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Last year, my son brought home a midterm progress report that showed he was getting an F in one of his classes. What was infuriating was that the F was in physical education.
“How in the world do you fail phys ed?” I asked my wife, shaking Matthew’s midterm report card in my hand for added emphasis.
“Beats me, Len. Why don’t you ask him?”
Why didn’t I think of that?
Needless to say, Matthew and I had a nice little heart-to-heart talk about his failing grade and, I’m happy to say, he actually ended up finishing the school year with a C in PE.
That little incident got me thinking about what people would have to do to earn an F in personal finance. If you find yourself swimming in debt and living paycheck-to-paycheck, the odds are you’re already getting one. Here are the most likely reasons why:
1. You don’t have an emergency fund.
In life, you should expect the unexpected, such as the sudden loss of a job. The last thing you want to do is be caught off guard and be forced to rely on credit cards or a loan that could get you into deeper financial trouble.
Extra credit: Establish an emergency fund of at least three to six months of expenses. And don’t delay. You should start building your emergency fund as soon as you get your first paycheck.
2. You don’t know how much you have in your bank accounts.
Overdrawing a checking account by just a few cents could result in lots of expensive bank fees. To ensure you’ll never write a check for more than what you have, you should always know how much money you’ve got in all your accounts.
Extra credit: Set your overdraft limit to $0 and your debit card won’t be allowed to overdraft your account. True, you could bounce a check. But if you’re running your household like a business and balancing your checkbook regularly, that shouldn’t ever be a problem. Consider using money management software to help manage your finances more closely.
3. You don’t understand the difference between a want and a need.
One of the biggest impediments to getting your financial house in order is the inability to properly distinguish discretionary and nondiscretionary expenses (otherwise known as wants and needs).
Extra credit: Understand that when taken down to the most basic level, all of us have only four or five primary needs. Those needs are food/water, clothing, shelter, transportation, and health care. Everything else is a want.
4. You don’t know how much money you spend.
It’s pretty simple: The amount you save is the difference between how much you make and how much you spend. But it’s tough to save anything if you don’t know how much you can afford to save. That’s why it’s important to take a critical look at your expenses so you know exactly how much money you are spending.
Extra credit: Audit your expenses by writing down everything you spend your money on for a couple of months. The trick is to be as detailed as possible. Try to capture even the smallest purchases. Here is a budget worksheet to help get you started.
5. Your tastes exceed your spending capability.
Understand that this is not a problem so much as an excuse. Kind of like my son arguing that he’s getting an F in his PE class because the teacher doesn’t like him. When your expensive tastes starts impacting your ability to save, you’re in for trouble.
Extra credit: If your tastes exceed your budget, ratchet them down a notch or three – and stop making lame excuses.
6. You can’t say no.
Many people do understand the difference between wants and needs, but they have trouble saying no anyway. Being able to say no is a crucial skill in the world of personal finance. Those who can’t will always have the most trouble keeping their personal finances on an even keel.
Extra credit: Master the art of saying no.
7. You’re an impulse shopper.
Impulse buying is a nasty habit that can best be cured by careful planning.
Extra credit: Establish a household budget. Before going out to shop, know exactly how much you will be spending at each establishment. Make a shopping list before you go to the supermarket or the mall. In short, think before you buy.
8. You worry about what others think about you.
People who worry about what others think of them suffer from a desire to keep up with the Joneses. There are many reasons why people do this, including: the urge to advertise their success in life (be it real or imagined), the desire to have what others have, and instant gratification. Whatever the reason, once they reach the checkout counter, they tend to ignore this little slice of reality: Unlike the Joneses, they probably can’t afford it.