
5 Money Questions Everyone Should Be Able to Answer
Of course, that kind of talk is easy. Saying you'll get yourself together is a piece of cake. But, doing it? Now, that's hard.
The key to getting your money straight isn't rocket science, however. Like anything else, the hardest part is that first step – but it gets much, much easier from there.
To get started on your journey out of denial and towards prosperity, you should start by figuring out “where you're at.” But, how? I reached out to several top financial advisors for their take on the helping consumers help themselves. Which money questions should people be able to answer, and why? Here’s what they said:
Question #1: How much am I saving every month?
Far too many people think they’re saving money, but don’t have the slightest idea how much money they’re stashing away. They signed up for their 401(k) and elected some arbitrary percentage, say 4%, but they have no idea how that percentage translates into dollars. Worse, they don’t always know how much cash they’re saving, either.
This often means they’re spending at will and trying to save what’s left, notes Financial Advisor for Physicians Andrew McFadden. This is a mistake, he says, since people who aren’t consciously saving for a goal tend to fall drastically short.
“People that don’t consciously save, end up spending,” he says.
If you don’t know how much you’re saving, that means you don’t really know how much you’re spending, either. It also means you’re in complete denial of how you’re using your income.
To fix this situation, you should consider using a monthly budget or tracking your spending and savings at the very least. You work hard for the money you earn, right? Now, let's make it work hard for you.
Question #2: How much interest am I paying every month?
Debt is one area of our lives where we deny, deny, deny. When you owe money to others, it’s easy to make a small minimum monthly payment and sweep the details under the rug. Heck, most people who are in debt don’t even want to admit how much trouble they’re in, let alone how much that debt really costs them.
To get real with your debt, you need to figure out how much you owe and how much your debt costs you every month. The easiest way to accomplish this task is to break out all your monthly bills and obligations, then add up their totals along with how much interest you’re paying every month. Will this process be painful? Probably. But, will it help? You bet.
“Your monthly interest payments and amounts are a very important thing to quantify,” says Seattle financial advisor Josh Brein.
Why? Because those interest payments could be killing your financial potential.
Let’s say you owe the average credit card debt of $16,061 on a card with an 18% APR. Even though your minimum monthly payment is only $321, more than $240 of that amount goes straight to interest payments. The result? You’re paying $321 per month but only reducing your debt by $80. And that’s only if you quit using your card and racking up more debt in the meantime.
The best way to deal with debt is to face it head on – to stop shredding those credit card bills and start reading them line by line instead.
Question #3: How much of my portfolio is in the stock market?
One of my favorite questions to ask a potential client is how much of their money is in the stock market. Not only is this a loaded question, but most people have no idea. Some guess they have a moderate or conservative portfolio, while others don't even know that much.
This is part of the reason people freak when we see huge market corrections. They know they’ve got money invested in several different accounts, but they don’t know how much skin they have in the game. So, when the market tanks by 20% and they lose more than that, they panic.
More from GFC, Below
In my office, we use an account aggregation software called Blueleaf to sync up all of our client’s accounts into one place. This helps them see the big picture when it comes to their money, along with the exact percentage they have in the stock market, in bonds, in real estate, and in commodities. With this knowledge at hand, our clients are less likely to panic or make a hasty move when their portfolio tanks.
“Know what you own and why own it,” says Taylor Schulte, financial planner and founder of Stay Wealthy San Diego. Once you figure out your asset allocation, ask yourself why you chose it.
“If you don’t have a good answer, it might be time to revisit your financial plan,” says Schulte.
Martin A. Smith, President of Wealthcare Financial Group, Inc.™ of Bethesda, Maryland, says this is where a good financial advisor can be worth their weight in gold.
To figure out a suitable level of risk – and what percentage of your money should be in specific investments such as stocks and bonds – you should consider sitting down with your financial advisor to draft an Investment Policy Statement, he says.
“The purpose of an IPS is to outline the general or specific values, needs and goals that you have for investment portfolio,” says Smith. An IPS can also be viewed as a way to anchor an investment portfolio to my client’s values, needs and goals, he says.
“When viewed in this regard, it becomes an indispensable guide to making thoughtful and suitable investment decisions; as well as helping investors to determine whether the risk is worth the potential reward.”
Question #4: How would my family be taken care of if I died?
Far too many people get so caught up in financial survival that they fail to look ahead. This is especially true when it comes to buying life insurance. As I’ve written about before, far too many people rely on their employer-sponsored life insurance plan without realizing it doesn’t offer anything close to what they need.
If you don’t have enough life insurance, however, you could be setting your family up for a world of hurt. Without your income to rely on, your family could easily wind up struggling or even broke. If you don’t want to face this one, you’re definitely in denial.
One of the most loving financial moves you can make for your family is to buy a simple and affordable term life insurance policy. But, financial advisor David G. Niggel of Key Wealth Partners in Lancaster, PA suggests asking some important questions first.
For example, do you want to help your children pay for college? Do you want your family to be able to remain in your current home? How much money do you currently earn, and how long do you need to replace that income?
These questions and others are a good place to start when you’re figuring out how much life insurance to buy.
But beyond these superficial questions, you should also dig a little deeper into the financial implications of your death, notes financial advisor Don Roork of AssetDynamics Wealth Management in Toledo, Ohio.
For example, what happens if you give X amount of money to a person in your family when you die? What’s the worst that can happen? Also, you should consider how you want your assets allocated to your children. You may love them all equally, but does that mean you shouldn’t treat them uniquely?
Even if you don’t have a huge portfolio, you don’t want the kids arguing over your ’57 Chevy or anything else. The best way to avoid confusion is to outline your wishes by creating a will. Estate planning is also important because it goes beyond your will to discuss who gets specific items, how you’ll minimize taxes, and how your wealth (no matter how small) should be transferred to the next generation.
Question: #5: When do I want to retire?
Since almost half of Americans don’t have a dime saved for retirement, it’s safe to assume at least half of us are in denial. You can’t continue working forever, yet many of us refuse to think that far ahead.
Unfortunately, not having a goal in mind makes it that much harder to save and plan. Without a date or range of dates, you don’t have any idea how much you need to save or what kind of returns you need. And, as we all know, failing to plan also means planning to fail.
Once you pull yourself out of the deceitful web of denial, it’s important to define what retirement means to you, says Arizona financial planner Charles C. Scott.
Is your goal quitting your job to do something else you’re more passionate about? Or, do you simply hope to get away from the hassle and pain of working at something that you don’t enjoy anymore? Maybe your goal is simply building enough cash so that if you decide to retire, you can.
Either way, you’ll never get there if you never start thinking of retirement as a priority. Once it becomes a priority in your life, you'll have no choice but to get to work.
Don't know where to start? Consider meeting with a fee-only financial planner if you don't have one. If your employer offers a 401(k) plan and you’re not taking advantage, make an appointment with your HR representative tomorrow. Then, show up.
If you want to retire one day, you can't keep putting this off. You have to commit to a goal, then take actionable steps to get there. This involves more than hoping you’ll win the lottery someday, but some real thought and reflection. When it comes to retirement, you need something to strive for; you need a sense of purpose. Without one, you’re bound to keep putting off retirement until it’s too late.
It's easy to get so caught up in everyday living that you forget about your future self. Unfortunately, years can pass in the blink of an eye. And if you're not careful, it will become to late to get your financial life together.
Don't continue living in denial when there is a much, much better way. Remember that small moves made daily can truly help you grow wealthy over time, but only if you have the courage to change.