There’s no shame in not knowing something, especially when it comes to the complex world of money. Money is a tricky subject, whether you’re applying for a credit card, planning for retirement, or wondering what an IRA is. There are a lot of things most people are never taught, so here are the answers to the money questions you may have been too afraid to ask.
- What’s My Credit Score?
A credit score is a snapshot of your financial health based on your credit history scored on a range of 350 to 800. If you’ve paid off your credit cards, college loans and bills on time, then you can expect to have a better score. A good score means you’ll have an easier time taking out loans, as lenders will see you as trustworthy. If you have a low score, you’ll have difficulty taking out loans, leasing properties and so on.
If you do a search for “what’s my credit score,” you’ll be overwhelmed with options. Some of these options sneakily charge monthly fees, so avoid those and go to reputable services such as Credit Karma, Quizzle or Credit Sesame.
- Should I Buy A House Or Rent A Place Instead?
This is almost a philosophical question as much as it is a money question. For older generations, buying a house as soon as possible was essential. That’s because people typically stayed at one job for life, and buying a house was considered a great investment. Things change, and after the financial recession of the past decade, housing isn’t the surefire bet it once was. Also, employees are more likely to move between jobs.
The most important thing to consider between renting and buying is if you want to stay in that town or city indefinitely. Next, you need to consider the real cost of buying compared to renting. The New York Times has a useful calculator to help you decide whether to rent or buy.
- How Big Should My Emergency Fund Be?
One of the most important things to do when you start working is to save up enough money for an emergency fund. This fund will help you handle the unexpected with peace of mind, such as a car breakdown or a sudden layoff. Opinions differ on just how big an emergency fund should be, but at least three months of your cost of living should be tucked away. If you’re spending $2,000 a month, you want $6,000 saved.
Three months is the minimum, and you’re probably better off setting aside closer to six months of expenses.
- What’s a 401(k)?
If you’re working full time, hopefully your employer offers a 401(k) as a benefit. With these retirement accounts, a set amount of your paycheck is deducted and your employer usually matches a certain amount of your deposit. The money is used to purchases shares of mutual funds, stocks or ETFs , exchange traded funds, essentially a combination of stocks.
The good news is the employer’s match is essentially free money and there are tax benefits to having a percentage of your paycheck put into a 401(k). The bad news is you can’t really touch the money until you reach retirement age. If you do need to withdraw the money, you’re hit with stiff penalties that could cost a lot of money.
Still, partaking in a 401(k) is a necessary part of setting up funds for retirement and shouldn’t be ignored.
- How Do I Invest in the Stock Market on My Own?
Lots of people invest in the stock market automatically through their 401(k), but fewer people do the investing on their own. It seems intimidating, but it’s not too difficult to set up an investing account.
Simply choose an investment company — Vanguard, Charles Schwab and Fidelity, just to name a few — and open an account for free. From there, you’ll need to transfer however much money you want, and you’ll be set to trade. For the most part, there are flat fees to either buy or sell a stock. Everything can be done online.
Of course, this is just the beginning, as you’ll need to decide how exactly to invest your money. The simplest place to get portfolio ideas is from Bogleheads, a community based around the investing philosophy of Vanguard’s legendary founder Jack Bogle.
- What’s an IRA?
If you’re keen to invest on your own for the long term, then an IRA is a solid retirement account that can help you save on taxes. In a nutshell, you’re allowed to contribute up to $5,500 annually, yet you’re not allowed to withdraw the money without penalty until you’re at retirement age, although there are a number of exceptions. The tax savings are considerable over time.
There are two types of IRAs — traditional and ROTH. Traditional IRAs are tax deductible as soon as you make a contribution, but you’ll need to pay taxes when you eventually withdraw the money decades down the road. Roth IRAs aren’t tax deductible, but you don’t have to pay any taxes when you take the money out.
Opening either IRA is the same as opening up a regular investment account. Choose a company and they’ll offer both types of IRAs. You pick which investments to make, so research is needed before plunging in with some purchases.
- How Do I Budget?
Put away the spreadsheets. There’s software out there to make it easier. You Need a Budget and Mint are the two most popular for tracking spending. They make setting up a budget easy, and any purchases you make with your credit card or debit card can be automatically logged. At the very least, programs such as these help you see where your money is going.
- What Kind of Bank Account Should I Have?
Banks offer a number of different services, but the classic accounts include checking, savings and CDs.
Checking accounts are the most utilitarian, as they’re easy to access and a great place to have your paycheck deposited in. They offer no interest rates, so you won’t gain anything by having large amounts of money sit there.
Saving accounts these days aren’t what they used to be, as interest rates are pathetically low. Still, they’re the safest place to set aside money you don’t immediately need but might need to withdraw on a moment’s notice. CDs offer better interest rates, but they’re also not as valuable as they once were. With CDs, you agree to essentially lock your money away for a set amount of time — six months, a year or longer — and you’re given a more favorable interest rate.
- What Does APR Mean on Credit Cards?
The annual percentage rate is how much interest you’ll be paying when you don’t pay off your entire balance. Lots of credit cards advertise very low rates, which make them enticing, but that APR is often for just a short period. Later, the rates will go up and could be very costly if you’re not paying off your credit card in full.
- What Happens If I Can’t Pay My Student Loans?
Hopefully you never have any problems paying off your student loans, but this isn’t an unusual situation for recent graduates. Take solace in the fact that there are some options that could help you out.
First, you can talk to your lender and see what sorts of payment options are available. Missing monthly payments is something to be avoided, but by working with the lender you can perhaps lower the monthly bill. There are also income-based repayment plans that could be useful if you’re between jobs.
You can also ask for forbearance or deferment. This means you won’t have to make any payments for up to a year if you qualify.