Answers to the Money Questions You’re Afraid to Ask
Financial advice so often seems to be written for people who started saving for retirement at 15, attended college without accruing any debt, and bought their first house before they were old enough to drink. Good for them, but what about the rest of us? Much as we try, not all of us are on the perfect financial path, and that can lead to some uncomfortable questions. For instance, how awful is it if you don’t pay your credit cards off every month? How will you know when you are ready to buy a house? And that retirement thing, how does that work? We’ve got you covered with financial information for the rest of us!
What if I Don’t Pay Off My Credit Cards Every Month?
Take a deep breath: You haven’t destroyed your financial future by carrying a balance on your credit cards. Sometimes, emergencies happen and you don’t have enough cash on hand to cover them. The important thing is to make your credit card payments on time every month. The next goal is to keep the balance under 30% of your available credit limit. Next, go over your budget and start allocating money to pay down the balance.
How Much Can I Spend on Fun?
One popular method suggests diving your money up by allocating 50% to needs, 20% to savings, and 30% to wants. Wants would include nights out, restaurants, concert tickets, streaming subscriptions, cosmetics, hobbies, and everything else not needed to survive. Remember, though, that if you have debt, you’ll probably have to cut back on your wants budget and reallocate that money to paying down debt.
When I Should I Start Saving for Retirement?
Yesterday! But today is great, too. It’s never too early or too late to start saving for retirement. Any single person making less than $122,000 a year is eligible to open a Roth IRA (there are different eligibility limits for couples). Since the IRA isn’t tied to a job, it’s easy to maintain throughout your working life. Check and see if your employer offers any retirement contributions, too. Usually, you have to save a certain percentage of your income, and the employer will match it. It’s basically free money, so you might as well take advantage of it.
Should I Talk to a Professional?
Almost everyone can benefit from sitting down and talking to a financial adviser. They can help you identify your financial goals and craft a road map to reaching them. Independent financial advisers cost money, though. Your bank probably offers sessions with free financial planners, but remember that their job is to sell you on the bank’s financial investment tools. Spending the money on an independent financial adviser makes sense if you have a complicated financial life, your finances have recently radically changed, or you simply need additional help.
What Budgeting System Should I Use?
Zero-dollar, envelopes, and tracking are all types of budgeting systems, but which will work best for you? It’s highly individual!
- Zero-Dollar Budgeting: Let’s say you have $1,000 in your checking account. Using a spreadsheet or an app like YNAB, you then assign that money to various categories. Perhaps your car payment is due, you need to make a credit card payment, you need to buy groceries, and you need gas. You assign the appropriate amounts to the various categories and then deduct the spending in each category. In the end, you should have zero dollars left unassigned: Every dollar should be accounted for, whether it’s going toward rent, a latte, or your savings account. This is best for people who want to devote time daily to their finances and want to plan where their money goes.
- Tracking: There are many programs and apps available that download your bank and credit card activity daily and then let you categorize the spending. This is great for people who honestly don’t know where their money goes or who budget using the 50/30/20 methodology.
- Cash Envelope: After paying your major bills, cash envelope systems ask you to withdraw the money you need for food, entertainment, transportation, and other incidental expenses. Grocery money goes into the grocery envelope, fun money has an envelope, and gas money has its own. Once an envelope is empty, you have no more money available for that category until next paycheck or next month.
How Do I Get Health Insurance?
Health insurance is a vital part of protecting your financial future. Check with your employer to see if or when you will qualify for a company-sponsored health plan. If you are under 26, you might be eligible under a parent’s employer-sponsored health insurance, or if you are married, you might be eligible under a spouse’s plan. If none of these apply to you, check out the government-run health insurance marketplace. Freelancers should also check out the insurance offered by the Freelancers Union.
How Much Money Should I Have in an Emergency Fund?
Start with a baby step and save $1,000. That should be enough money to handle most routine emergencies, like an unexpected vet bill or blown tire. After you have set aside that $1,000, start thinking about a real emergency fund. Ideally, you want three to six months of living expenses. This should include housing, transportation, food, health care, and job-seeking costs.
How Much Debt Is Too Much?
Debt can be a tool used to build your credit score, get an education, and help you find a solid financial footing. Debt can also overwhelm your financial life and leave you unable to save for the future or even maintain your current standard of living. Payments for student loans, credit cards, and car loans should take less than 20% of your take-home pay. Ideally, housing costs plus other debt types should only equal 43% of your income.
How Can I Save for Vacation?
Open a separate vacation savings account so you don’t accidentally spend the money on something less fun. Figure out how much you’ll need for your vacation and how long you have to save the money. Next, look for easy ways to trim your budget. Can you pack your lunch and save $40 a week on takeout? Can you do without a streaming service and save $15 a month? These small savings, when deposited into your vacation account, can add up fast. Not going to be enough? Pick up a side hustle. Babysitting on Saturday nights might be enough to help you pay for the vacation of your dreams! And don’t forget to go through your stuff and sell anything you no longer need or want.
Am I Ready to Buy a House?
How’s your credit? Your score should be around 620 or higher to qualify for a mortgage. You also want to have some money in the bank. Even if you are eligible for a program that waives a down payment, a robust emergency fund is a must. You need a buffer in case of a job loss or something going wrong with the house. Next, are you sure you want to stay in the area where you will be purchasing a home for at least five years? You’ll need to if you want to at least break even when you sell it. If the answer to all of these questions is yes, find a reputable mortgage lender and start the pre-approval process. Make sure what the bank thinks you can afford is what you think you can afford!