6 Questions to Help You to Overcome the $400 Trap and Own Your Finances

LinkedIn recently reported that a Federal Reserve analysis indicates that, “Even with the job market tightening, 40% of Americans would still struggle to come up with $400 in an emergency.” In 2018, thirty-nine percent of Americans indicated that they would have to incur interest or take a loan to cover the $400 expense. Herein lies the $400 trap that so many Americans fall into year after year.

I think we can all agree that when finances are tight, it’s hard to accomplish so many things that matter. Financial issues are often deeper than dollars and cents and they hold us back from living the life we truly desire.

I invite you to imagine the life you want to live. Consider your goals and your aspirations. Think about what you love to do and reflect on what truly matters to you.

When you think about these things, what comes to mind?

• Do you want to retire early and travel the world?
• Are you interested in opening your own business?
• Would you like to take some time off from work to pursue an interest or spend time with your family?
• Do you have a wonderful novel in you, but no time to write it?

Whatever you desire, your ability to pursue your interests is fueled or hindered by your financial situation.

I’m not saying money is everything. It isn’t. However, it sure comes in handy.

Take a few minutes to answer 6 money questions. Use your answers to fuel your actions to put yourself into a position to live the life you want:

1. What is your number?

In his book, The Number, Lee Eisenberg asks readers to think about the lives they want to live and the amount of money needed to sustain themselves. If you decide to go without a paycheck, either in retirement or somewhere else in your life, you need to know how much money you need to sustain yourself. One way to think about it is that if you need $40,000 (USD) per year and you don't want to eat into the principle of your savings, then you need to have $1 million working for you, assuming it is generating a 4% return.

2. What should you be saving?

If you answered the first question saying that you need $1 million at age 62, that means you should be saving some serious money. At 30, you need to put away $14,000 per year, assuming a 5% annual return, to hit the million by 62. If you are 40, double that amount – put away $28,000 per year.

Perhaps you are thinking to yourself, those are big numbers, where would I possibly find that amount of money to save?

You aren't alone. Those are big numbers.

When I was 30, I had recently separated from the U.S. Army. At the time, my wife and I had two young children. Saving $14,000 per year would have required us to stop eating, take up residence in my old army tent, and sell our plasma on a regular basis.

Don't let the big numbers cause despair. There is hope for all of us and it can be found in the power of compound interest. You can save big money with far less to put away each month. Consider this; if you are 25 years old and you save $100 monthly until age 62, you will have over $128,000 in the bank. Add an extra $20 to that per month and the number jumps to $154,000.

The key takeaway is to start putting money away (no matter how much) as soon as possible, and make saving a habit.

3. What’s your relationship with money?

Are you the type of person who has the first dollar you ever made or does money fly out of your bank account the moment it arrives? Some of us learned our spending habits during our upbringing, others seem to be pre-wired to save or spend. Whatever your relationship with money, you need to consider if the current relationship will serve you well in the short- and long-run. If not, consider revisiting it.

4. What are you spending your money on?

Take a look at how you spend your money. Do you have an emergency fund? Are you paying down debt and saving for retirement? Your answer to question #3 (above) will suggest how you see your relationship with money; but, your answers to these spending questions will allow you to see the ramifications of that relationship.

5. What is your budget?

There are a number of ways to determine your budget, but they all come down to putting numbers on paper. Take a look at your last couple of months of spending. What was your income? What did you spend and where did it go? Did you cover just the basics or did you eat out, buy new toys, etc.? Was there anything left over at the end of the month? If you don’t have a budget, start small – build a budget for yourself for the next month, try to live within that budget, assess how it went and adjust going forward. Make it both realistic and challenging.

6. What should you prepare for that you can’t control?

Lots of things can happen that can knock you off of your plan. You can become ill, end up in a car accident, lose a job, etc. Be proactive and plan accordingly. Get a will, buy some life insurance (ideally term), and have a plan in the event of medical costs. Make sure you have the right amount of car and home owner’s insurance. Don’t spend and save wisely for years only to have a significant event knock you off of your feet.

Admittedly, I’m not a financial planner. I simply pose these questions to get you thinking.

I encourage you to own your finances and live the life you want to live!

Best- Patrick

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(Note: Based on reader comments, Patrick provided further clarity to his 'question #2' answer.)