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When it comes to building wealth, ignorance is not bliss. Staying informed and continuously learning will help you stay on top your investment strategy and financial objectives. Whether you’re focused on improving your credit score, saving for a rainy day, or buying a home, having a solid grip on reality will help you make better financial choices. I asked around to understand what people were most curious about and below have compiled the top 8 personal finance questions answered.
This is by far the top personal finance question and to be honest it’s the most difficult to answer as it will almost always depend on where you are in life and what you want to accomplish. If I’m speaking to someone who is up to their eyeballs in debt, I would say they should probably tackle that mountain first. However, if I’m speaking to someone with decent disposable income and little to no debt, the conversation will likely take a different turn. Additionally, some people are just looking to get through the next few months vs. others are thinking about a much longer timeline, well into retirement. Unfortunately there is no clear cut answer to this question and in order to answer it, you have to understand your place in your financial journey and where you want to be in the future. Not sure how to get started, check out our post on the best personal finance books or best personal finance podcasts for some inspiration.
I’m thrilled when I hear people ask this question. 40 years ago people would likely have told you they plan to live off their savings or social security in their retirement years. In today’s world however, heavy inflation coupled with stagnant wages has made this a shaky plan at best. I always recommend people allocate at minimum 20-30% of their income to some kind of retirement or long-term investment plan. Allocating these funds to a tax-advantaged account like a Roth IRA or 401k ensures that your money has the opportunity to grow over time and is tucked away in a place where you’re less likely to reach for it (these come with early withdrawal penalties). Many employers will also sweeten the deal and match your contributions to a 401k. Feeling secure for the future is a common source of anxiety for many, making this one of the top personal finance questions I get asked.
Honestly if it were up to me I would do away with credit scores. While I understand the concept or the reasoning behind a credit score, in practice I think it’s a faulty calculation that gauges how well you can game the system vs. measuring how good you are at managing debt. The number will frequently fluctuate and can change as often as monthly. However many institutions use credit scores as a way to evaluate your ability to pay off debt and whether you are a desirable candidate for taking on a loan. In fact, I can’t remember ever a situation that involved taking on debt where my credit score wasn’t evaluated. Because this number is so important, a frequent question asked is always “how I improve my score”? I would say, if you know the equation, then you know the answer. Credit scores are a mix of your payment history, weight of payments/amount owed, length of credit history, new credit, and type of credit. While this may seem like a lot, the short answer is simple. Pay off your debt every month and on time and keep your credit balances low (ideally less than 30% of the limit). Showing a consistent payment history is the best way to improve your score. Additionally, there are companies like CreditRepair.com that will help you sort through your current situation and provide recommendations on how to improve your score. For a more detailed plan on improving your credit score you can check out our post on 5 Ways to Improve Your Credit Score.
I often hear from people that they find investing in the market to be completely overwhelming. I can completely relate to this sentiment. When I first started I had no idea what I was doing and just ended up invested a few hundred dollars in random companies that really didn’t do much for my portfolio. In fact, I ended up selling them and was so discouraged I stopped investing for a while. Investing in the market is made up of two components: financial liquidity and emotional fortitude. The first piece is simply your financial ability to put aside money. With fractional shares available on select apps, it’s easier than ever to start investing with nominal funds, lowering your barrier to entry. The second component however is what’s most difficult for people which is building emotional fortitude. The market will fluctuate. You will go through days, weeks, or months where you are losing money and you have to learn to be okay with that. In fact, we’re currently going through a bear market and everyday I just have to grit my teeth, trust the process, and keep going. My best advice is to start with an amount you feel comfortable “losing”. For me, that amount was a few hundred a month. Apps like Acorns even allow you to start investing with spare change. Do some research as to what sorts of investments work best for you. Our post on “Investments Tips for Beginners” will help you get started.
Like many personal finance questions, this one is very loaded and again highly dependent on the type of person you are. If you are someone who is swimming in debt or is new to budgeting, I would probably not recommend opening a credit card. The benefits of building credit and racking up rewards points is nothing compared to the overspending and money mismanagement you’re likely to face. In fact studies show that people spend 12-18% more when using a credit card vs. paying cash.(1) “But what if I pay my balance off every month?” Great-you are one of the 44% of individuals who are able to pay their credit card balance in full every month. (2) Less than half of individuals are able to pay their balance in full which means that over 50% are subject to some kind of interest rate or penalty. In fact, this is how credit card companies make money-off your inability to pay your balance. If you are someone who has their spending under control, then sure why not-open that credit card. Having a credit card helps you build credit history which helps with your credit score. Credit cards can also offer rewards in the forms of points or miles that you can redeem for trips and other purchases. However, consider the points just a bonus-your main priority should always be to keep your spending on track and that monthly balance to zero.
Mortgages are always the source of a top personal finance question because there are so many unknowns. The idea of a mortgage is actually quite simple. You are seeking a loan from a bank or lending institution for the purposes of buying a home. Most mortgages are granted on a 15-30 year term affixed with an interest rate. The interest rate is basically your cost to take on a loan or how the bank makes money. Some interest rates are fixed, others are variable, depending on the agreed upon terms. Each month, you will pay back the bank a set amount which is comprised of a principal balance plus the interest rate. What most people don’t know, is that the majority of the interest is actually paid upfront. This is the bank’s way of ensuring that they are paid first before the balance of the loan is paid off (again this is how they make money). The terms of the loan including the length and interest rate will vary by lender so make sure you’re crystal clear on what you’re signing.
The short answer is no. Not all home purchases require a 20% down payment. Banks and lenders these days offer some pretty amazing terms especially to first time home buyers. However, that doesn’t mean that a 20% down payment isn’t recommended which is why this is consistently a top personal finance question. The down payment is just the first chunk of what you’ll eventually pay to own your home. The larger the down payment, the smaller the mortgage you take out, the less interest you’ll pay. Additionally, putting down a larger down payment can grant you more favorable interest rate terms with the bank as they see you as a more desirable candidate. Some properties such as CO-OPs may require you to put down a minimum 20% down payment so just be ready for that.
When you sell an asset, the profit you make on the sale is known as capital gains. How much you pay will depend on how long you’ve held the asset. If you held the asset for less than a year, it’s considered short term; anything longer than a year is considered long term. Short term capital gains are taxed just like ordinary income up tp 37% whereas long term capital gains are taxed at increasing thresholds of 0%, 15%, or 20%. (3)
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