Personal Finance Budgeting

Financial self-deception is a form of slow-motion financial self-destruction. If you keep ignoring reality, you’ll dig yourself a hole so deep you’ll never recover.

Take this brief quiz to learn if you’re on the brink of financial self-destruction.

1. Do you blame external forces, events or other people for your financial problems?

Example: “If the transmission on my car didn’t go, I would have been able to pay the rent this month.”

Example: “If the stock market didn’t nosedive last year, I could have retired by now.”

Change your outlook, change your life. We can’t predict mechanical breakdowns, stock market swings or unexpected health problems, but there are many steps we can take to protect ourselves financially if worst-case scenarios occur.

Allocate a fixed portion of each paycheck to an emergency savings fund so unanticipated expenses don’t mushroom into full-blown financial crises. Contribute as much as you can without seriously shortshrifting yourself elsewhere.

Millions of Americans have suffered substantial losses in the stock market or worse, as those who invested with Bernie Madoff can attest. Lingering regrets will keep you living in the past. The only practical thing to do is to learn from your mistakes and move forward.

2. Do you allow the full balance of your credit card bill to go unpaid?

Example: “The balance on my Visa bill can wait another month, because we need to buy [fill in the blank.]“

Change your outlook, change your life. If you don’t pay your credit card balances in full each month, you’re a darling of the credit card industry because you’re tolerating additional interest and late fees on unpaid balances. If you’re unable to pay monthly credit card bills, you’re clearly living beyond your means, and that can’t continue indefinitely. More than any other type of financing or loan (short of money obtained from loan sharks or payday lenders, which isn’t recommended), credit card rates and fees are exorbitant.

Used responsibly, credit cards are a convenient tool for making purchases when carrying large amounts of cash isn’t practical. But paying with plastic demands the same caution and risk awareness you use when lighting a fire in your woodstove, and carelessness in both instances could get you burned.

3. Did you buy a champagne house on a Pabst beer salary?

Example: “Yes, but our realtor said to buy as much house as we could afford.”

Change your outlook, change your life. You probably realize now that houses don’t always appreciate in value. And plunking down thousands more for that extra bedroom you don’t need, the third bath, or the finished basement isn’t just a one-time expense. You’ll be paying to heat that extra space in winter, and cool it in summer, for the rest of your life, not to mention paying higher property taxes for as long as you own the property. And since you probably won’t be content with an empty room, you’ll spend thousands more to furnish it.

There’s no better time than a recession to get rid of the “more is always better” mentality. Forget about weaning yourself off extravagances, do it cold turkey. As with all things in life, purchase only what you really need.

4. Do you take your full pay rather than setting something aside in your retirement accounts?

Example: “I’m young and just starting out. There’s so many things I need to save for; funding my 401(k) and IRA can wait.”

Example: “My husband and I are 40-somethings with a growing family. College tuition comes first, and we won’t have too many more vacations together as a family, so 3% is all I can afford to contribute to my 401(k).”

Example: “I’m scared. I’m 59 years old, and I only have $25,000 saved for retirement. I guess I’ll be working until I’m 80.”

Change your outlook, change your life. Ultimately, only you are responsible for saving for your retirement. Absent Congressional intervention, Social Security payouts will begin exceeding tax revenue not long after the huge number of baby boomers have retired, in roughly 32 years. With fewer young people paying into the system, cutbacks in benefits or an increase in eligibility age appears likely.

So do you want your golden years to truly sparkle, or will you settle for a steady diet of macaroni and cheese? Based on historical averages, a 20-year-old investing the maximum amount ($15,500) into a 401(k) earning 9% will save $1,000,000 before she’s 45. (The average annual return of the S&P 500 index from 1926 to 2007 was 10.36%, according to Ibbotson Associates. Of course, past performance is no guarantee of future results.) But if you wait a decade or more to start making contributions, reaching the big milestones becomes much harder.

Even if you can’t invest the maximum permitted by law, early and regular 401(k) contributions can substantially boost your rate of savings over time.

If you’re in mid-career, it’s also a great time to pump up your retirement savings. If you haven’t done a good job of doing so in the past, you can still catch up now while you’re in your peak earning years. Wouldn’t you rather suffer a little deprivation now, in terms of cutting back on eating out or the second annual vacation, instead of worrying about healthcare expenses in your 80s? The choice is yours.

Those less than 10 years away from retirement face the biggest retirement challenge. The bad timing of the stock market downturn means you’ll have to work double-time to build up your savings and make up for losses.

5. Have you “borrowed” money from sources already earmarked for other things?

Example: “I want to put in a swimming pool, so I’m going to tap my 401(k) and then pay it back later.”

Example: “When we refinanced, we leveraged our home equity to finance our trip to Thailand this year.”

Change your outlook, change our life. Your home is not a piggy bank. Neither is your 401(k). If, for some reason, you cannot pay back the 401(k) loan (think layoff or a half-dozen other common “stuff happens” scenarios), the IRS will consider your loan a withdrawal, taxing you on the entire amount and adding a 10% early withdrawal penalty if you’re under age 59 1/2. More important for the long term, you’ll have shortchanged your future retirement. Realistically, can you pay back that loan and continue building on it without falling behind?

If you refinance and “borrow” from your home equity to pay for something else, and then roll over the extra money into the mortgage, you’re diluting the benefit of refinancing at a lower rate. That’s because you’re adding to your mortgage balance and increasing the total amount you’ll pay in interest and principal, as well as the time needed to pay it off.

Wouldn’t you like to retire with a mortgage that’s been paid free and clear? If so, don’t extend your loan terms by tacking on additional borrowed money. If you can’t afford to pay cash for what you need now, then wait and save up.

If you answered “yes” to any of these questions, it’s time to take a hard look at your lifestyle, goals and priorities. Getting your finances in order is your personal responsibility.