What is an IRA? How much should you save? What types of debt are acceptable? Here are clear responses to your fundamental money questions.

Financial literacy isn't universal, and navigating money discussions often feels uncomfortable. Many of us rely on outdated lessons from our parents, which might fall short in today's complex landscape.

Below are answers to ten essential personal finance questions:

What’s a Credit Score?

One of the most common inquiries about money is about credit scores. A credit score is a numerical value that lenders use to evaluate the risk of lending to you. The FICO score is the most widely recognized, calculated based on factors like your debt levels, payment history, number of credit accounts, and any outstanding bills.

Your credit score ranges from 300 to 850, influencing significant financial decisions like purchasing a car or renting a home. A low credit score can hinder your ability to secure these opportunities.

Think of your credit score like a delicate plant that needs nurturing. Regularly check your score and review your credit report at least annually to ensure its accuracy and to protect against identity theft. You can access your score for free online at any time.

Bottom line: Your credit score is crucial for your financial wellbeing, so be aware of where you stand.

What Is a 401(k)?

A 401(k) is a retirement savings plan provided by employers, letting you allocate a portion of your paycheck toward retirement savings. This money is typically invested in a mix of stocks and bonds, growing your savings over time. You can choose your investments based on your risk tolerance.

Why not just stash all your money in a regular savings account? Because funds left idle for decades can lose value due to inflation.

The $20,000 you save today won't maintain its value in 30 years if it's simply sitting in a savings account. A 401(k) keeps your money in the market, which tends to outpace inflation in the long run.

Many companies offer matching contributions to your 401(k), which is essentially free money for your retirement.

Bottom line: If your employer provides a 401(k), consider participating. Consult your HR department to find out about the best investment options available.

What Is an IRA?

IRA stands for “Individual Retirement Arrangement” or “Individual Retirement Account,” a vehicle for retirement savings that can be invested on your behalf. IRAs can be used alongside a 401(k) or as an alternative if your employer doesn’t offer one. Like a 401(k), IRAs let you choose from various investment options to grow your savings. However, be mindful of contribution limits: in 2019, you can contribute $6,000 annually, with an extra $1,000 allowed for those over 50.

There are two primary IRA types:

  • Traditional IRAs: Contributions are tax-deferred, meaning you pay taxes upon withdrawal. Income levels don't restrict contributions.
  • Roth IRAs: For 2019, the income limits for contributions are $122,000 to $137,000 for singles and $193,000 to $203,000 for married couples. Withdrawals are tax-free, but contributions aren't tax-deductible.

Bottom line: If you lack a 401(k), absolutely consider setting up an IRA for retirement savings.

What Does Investing Mean?

Investing involves putting your money into assets—like stocks, commodities, or real estate—with the expectation of earning a return. Retirement accounts are an easy starting point for investing, but there are various avenues available. You don’t need a hefty sum to begin.

Bottom line: Only invest when you have a solid savings foundation and a clear understanding of your investments.

What Is ‘Good Debt’?

This varies by individual circumstances. While there are general questions to consider when evaluating debt, ultimately, only you can determine what constitutes good or bad debt.

Bottom line: Ideally, student loans should lead to better career opportunities and higher income, while accumulating $30,000 in credit card debt for lifestyle inflation is not advisable.

How Much Should I Put in an Emergency Fund?

This amount is personal and varies based on your living costs. A common recommendation is to save three to six months’ worth of living expenses for emergencies. This ensures that you can maintain your lifestyle in case of sudden job loss or unexpected challenges.

Bottom line: An emergency fund is essential, and it should be your priority before spending on luxuries or vacations.

What Is a Budget? Do I Need One?

A budget helps you track how much money you spend versus what you earn.

Yes, budgeting is important. It can take on various forms, from strict expense tracking to simply automating transfers to your savings account. You might also adopt the 50/20/30 rule or maintain separate accounts based on your spending habits.

Bottom line: Budgeting fosters a sense of control over your finances. Ask yourself: how much control do I need?

How Much Do I Need for Retirement?

This depends on multiple factors: your current age, retirement savings, annual income, and desired lifestyle in retirement. There are many retirement calculators available to help clarify your situation.

Bottom line: Aim to save at least 20 percent of your income. Pursuing raises and promotions will help bolster your savings.

How Many Credit Cards Should I Have?

That’s a personal decision. Consider your current credit score and how well you manage existing cards. While a variety of cards can enhance your score, excessive cards can lead to trouble. Don't open new accounts if you're overwhelmed with debt, but if you've managed your existing cards well, look for options with better rewards. Just avoid closing old accounts with positive histories, as this can negatively impact your score.

Bottom line: Maintain as many credit cards as you can responsibly manage.

What Is APR? How Do Interest Rates Work?

APR stands for “annual percentage rate.” It’s crucial if you plan to carry a balance on your credit cards. APR represents the interest charged on any unpaid amounts from your last statement. If you're considering credit cards and anticipate carrying a balance, comparing APRs can help you choose wisely.

Pro tip: You can often negotiate your APR, especially with long-held cards that you've consistently paid on time.

Bottom line: Avoid carrying credit card balances unless necessary; using your cards responsibly can minimize the impact of APR.

These responses are designed to guide you toward better financial preparedness. If you have more questions, feel free to reach out at info@savinghunt.com.