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First things first, let’s establish the purpose of this list. This list of money questions was not developed to shame anyone. If you don’t know all the answers, it certainly doesn’t mean you ought to give up on personal finance. Personal finance is an ever-evolving subject area. And just like the name states, it’s personal. So even if you can answer all of these questions, it doesn’t mean that you know everything you need to and should quit learning. Your finances will live and grow with you throughout your entire life.
Understanding the following Q&A is a way to help you establish where you’re at in your understanding of personal finance. Use any gaps in your knowledge to help you develop a path to reach your financial goals.
So without further ado, here are the 30 money questions you should be able to answer by age 30:
1. Do I need a budget?
Everyone needs a budget. Yes, you – even you need a budget. While this may be a cliche, it’s absolutely true: if it can be measured, it can be managed. Perhaps you may only need a very simple budget, but there are 4 essential reasons that every single one of us needs a budget:
– Simply spending less than what you make is not budgeting
– A budget keeps you prepared for the unexpected
– It makes your good (and bad) spending habits very easy to see
– Budgeting keeps you excited and focused on the future
2. How much money should you save in an emergency fund?
Financial professionals suggest building an emergency fund with 3-6 months worth of expenses. Take note that it’s 3-6 months worth of expenses, not 3-6 months of income. Using that handy budget of yours will make that calculation easy peasy.
Mind you, 3-6 months worth of expenses is a wide range that attempts to account for differences in factors like sole family providers versus dual-income households, and salaries which may be more or less stable than average. Some people are also just more comfortable with a bigger buffer.
3. How much should I be saving for retirement?
This answer has quite a bit of variability to it depending on your age, current spending and saving habits, expectations for retirement income, as well as your lifestyle preferences now and in the future. However, a good rule of thumb is to invest between 10-15% of your pre-tax income each year. A rule of thumb is just that though, a rule of thumb.
Determining a concrete saving and investment plan specific to you is one of the most beneficial things you can do for yourself and your family. If this isn’t something you feel confident developing on your own, using tools like a retirement planning calculator, net worth calculator, meeting with a financial advisor, and/or taking a class will be well worth your effort.
4. What’s an IRA?
An IRA is an individual retirement account. These differ from employer-sponsored retirement accounts such as 401(k)s and 403(b)s. There are 3 different types of IRA’s, all of which serve as investment vehicles with varying benefits. So, while the term IRA gets thrown around generally, it’s important to understand that there are some major distinctions between the different types of IRAs.
The 3 types of IRA accounts are Traditional IRAs, Roth IRAs, and Rollover IRAs. The greatest differences between these are whether or not they offer tax-deferred growth or tax-free growth. IRAs also have contribution limits each year, which vary slightly depending on your age and tax filing status.
5. What’s the difference between a Traditional IRA and a Roth IRA?
A Traditional IRA allows you to put pre-tax dollars into your investment account. Some of the advantages to this type of investment account are that it reduces your current taxable income as well as allowing you to invest more money since it is pre-tax. However, when you begin taking disbursements from a Traditional IRA, you’ll pay tax both on the principal amount you invested, as well as all of the gains.
In contrast, a Roth IRA allows you to invest post-tax dollars into your investment account. A major benefit to this investment model is that when you begin taking disbursements, you won’t have to pay tax on any of the gains. That’s a tremendous benefit considering how long your retirement funds can grow over the lifespan of your account.
6. What’s a 401(k)?
A 401(k) is an employer-sponsored retirement account. It is classified as a defined contribution plan. Some companies offer a percentage of matching contributions, thus the amount they contribute alongside the employee is pre-defined. Matching contributions are a major benefit of utilizing a 401(k) account because it is essentially free money being added to your retirement account on your behalf.
Some companies are also starting to offer a Roth version of their 401(k). Regardless of type, it’s important to understand if your employer requires a vesting period. A vesting period is essentially a waiting period – meaning if your employment ends prior to the end of the vesting period, you likely won’t be able to keep any of those matching contributions.
7. What’s my net worth?
Your net worth is the total of all of your assets (savings, investments, cash, etc) minus all of your liabilities (debt, mortgage, student loans, credit card balances, etc). This can be pretty tedious to do by hand, but luckily there are some pretty fantastic apps out there that simplify the process and make all of your accounts visible in one spot. Our favorite here at The Ambitious Dollar is Personal Capital’s free net worth calculator.
8. What’s my credit score?
Your credit score is a number that falls between 300 and 850. It is essentially a signal to lenders letting them know how likely you are to repay your debts on time. It is calculated based on things like how many lines of credit you have, the average age of your lines of credit, how much debt you have, and how frequently you’ve made on-time payments. If you don’t know your credit score, it’s completely free and easy for you to access through an app like Credit Karma.
9. What’s a good credit score and why does it matter?
Credit scores are categorized in 5 levels: very poor, fair, good, very good, and exceptional. A “good” credit score falls between 670-739. Having a good (or better) credit score matters because, as just mentioned, it’s what lenders use to determine whether or not you’ll be a good borrower. If they think you’ll be a good borrower, they’ll be inclined to offer you better interest rates, reward credit cards, etc. which will reduce the cost of debt you incur, and open up other earning opportunities.
10. How can I monitor my credit score?
Under the Fair Credit Reporting Act, you have the right to a free copy of your credit report (which is used to determine your credit score) once every 12 months. However, monitoring your credit score more frequently than that can be very beneficial to stop fraud and keep on top of your overall financial health. Fortunately, a number of credit card companies are beginning to include your credit score with your monthly statements, and there’s also a bunch of great apps at your disposal. The Credit Karma app is our personal favorite here at the Ambitious Dollar.
11. How can I improve my credit score?
Some of the most important things you can do to improve your credit score are to:
– Pay your bills on time. If you aren’t very good at remembering due dates, automate your bills to pay directly from a credit card or checking account.
– Reduce your debt.
– Lower your credit card utilization. To reduce your utilization, you can either increase your credit limit (most credit cards make it easy to request) or lower the amount you charge on your credit card each month.
– Avoid taking out unnecessary lines of credit.
12. What’s an APR?
APR stands for annual percentage rate. It’s usually in the fine print of credit cards, mortgages, etc. that we all skim past while looking for the interest rate. In a nutshell, you can think of the interest rate as something to pay attention to in regards to your monthly payments. APR, as stated in the name, is an annualized version of the interest rate. APR also includes other fees wrapped into its rate.
For instance, the APR on your mortgage may also include costs like lender fees. Another example is if you opt to pay the minimum amount and carry a balance on your credit card. In doing so, you’ll be charged the stated interest rate plus a margin assessed by the credit company. That total is the APR.
13. How many credit cards should I have?
If you want to take a hint from the average American who has excellent credit, the answer is 3. Although this is not a hard and fast rule. The important thing is to remember that opening additional lines of credit can impact your credit score.. It may also incentivize you to spend more than you should.
However, there are lots of great credit cards out there with impressive incentives, so just because you may have 4 or 5 credit cards does not mean you have too many. Focus on making sure you pay your bills on time, keep your credit utilization low, and be wary of fees that may outweigh the benefits of certain cards.
14. What is a CD?
A certificate of deposit, or CD, provides a premium interest rate for customers who deposit a lump sum into an account and leave it untouched for a predetermined amount of time. Compared to many other types of investments, CDs offer fixed, safe, and federally insured rates for your money to grow. They are typically considered low-risk investments, but with that, they also provide lower returns.
The longer the term of your CD, the higher the interest rate will be. However, rates fluctuate quite a bit between banks, so it’s essential to shop around. CD’s are not all created equal either. Some offer fixed rates, some are variable, and not all of them are penalty-free in case you decide to take your money out early.
15. What’s the difference between stocks and bonds?
When you buy a company’s stock, you are buying a piece of that company in the form of ownership. There are no guarantees that you’ll reap a return for your investment, but if you did your homework and the company is doing well, you’ll either see that stock grow in value and/or be paid a dividend.
In contrast, when you buy a bond, you are essentially buying someone else’s debt. You can think of yourself as a lender to whoever issued the bond. Essentially, you are giving the bond issuer funds and in return, they are promising to pay back your principal investment with a guaranteed interest rate.
Stocks are generally higher risk with greater opportunity for return. Bonds, in contrast, are lower risk but with lower return potential. A well-diversified portfolio will likely have a mix of both.
16. What are dividends?
As we just went over, some stocks are dividend-paying. When a publicly-traded company makes a profit, its board of directors can determine if it wants to pay its shareholders dividends. The board can also determine how much to pay in dividends. There’s a myriad of reasons why a company may choose to pay or not to pay dividends, but a smart investor would do well to reinvest them!
17. How does compounding interest work?
Let’s start with simple interest. Simple interest is earned on the principal amount only. For example, say you have $2000 in an account which earns 5% in simple interest. You would earn $100 in interest bringing the total in your checking account to $2100. In future years, you would continue to earn 5% interest, but only on the principal amount in the account (excluding interest earned).
In contrast, compounding interest pays you interest not only on the principal amount, but also on any interest you’ve earned. So, your interest starts earning you more interest. In year one, that $2000 would gain $100 of interest at 5%. Then, in year 2, you would earn 5% interest on the full total of $2100 bringing your account total to $2205. By year 10, you’d have $3257. This is where time becomes an asset and why people refer to compounding interest as the eighth wonder of the world.
18. What’s the difference between active and passive funds?
An actively managed investment fund is one in which a financial manager or team is actively involved in making decisions about how to invest the fund’s money. Passive funds, on the other hand, generally follow some sort of market index and do not involve any parties actively managing them. A very commonly followed index for passive funds is the S&P 500.
Because actively managed funds do not simply follow an index, they have the potential to “beat the market” – which is why certain people choose this option. However, historically actively managed funds have statistically underperformed compared to broad market index funds. Additionally, actively managed funds often assess higher fees which eat into your investment growth.
19. How much should you spend on housing?
As a general rule of thumb, you should aim to spend no more than 30% of your gross (pre-tax) income on housing. Keep in mind that 30% is not simply your rent or mortgage. It should also include associated costs like utilities, property taxes, HOA fees, etc. However, there’s certainly wiggle room in that 30% depending on what the rest of your financial situation looks like. Taking a look at that beautiful budget you took the time to develop will make it easy to determine whether or not it’s a smart move for you to spend more of your income on housing.
20. How much should you spend on vehicles?
It’s important to remember that a car is a depreciating asset, not an investment. While there is a lot of personal preference that comes into play when choosing a car, don’t forget that it is ultimately a financial decision.
Experts say that you should spend no more than 15% of your monthly take-home pay on a vehicle. But this comes with a caveat. The 15% figure was developed for those with little other debt besides a mortgage. So, if you also have student loan debt, credit card debt, etc. it would be smart to consider spending less than 15% on a car.
Take a moment to consider 2 big picture takeaways:
– If you spend 15% of your income on a car and another 30% on your housing, that’s almost half of your total income. Remember that those are guidelines and you need to consider all of your other necessary expenses before assuming that’s the best guideline for you.
– Your debt to income ratio plays a big role in your credit score – so just because you can pay for it, doesn’t mean you can afford it…
21. What are FSA and HSA accounts?
Flexible Spending Accounts and Health Savings Accounts are financial accounts which can help offset the costs of eligible medical expenses by using pre-tax dollars. Each has corresponding contribution limits, rules regarding rollover funds, and requirements regarding withdrawals.
One of the biggest differences between the two is that an FSA must be set up by your employer. HSA’s do not need to be set up by your employer, but you must be enrolled in a high deductible health plan to be eligible for one. When funding an FSA account, it’s important to know that only a certain amount of money can rollover into the following year. So you’ll want to carefully decide how much to contribute without overdoing it.
Additionally, FSA’s limit when you can enroll or make changes to your plan. On the whole, HSA’s tend to be much more flexible, but can have higher penalties for withdrawing funds prior to a certain age. A less popular but strategic reason to open an HSA is to use it as an investment vehicle for retirement.
22. What’s the difference between a premium and a deductible?
Don’t we all love healthcare jargon. A premium is what you pay each month to retain your active health insurance plan. This is the amount to include in your monthly budget! Most insurance plans have a deductible, but not all. For plans that have a deductible, it’s the amount you’ll have to pay towards your medical bills before your insurance will kick in to cover the remainder or negotiated amount.
23. Should you rollover your 401(k) when you change jobs?
Typically it is in your best interest to rollover your old 401(k) when you change jobs. A direct transfer will allow you to move funds directly from the old 401(k) to your new employer’s 401(k) without owing any taxes for the transaction. For simplicity’s sake, having your money consolidated in fewer places can make it much easier to manage. Not to mention that Americans lost track of over 7 billion dollars of retirement savings in 2017, much of which was simply forgetting about old 401(k)s with previous employers.
Before deciding to rollover your old 401(k) into a new 401(k), one other option worth considering is converting it to a Roth IRA.
24. When will you be debt free?
If you’ve already set yourself up with a budget or use a money management app, determining when your debt free date is will be pretty easy. If you haven’t there are some really great free calculators out there that will do all the heavy lifting for you. Get ready to start the countdown!
25. Should I wait to invest until I’ve paid off my debt?
Probably not. But, this answer requires you to do a little bit of math. First things first, take a good hard look at your financials and decide whether or not you absolutely need to choose between doing one or the other. Paying off debt and investing for your future are both essential to your financial health. Sometimes when it seems impossible to do both, it may mean you need to revisit that budget and cut out additional unnecessary expenses.
If you determine that you can’t afford to do both, this is where the math comes in. If you have debt with an interest rate above 4%*, it may be worth it to hold off on investing and put more money into paying off that debt faster. Paying it off faster will cost you less in interest.
On the flip side, if your debt has an interest rate lower than 4%*, you will likely make more money by investing your funds than you would save by trying to pay off your debt early.
*The S&P 500 has had a historical return (adjusted for inflation) of 7%. So 4% is a conservative number to start with. Assess your risk tolerance, and when in doubt, talk to a financial advisor.
26. When should I create a will?
Most financial experts suggest that you create a will at the point in which you feel you have enough of anything worth passing on. However, how do you determine that point? The good thing is that wills can be easily updated. Since life is unpredictable, it’s much easier to have one in place and occasionally update it rather than not have one because you tried to wait until the right time.
27. Am I earning as much money as I want to be/need to be?
This is a very personal question and your answer will likely evolve as you age and your needs and desires change. The important thing is to keep tabs on what you’re making and evaluate whether or not that figure supports what you want and need.
If it doesn’t, don’t waste your time hoping and wishing that your income will change. Take concrete steps to ask for a raise, consider pursuing a better paying job, consider going back to school if it will provide a return on your investment, or pick up a side hustle. Go out there and get after it, because no one else is going to do it for you.
28. What is life insurance and do I need it?
Life insurance is a type of policy which pays what’s known as a death benefit to the beneficiaries of the insured individual. While it feels a bit morbid to talk about, this is the whole point of financial planning; to make sure that you and those that count on you are taken care of, regardless of what happens.
Many employers offer sponsored plans which can reduce the cost of attaining a life insurance policy. However, you don’t need to go through your employer to sign up for a life insurance policy. The challenging part is to determine how much is enough, or appropriate for your given situation. Your age, health, and other factors may all influence the cost of a plan, as well as limit the options available to you. Utilizing this comprehensive guide will be a great place to get you started.
29. What is the best way to save for my children’s education?
There are a lot of options, but one of the most popular and tax-advantaged ways for parents to help save for their children’s college education is by opening up a 529 Plan.
A 529 is a state-sponsored plan which allows you to make after-tax contributions (certain states provide additional tax benefits) and lets your investment grow tax-free if you spend those funds on qualified educational expenses. An additional bonus is that the contribution limits are very high which gives you lots of flexibility of when and how to invest.
Essentially, you open a 529 account as the parent, and list your child as the beneficiary. If your child doesn’t use or need all of those funds, you can easily transfer the account to another child or family member as well. Because this type of account was developed for educational expenses, it has much less of an impact on potential financial aid available to your student through the FASFA. However, if all of these funds aren’t used towards educational expenses there are some higher penalties assessed on withdrawals.
30. Who has access to my essential banking information in case something happens to me?
Perhaps you have this information listed in an emergency binder, life box, or through a password management system. Anywhere is likely better than nowhere. The point is to make sure that if something happens to you, the situation isn’t made any more difficult on your loved ones as they try to determine what the next best step is. Most importantly, make sure that your loved ones know where to find all of this information.
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