We gathered some financial and budget questions from our nearest and dearest and posed them to Learnvest’s Alexa von Tobel. Her advice, below.
I don’t want to worry about money as much as I do now. What’s the smartest thing to do to make the biggest difference?
Get a plan. When it comes to tackling any major goal, the first step is having a roadmap to get there. Start by thinking about where you want to be in 5 years: Do you want to buy a home? Have a child? Travel the world? Figure out how much you’ll need to achieve that goal and by when you want to achieve it…And then break it down into monthly pieces. For example, need to save $50,000 for a down payment in five years? That will be just over $800 per month for the next five years. You can achieve your financial dreams, as long as you prepare!
“Figure out how much you’ll need to achieve that goal and by when you want to achieve it…”
There are a lot of financial terms being thrown around in the news these days. Can you define them and tell us what they mean for our households?
The Debt Ceiling: The debt ceiling limits how much the government can borrow. One of the ways the government is able to finance programs and expenses is by borrowing money—sometimes, from us. If you own a government bond, you’re lending them money! The ceiling was established to keep our government from going too far into debt, and when we hit the ceiling, Congress voted on whether to raise it. If they didn’t raise it, the government would default, which means it would be unable to pay its debts—a huge deal for the national and global economy.
The Fiscal Cliff: This term usually refers to the end of 2012, when a series of major fiscal policies were set to either expire or begin, making a sudden impact on the American economy. In early January, Congress voted on a series of measures to keep us from plunging off the cliff, including the expiration of the payroll tax cut, the extension of Bush-era tax cuts and an increase on income taxes for high earners. One of the primary effects you’ll see in your daily life is that more money will be withheld from your paycheck to satisfy the increased payroll taxes.
Inflation: Inflation is a rise in the general price level of goods and services over time measured by the Consumer Price Index (CPI). Because prices rise, your money is able to buy less. Historically, inflation has increased at an average of 3% each year. (That means your money essentially loses 3% of its buying power each year!) The more money you save, the better. Consider that if you currently live on $50,000/year, you’ll need around $121,000/year to maintain the exact same standard of living in 30 years.
I’m ready to organize my finances once and for all. What do you recommend?
With endless accounts, bills and receipts floating around, feeling truly organized can be challenging. I run my financial life like I run my social life. I recommend setting up calendar alerts for everything so you never miss an important date. Forgetting to pay a bill should never happen, and it won’t if you have everything organized properly. I run my financial life like I run my social life. It’s all too easy to lose account statements in the craze of your inbox, so set up a separate email account just for your money. Log-in on a regular basis and make sure nothing important slips by you. (For example, I use email@example.com).
I also recommend using a tool to aggregate all of your accounts in one spot. For example, our Money Center is a free way to do this and helps you track and visualize where every dollar goes.
“I run my financial life like I run my social life.”
I don’t know where my paycheck goes each month. How can I budget?
Our favorite budgeting method is the 50/20/30:
- 50% of your budget should go to your Essentials. These are the expenses you always have to pay to keep your life going: Your rent/mortgage, transportation, groceries, and utilities.
- 20% should go to your Priorities. These are expenses that help you accomplish important financial tasks, such as paying off loans, building savings, saving for retirement, and more.
- 30% should go to your Lifestyle. This is what’s leftover, which is what you get to live on and enjoy now, on expenses such as dining out, shopping, and other fun spending.
My husband and I are about to have our first child. Can I afford to be a stay at home parent?
Making the move from a full time career to running the household full time is a big change financially and emotionally. For many, this is the ultimate dream, but there’s a lot to consider. First, do you have a solid cushion of savings in the bank? Second, how would your costs decrease if you didn’t go to work every day (e.g. no more commuting expenses and way less childcare)? What would be more expensive (e.g. healthcare)?
Our best advice is to do a trial run, which means putting 100% (yep, every dollar) of your net pay for a month into savings so your household can try living off of just one income. Assess after a month…or three.
I’m ready to merge my finances with my significant other. How do we do this?
Merging your finances is a big step. I hear from many couples who decide to do this as soon as they move in together, and there are a few different strategies. My favorite is a system that lets you contribute equally (regardless of differing incomes) and have both joint and personal accounts. Start by setting up a joint account and contribute equal percentages of your paychecks (for example: You take home $5,000/month, he takes home $4,000. You both put in 50%: $2,500 from you, $2,000 from him). This fund will be used for all of your shared bills, like rent, groceries, and trips you take together. Whatever money is leftover is yours and yours alone—it makes it a whole lot easier to surprise your significant other with a gift. Even as you merge your lives, it’s still important to feel a sense of ownership over your earnings. I think of this strategy as the best of both worlds!
“Even as you merge your lives, it’s still important to feel a sense of ownership over your earnings.”
I’ve saved up a down payment for a home and am ready to buy. What should I do next and who should I talk to?
First, we recommend having a 20% down payment saved up. If you are chomping at the bit to take advantage of today’s low interest rates, at the very least you should have 10% saved up for a down payment. As a rule of thumb, you can afford a home that costs 2-3x your household gross income.
Know that a home is a long-time investment. Historically, homes have appreciated 2-5% per year. To ensure long-time love, search for a home that can accommodate potential lifestyle changes such as a new job in a different location or a growing family. Next, run all the numbers.
Before you fall in love with a house that’s out of your price range, do the math to figure out what you can afford. Don’t forget about added costs of home purchase and ownership. Budget for property taxes, homeowner’s insurance and unexpected repairs, plus any upkeep (like yard care), which can total up to be around x percent of the cost of the house itself.
As you get closer, shop around for financing—it’s probably the least fun and most stressful part of the home buying process, but it’s also the most important. Shaving even half a percentage point off your mortgage rate can save you thousands of dollars over the life of the loan, so make sure you get more than one quote.
What can I do to improve my credit score?
Your credit score is the only grade that matters after you graduate. Scores range from 300-850 and are meant to represent your financial responsibility. They help potential lenders determine whether to approve you for a loan or credit card—not to mention what interest rates you’ll be given.
You can check your credit score for free on Credit Karma. Aim for a credit score above 760. If you’re not there yet, here’s what to do:
Check your credit report. If you spot any errors, contact the credit reporting bureaus to correct!
Attack your debt. Getting rid of credit card debt will be most effective.
Know your limits. Aim to use less than 30% of the limit on each card. Maxing out your card is a big no-no (even if you pay it off in full each month!).
Don’t cancel your oldest card. The further back your credit history, the better your score.
Avoid late payments. Late payments ding your score majorly. If you have any on your record but have been perfect since then, call your creditor and request that they remove your past late payments.
Say I have an extra $1K, with inflation going up, I hear that the bank is not necessarily the best place to keep my savings. Where should I be investing my money and how do I even begin to do that?
First, know the 5-year rule: If you’ll need that $1k in the next five years, it’s safer to keep it out of the market. Investments can be volatile in the short-term, and you’ll want that money to be there when you want to use it!
Before investing, you’ll need to determine your risk tolerance. Generally speaking, the younger you are, the more risk you can take (because you have more time to bounce back). You’ll find many risk tolerance quizzes online.
If you have a lower risk tolerance, then a high yield savings account might be the best option. Many online banks, like ING Direct, Ally Bank or Smarty Pig offer good rates. You can compare rates at Savings Account.
If you decide to invest, start by doing your research—you’ll need to decide where to open an investment account (being mindful of fees) and what to invest in (such as mutual funds or ETFs, which are comprised of multiple stocks).
If I’m interested in starting to invest some of my money in the stock market, what are some solid resources you’d suggest for me to learn more about how the market works? And, would you recommend going through a broker or going it alone?
Investing is a complex topic, so LearnVest has built many resources to help you through it. We have a free Start Investing Bootcamp—a 7-day email program that will walk you through the basics.
When considering where to open your brokerage account, you have a few options, including full-service brokers and discount brokers. A full-service brokerage firm provides guidance—at a cost, while discount firms offer limited (if any) guidance. You can also use a discount broker with the help of a fee-only financial planner on the side. Decide whether you need active investing support and whether you can afford such services. Remember that with a full service firm, the higher fees will essentially limit your returns (every additional 1% in fees that you pay is 1% less that you earn that year).
Note: For all you international readers, please keep in mind that some of the information and advice Alexa provides is specific to the U.S.
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