The Equifax data breach taught us that “identity hygiene” is more important than ever. But what about your overall “money hygiene,” or how well set up and protected your finances are? If you’re still struggling to become a financial adult, chances are you’re overlooking a few basic steps. The problem is, often you don’t know what you don’t know.
Don’t give up, though. If you’re tempted to throw up your hands because of all of the complexities of managing money, the consequences can be dire. “Making uninformed financial decisions can set you back from achieving your financial goals,” Douglas Boneparth, a certified financial planner, said in an email interview.
Informed decisions, on the other hand, will put you on the road to financial stability. “Staying on top of your overall financial situation and making choices that help strengthen your finances will give you more options,” Kimberly Palmer, credit cards and banking expert at NerdWallet said in an email interview.
And that, in turn, will open more doors for you in life: “Your financial situation determines what kind of life choices that you have — whether you can afford to retire when you want to, buy your dream home or go on a vacation,” Palmer added.
Here are 10 questions to ask yourself in order to figure out your baseline understanding of your finances. Give yourself one point for every question on this “money hygiene” quiz that you answer yes and check out our tips for getting more information on the questions you missed.
1. Do you have an emergency fund?
Nearly half of all Americans don’t have $400 to cover an emergency. If you’re one of them, you’re at risk for racking up the dreaded high-interest credit card debt if your car breaks down, you lose their job or face a medical emergency that you have to pay for out of pocket.
It’s wise to have enough saved to cover three to six months of living expenses. Start small to begin building your savings if you don’t. And if you do have enough funds socked away, make sure your savings are safe and accessible but still earning interest by investing in a high-yield savings account.
2. Are you sticking to a budget?
If you don’t have a budget, there’s a good chance you don’t even know exactly where your money goes. “You need to become a master of cash flow,” Bonepath said. “This means intimately knowing what’s coming in and going out each month.”
When making one, be sure to avoid rookie budgeting mistakes, like not knowing what you’re spending already or making an unrealistic budget. You can also choose from different kinds of budgets, including a zero-based budget and an envelope budget if you need extra help being disciplined.
3. Are you protecting your identity?
Identity theft is costly, time-consuming and shockingly common: Around 7% of Americans over age 16 were victims in 2014. If you post your personal information on social media or don’t secure your WiFi, you’re inviting hackers to steal your info.
To protect your identity, be aware of common scams — like fake calls claiming you owe a fine for missing jury duty — and follow tips like strengthening your passwords and reading credit reports regularly.
4. Do you know your credit score and how it’s calculated?
Did you know you actually have multiple credit scores at the same time?
You don’t need to know all of them, but should check your score and credit report on a regular basis. “Checking your credit is important because it gives you a sense of whether you can currently take out loans for things like a home or a car, and if you currently have poor or average credit, then that information can help you take steps to improve it,” Palmer said.
If your credit score is below 700, you’ve got work to do. It helps to know how credit scores are calculated. In a nutshell, it’s a formula that takes into account your payment history, amount of available credit used, the length of your credit history, the different kinds of credit you have and the number of inquiries or requests for new credit on your report.
How can you boost your credit? Try paying down debt or asking for a credit line increase to lower your utilization rate.
5. Are you saving enough for retirement?
While saving 10% of your income used to be a good rule for retirement savings, many financial experts now think you need to save more because people are living longer and returns are lower. Unfortunately, most millennials aren’t saving enough and most workers spend more time planning vacations than planning for retirement.
“Checking your retirement portfolio can give you the motivation you might need to make changes, such as saving more,” Palmer said. Don’t have a retirement account? Follow this guide to open an IRA.
6. Do you have enough insurance?
Most Americans have health insurance, either through their employer, their family, Medicaid or the marketplaces set up by the Affordable Care Act. But you need more than health insurance to protect yourself.
“Look at your insurance needs and whether you have the coverage to protect you, including rental insurance, homeowners insurance and life insurance,” Palmer said. Life insurance isn’t just important if you’re married, either. If anyone depends on you financially, it’s time to get covered.
If you don’t have a house, renter’s insurance is important to protect all your possessions as well as to protect you from liability if someone gets hurt at your place. Your personal property isn’t covered by your landlord’s insurance, and your landlord is only responsible if someone gets hurt in common areas — you could be sued if someone gets hurt in your home.
7. Are you growing your career prospects?
Most people wait until they are unhappy at work or in a crisis situation to build a professional network. That’s a big mistake. Networking on a regular basis lets you develop contacts who are ready and waiting if you need help finding new work — which is especially important in industries like higher education and computer networking. Even if you decide to stick with your current gig, it’s always nice to know you have options.
8. Are you square with Uncle Sam?
Believe it or not, owing money to the IRS is actually better than getting a big refund because, you’ve given Uncle Sam an interest free loan if you get a check in the mail after you do your taxes. While you can use your refund to accomplish money goals like paying debt or starting an emergency fund, you’re far better off not lending the IRS your money for months at a time.
Whether you’re owed a refund or not, make sure you file your taxes early to avoid scams like criminals filing in your name and claiming a refund.
9. Are you avoiding unnecessary fees?
Bank fees — like overdraft and ATM fees — are a drag, but they’re not as bad as big fees on your retirement investments. A fee as low as 1% could cost you almost $600,000 in sacrificed returns because of compound interest, so it’s vital to monitor what you’re being charged in fees for mutual funds, money management or other services or investments.
It’s smart to keep an eye on credit card fees as well, whether it’s for a late payment or a balance transfer. Even an annual fee can also be a net loser if you’re not spending enough to make the fee worth it, but you may be able to get your creditor to waive the fee just by calling and asking.
10. Have you diversified your investments?
The old saying, “Don’t put all your eggs in one basket” applies perfectly to your money. Instead of putting all your hard-earned cash in, say, bitcoin, it’s wise to pick index funds that have a broad mix of investments in order to lower the risk that you’ll lose a big chunk of it all at once.
How to get started? “Investing starts with picking an asset allocation,” Arielle O’Shea, an investing and retirement specialist at NerdWallet said in an email interview. “But that allocation isn’t static. Some asset classes will grow faster than others, tipping the balance and weighting your portfolio more toward them.”
When some of your investments grow faster than others, it’s time to rebalance. “Rebalancing your portfolio prevents risk from being built in over time or from a portfolio becoming overly conservative,” Boneparth said. Around once a year, you’ll need to check on your investments to make sure they’re still allocated appropriately.
Rebalancing is a way to check in on your portfolio. “Are you still invested the way you want to be, or did things — the market, your goals — change? If you’re still happy with the allocation, no need to do anything. If you’re not, time to bring things back in line,” O’Shea said.
Understanding your score
Add up how many questions to which you were able to answer “yes” to find out your score — then see where you rank in the rubric below.
If you scored 8-10
If you scored 5-7
Your financial knowledge is definitely above average, so you’re doing pretty darn well. Consider boosting your knowledge a bit by discovering what to do when the stock market drops, how to save money on everything you buy and how you should be ranking your financial priorities.
If you scored 0-4
You’re on the right path, but have a little more to learn. Find out some basics that will help with money decisions in the future, like how to budget, choose the right credit card for you or how to handle your student loans.