If money worries are keeping you up at night, it’s time to get proactive. Check out five money tips from Tyler Dolan, CFP®, to make financial planning less scary.
With Halloween coming up, I got to thinking: Other than ghosts, clowns, witches, and politics, what are people actually afraid of?
In 2015, Chapman University published a survey about America’s top fears, and 37 percent of respondents said “running out of money in the future” was a major concern.
So if you have a fear of money, you’re not alone. There’s even a phobia name for it—chrometophobia—so it must be pretty common.
It’s OK. Money is a taboo subject and may feel complex and overwhelming. It can cause lots of stress and anxiety; it can even keep you up at night.
I think the root of money fears stems from a lack of financial education. We don’t learn about personal finance in school. Most people learn financial lessons from their parents. And let’s face it, our parents may not be the best resource; they’ve had “their way” and their attitudes about money for a long time.
But you’re different. You have your own goals, and there might be an approach to personal finance that works better for you.
So let’s tackle things head on this Halloween. Here are the top five common financial fears and how you can face them.
Grownups’ fear of budgeting reminds me of claustrophobia. Setting a price limit on each spending category can feel very restricting, like the walls are closing in when you’ve spent almost your entire monthly “dining out” budget on one date.
But a budget is a very important element of a solid financial plan, one that keeps you on track to reach your goals. If you fear creating a budget because you’d feel restricted by your spending categories, try a different approach. Create a spending plan instead.
A spending plan is built around the idea of paying yourself first. With a budget, every dollar basically has a job. You use your take-home income and spend within the limits of each category. What’s left over is used for your savings goals and/or fun money. With a spending plan, you first cover your needs (the essentials like rent, food, etc.). Then you pay yourself: Your savings goals are treated the same as your needs. Whatever’s left is yours to spend—however you’d like! A spending plan can remove some of the guilt and restrictions inherent with a budget. (If you’d like to learn more, we have an entire class dedicated to spending plans!)
Debt gets a bad rap, but it doesn’t have to be scary. It can be used as a tool to help reach your goals…if used responsibly.
Last year, we did a live credit chat on Twitter with Experian, which brought numerous financial minds together to discuss financial freedom. The first question was straightforward: What does financial freedom mean to you? I was shocked at how many responses were along the lines of financial freedom equals being debt-free. While this is certainly a goal, it doesn’t necessarily indicate freedom.
If you’re fearful of taking on debt, plan ahead. When I meet with Grownups who are struggling with the decision of whether to use debt to reach their goals (most commonly for student loans and homebuying), the conversation usually leads to a discussion about how a future debt payment may fit into their budget.
To start, do your research. For example: There are many different repayment plans offered for federal student loans, and you aren’t obligated to use the default 10-year repayment plan. Next, estimate what your monthly payment will be once you’re required to start paying off the loan. Will that number fit into your budget? If your essential expenses (rent, food, etc.) plus your loan payment is greater than the monthly income that hits your checking account, you may be correct in your fears. If it looks like the number fits into your spending plan, doesn’t that feel a little less scary?
Paying off debt is a financial goal, but that doesn’t mean that you have to aggressively pay off your debt. It’s OK to pay only the minimum payments toward your debt (on time, of course). If you feel an enormous weight on your shoulders because of your debt and it keeps you up at night thinking about it, then by all means, pay more. You can have “pay more toward my debt” as a savings goal. You’ll save money in interest over time and actually pay off your debt a bit quicker. (Our loan repayment calculator can help with “how much.”) But you don’t have to. It all boils down to how you feel about debt. You’re not committing financial suicide if you just pay your minimums. You may actually feel a bit more freedom to save toward your other goals!
Everyone felt the effects of the 2008 financial crisis, and unfortunately, the stock market’s negative performance (and its impacts) left more than one generation with a paralyzing fear of investing.
But when it comes to investing, don’t let fear drive your decision making, especially during a market downturn. I know how hard it is to look at your portfolio’s performance and not try to stop the bleeding. During volatile markets, default to the rational side of your brain. Don’t panic! Stay the course. After all, you’re invested for the long term, right?
Your investments should be in line with your goals, your time horizon for those goals, and (most importantly) your risk tolerance. Exercise caution when using investments to save for shorter-term goals. Although investing offers opportunities for higher rewards compared to savings accounts, there is the risk that you’d need that money during a market downturn, forcing you to sell your investments at lower prices. If you have a longer-term goal, consider investing for that goal, but only within your risk tolerance.
To tackle investing fears, start small, and learn by doing. If you’re not already saving for retirement in your employers’ plan, start there. Learn about investing and what your risk tolerance truly is.
I recently met with a Grownup who stopped opening her credit card statements once she learned they would feature her credit score. She was that afraid to even look. Your credit score is your GPA of your debt record, which lenders base most of their decisions on when it comes to offering you financing. The higher your credit score, the lower your rates could be, and vice versa, which can make a big difference in interest payments over time. Since your credit score is so important, it’s a good idea to monitor your credit information regularly.
What can make your credit score less scary is knowing you have the power to change it. Improving bad habits goes a long way toward getting a better credit score over time. A good place to start is by creating an account at Credit Karma. This free tool allows you to monitor your credit score, learn about its different components, and understand ways to improve it. You can also use their simulator tool to determine how specific actions like increasing your credit limits or closing old cards can affect your score.
Additionally, check out our online class, Can I Have Your Number?, to better understand credit and debt.
5. Emergency funds (or lack thereof)
Not having enough money to pay bills can be scary enough, but it’s really scary during an emergency. Grownups commonly incur high-interest credit card debt when faced with these types of situations. To avoid using less favorable sources of funds (like credit cards or retirement accounts) in the event of an emergency, aim to maintain an easily accessible account—aka an emergency fund—with enough savings to cover three to six months of your essential living expenses. Why the range? For couples with dual incomes, it can make sense to save toward the lower end of the spectrum because if there was a situation where one couldn’t work, you can be reasonably confident that you’d have one source of income coming in. For single folks and freelancers, it can make sense to save toward the higher end of the spectrum.
Having an emergency fund may help you sleep better at night knowing you have something set aside “just in case.” Life happens and things change. It’s better to be prepared. To start, set up automatic monthly payments to a separate savings account and nickname it “emergency fund.” Even if you start small, you’ll be able to track progress toward your goal.
Tyler is a CERTIFIED FINANCIAL PLANNER™ practitioner who believes financial education can empower people to reach their goals.
Any third-party resources or websites referenced above are not under Society of Grownups control. Society of Grownups cannot guarantee and are not responsible for the accuracy of the resources, websites, or any products or services available through such resources or websites.
While Society of Grownups hopes the information is useful, it’s only intended to provide general education. It’s not legal, tax, or investment advice, and may not apply or be useful to your specific financial situation. If you need recommendations geared to your personal financial situation, schedule time with a financial planner.