Test Your Financial Savvy with This Engaging Quiz

Matt Kelly’s journey offers a profound insight into the financial struggles many face. In the mid-1990s, Matt and his wife found themselves trapped in a cycle of debt, trying to keep up with their friends’ lavish lifestyles on a combined income of $80,000 per year. Their high-cost mortgage and expensive outings led them into a financial abyss, accumulating over $160,000 in debt.

Determined to turn their lives around, they made a drastic change. They sold their Chicago condo and moved into a modest apartment in Colorado. Through years of disciplined living and meticulous budgeting, they managed to pay off their debt and are now living frugally, finally able to save money. Matt even started his own finance company, Momentum Personal Finance Coaching, to help others achieve financial stability.

Matt’s story is not unique. In November 2013, the U.S. personal savings rate plummeted to a mere 4.2 percent, one of the lowest rates in recent history, according to the U.S. Department of Commerce. This alarming statistic underscores the financial challenges many of us face. However, there is hope. By making small, mindful changes, we can all create healthier financial lives.

Take this quiz to gauge your financial savvy and discover what you can do to break free from dysfunctional money patterns.

Do You Know Your Monthly Income and Expenses?

A. I know my income and have a rough idea of my expenses, but I don’t know the exact figures.
B. I have no idea.
C. Yes, I meticulously track my money on a daily/weekly basis and try not to spend more than I make.

Answer: C

Many of us have a general idea of our income and expenses but are often surprised when there’s nothing left at the end of the month. This lack of awareness perpetuates mindless spending.

“To figure out a realistic budget, you need to know where you are spending your money,” says Annalee Leonard, founder and president of Mainstay Financial Group in Pensacola, Florida. “I had a client who made good money but wasn’t saving anything because she didn’t know where her money was going.”

Leonard advised her client to write down every expense, down to the penny, for a full month. “She came back, and it was like a lightbulb had gone off; she never realized she was throwing so much money away,” Leonard notes.

Before jumping into budgeting, try this step first. It will give you a clear picture of your financial standing, which is crucial for any budgeting exercise.

Do You Plan for One-Off Expenses?

A. Yes, I think ahead and am almost always ready for them.
B. I live paycheck to paycheck; unexpected expenses go on my credit card.
C. I have a small emergency fund, but it often gets depleted, and I struggle to replenish it.

Answer: A

One-off expenses can be a significant source of stress unless we plan for them. Matt and his wife manage this by maintaining a “momentum” account. “We tried to factor in what our life really looks like, and we stopped having emergencies,” he says. This approach helped them prepare for expenses like car tires ($600) or medical procedures ($3,000) not fully covered by insurance.

“We know the tires will last about three years, so we divide $600 into 36 months and save accordingly,” Matt explains. “My wife will need another colonoscopy in five years, so we’ve started saving to have $3,000 by then.”

Matt’s momentum account is dedicated to non-monthly expenses. While it doesn’t cover every unplanned occurrence, it helps significantly. “I recommend getting started by giving your life some thought,” says Matt. “For example, if you are 25 years old, you will most likely have a summer in the next five years that will include seven weddings. It is something to think about and plan for.”

How Do You Account for Impulse Purchases?

A. I spend money on things I think are fun when I want to.
B. I work hard, so I feel it’s okay to go shopping occasionally. I don’t track that spending, though.
C. I save cash for fun purchases. When it’s gone, it’s gone.

Answer: C

About 25 years ago, Edrie Pfeiffer found herself increasingly frustrated. When she and her husband were newlyweds, they never went on dates because “he didn’t know if we had enough money to go out,” she says. To solve this problem, they instituted a system of cash in envelopes.

“We have a safe in our house, and inside the safe, we have envelopes for entertainment money, clothing money, vacation money, etc.,” says Pfeiffer, owner of and attorney at Hampton Roads Legal Services in Virginia Beach, Virginia. “Whenever we got a raise, we would increase our savings in those envelopes. It has worked really well.”

The envelope method is respected for its effectiveness in controlling impulse buying, primarily because it involves cash. “One way to control impulse buying is with actual cash,” says Coleen Pantalone, professor at Northeastern University’s D’Amore-McKim School of Business in Boston. “And by cash, I don’t mean debit cards. If you have to wander off to an ATM to withdraw money, that wandering gives you time to think about what you really want.”

How Much Money Should Be in Your Emergency Fund?

A. What emergency fund?
B. Equivalent to six months’ salary, after taxes.
C. $10,000, no matter how much money you make.

Answer: B

An emergency fund is a readily accessible pot of money, whether in a savings account, checking account, or money market account. It’s there for true emergencies, such as job loss or illness.

Establishing an emergency fund is crucial. Saving six months’ salary can be daunting, but it is possible. “Start with $50 per month,” recommends Leonard. “Next year, go to $55 or $60, if you can handle it. Go up from there.”

How Much of Your Salary Are You Saving for Retirement?

A. The maximum that my company matches—10 percent or more.
B. I’m going to wait until I get a better job to save for retirement.
C. I’m relying on my trust fund to buoy me during my later years.

Answer: A

“People tend to spend what they earn—out of sight, out of mind,” says Carol Khouri, CFP, CDFA, principal at Wingate Wealth Advisors in Lexington, Massachusetts. “Therefore, it is so important to maximize the amount you can contribute, especially if you have a matching retirement plan at work.”

If your company doesn’t have a matching retirement plan or if you are self-employed, plan to contribute at least 10 percent of every paycheck, recommends Khouri.

Have You Ever Evaluated Your ‘Fixed’ Costs?

A. Why would I? Fixed costs never change; I can’t do anything about them.
B. Yes, I recently reevaluated my fixed costs and realized that very few of them were actually fixed. I changed several costs and now spend less.
C. I’m too busy to evaluate my fixed costs. What value would it add to my life, anyway?

Answer: B

Ellen Rogin, financial advisor and president of Strategic Financial Designs in Northfield, Illinois, recommends a “values-based spending plan.” This involves looking at your spending based on your personal value system and deciding if what you are spending aligns with your values.