PERSONAL FINANCE 101: 7 *FREQUENTLY* Asked Money Questions
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PERSONAL FINANCE 101: 7 *FREQUENTLY* Asked Money Questions
Today we’re looking at the most common money and financial questions I’ve received over the past couple of years. I’ve said this before, financial literacy is important – and the more you know about money, the easier it is to make sound decisions.
But unfortunately, many people don’t understand the basics of money management. My goal has always been to simplify money and help people get out of a rut. So I always welcome questions, comments, and concerns.
Here’s a look at some of the most common (frequently asked) money questions I’ve received.
1. How much do I need in an emergency fund?
I love talking about saving money, and this question comes up a lot.
One thing I’ve discovered over the years is that some people think a $1,000 is a big enough emergency fund. But honestly, this amount barely scratches the surface for many.
Yes, this is a good starting point. However, you should really aim for a minimum 3 to 6 month’s of income (or basic living expenses). This is considered a fully-funded emergency fund.
But although 3 to 6 month’s of income is typical advice, some people are more comfortable with 12 month’s of income or basic living expenses.
2. How much should I spend on fun each month?
This is another excellent question, and I had to include it because “fun” is what ruins a lot of budgets.
Now I recently spoke about the 50/30/20 rule of money, which encourages spending no more than 30% of your after-tax income on wants. This includes entertainment and recreation.
Keep in mind, though, your “wants” also include other expenses like subscriptions, hair appointments, gym memberships, etc. So obviously, you can’t spend the entire 30% on fun (or at least you shouldn’t).
So as far as how much to spend, I’ve seen advisors recommend spending no more than 5% to 10% of your after-tax income on recreation and entertainment each month.
For example, if you bring home $3,500 a month, you should cap your fun budget at $175 to $350 a month.
You have to be reasonable, too. So if you need to increase your savings and/or debt repayment efforts, keep the amount you spend closer to the lower end of this percentage.
3. Is debt ever good?
There are varying opinions on this.
Some people believe all debt is bad debt. In which case, they think you shouldn’t use a credit card, finance a car, and they suggest getting rid of a mortgage as soon as possible.
In my opinion, though, bad debt is defined as “debt that isn’t making you money, or any debt you don’t manage responsibly.”
Depending on your career path, you might need a college degree which often requires a student loan. And if you buy a house, you’ll probably need a mortgage loan.
The key is being smart with the debt you have and not getting in over your head. Therefore, a degree should pay for itself, buying a house shouldn’t leave you house poor, and you should pay off credit card balances every month.
4. When should I start investing?
A general recommendation is to save a fully-funded emergency fund “before” you invest outside of your retirement account. This makes sense because you’ll need liquid cash to get through a financial hardship.
A common suggestion is to build a rainy day fund first (which could be $1,000 to $2,000). Next, enroll in your employer’s 401(k) or open an IRA. Once you have your retirement account set up, work on saving a fully-funded emergency fund – and then start investing.
If you want to start investing sooner – on a smaller scale with less money – one option is micro-investing with Acorns. You can sign up and link a debit or credit card to your account. Acorns will round up your purchases to the nearest dollar, and then invest your spare change in a diversified portfolio of ETFs.
5. Where should I keep my savings?
I think a regular savings account is a great place to store cash for immediate access – maybe keep a minimum $1,000 in this account.
But I don’t think it’s the right place for the majority of your savings account. The interest earned with a regular savings is pennies, and truthfully, you can do a lot better with an online high-yield savings account. One option is CIT Bank’s Savings Builder account. I like this account because it includes an “accountability factor” to help you save consistently.
6. Should I save first, or pay down debt?
This is another question I’m asked frequently. And honestly, I don’t think it’s necessary to have a fully-funded emergency fund before paying down debt. However, you should have something in savings before starting a debt repayment journey.
Here’s why: If you don’t have anything in savings, it only takes one emergency to push you deeper into debt. So prioritize saving a rainy day fund or a small emergency fund first. Once you have something in savings, you can then prioritize paying off debt.
Another option is splitting your extra money between savings and debt repayment. If you have $500 a month, you might save $250 and put the other $250 toward debt.
7. How to improve my credit score?
To build a better credit score, you must first understand the factors that make up your score. If you don’t, your credit decisions could unintentionally lower your score.
The first factor is your payment history. This makes up roughly 35% of your score, so it’s vital to pay your bills on time.
The second factor is the amount of revolving debt you owe, which makes up 30% of your score.
Credit card debt is a type of revolving debt. Therefore, maxing out your credit card accounts – or keeping high balances – means your credit score might not be as high as it could. To improve your score, work on reducing these balances. Keep them under 30% of your credit line.
The other three factors include the length of your credit history (15%), credit mix (10%), and new accounts (10%). These make up a smaller percentage of your score, but also play a role in boosting your rating.
With regard to the length of your credit history, patience is key. Don’t expect an 800 score overnight. This happens with time.
As far as credit mix, diversifying helps your score because it shows a pattern of managing different types of credit responsibly. But don’t open a new credit account for the sake of having one. Only apply for new credit when necessary.
This leads to the fifth factor that makes up your score – new credit. Applying for too many credit accounts in a short span of time can hurt your score. It’s believed that each inquiry can reduce a score by about two points. So if you apply for 10 credit accounts within a month (and you’re not loan shopping), you might lose as much as 20 points.