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Four questions to determine your financial savvy

Wondering if you are financially savvy? Answer the questions below to see if you have four basic habits of good spending—then find out what to do if you don’t.

1. How much money do you require each month?

financial savvyIf you know the answer, well done: you must be a savvy planner.

If you can’t answer how much you spend each month no matter what (e.g. housing, insurance, gas, food, utilities, loan repayment minimum, cellphone service, Internet/cable, childcare), you need a plan.

Planning your expenses is essential for organized financing. Knowing beforehand where money coming in is able to go is the first step to making sure it doesn’t run out. It can also be the difference between feeling in or out of control of your finances.

Lots of resources are available to help you plan. Dave Ramsey, of Financial Peace University, is a good place to start. His website offers a lot of great financial advice for free, including spending tools and advice that can help you form your own spending plan.

2. Where does the rest of your money go?

If you’re sure, you have a head start on about half of U.S. residents, according to a 2011 poll by Bankrate.com finding 42 percent don’t track their expenses at all.

If you don’t know, it’s time to start tracking your spending. Expense tracking goes hand-in-hand with a spending plan, which doesn’t do a lot of good unless you check whether you stick to it. This way, if you find yourself slipping up, you still have time to strategize. You’ll notice if you’ve accidentally overspent on gas and can borrow from another category before the bills are due.

Lots of digital spending trackers exist—through your bank, your credit card, cell phone apps, etc. If you prefer to write it all down, here’s a free printable template.

3. After taking care of the basics, is the first bill you pay each month related to debt?

If so, well done. You’re taking an important step toward putting that debt behind you.

If not, it should be. (Unless you don’t have any. In which case, you can start saving!) Once you’ve made sure you have enough money for necessities—housing, transportation, food and medical needs—put as much as possible toward your debt. Not doing so means you will pay more in the long run. If you think you don’t have enough money to do this, consider outside help, such as debt counseling (try to find free or low-cost options).

4. How much of your paycheck do you save?

Is it 10-20 percent? Great—you’re following the common rule of thumb.

But if you’re an average American, that rate is only 5.4 percent, according to the Bureau of Economic Analysis’ February report.

The first strategy for saving is to build an emergency fund of three to six months of living expenses. Put some amount of saving into your expense plan, ideally 10-20 percent, but at least something.

Once that’s in place, focus on retirement funds and investing. Keep in mind the sooner you start saving, the less you’ll need to set aside to meet your financial goals. CNN offers answers to many common questions on saving for retirement here.

Of course, life (and your health) can get in the way of saving—or even earning—and unpredictable expenses can throw anyone’s careful plans out the window.

Keep learning

So now that we’ve covered the basics for financial savvy, stay tuned for two more posts: on rethinking common financial advice when money is tight, and tons of tips for everyday savings (stop buying bottled water!).

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