Money Questions You Should Be Able to Answer
Americans are really worried about money. This is understandable: savings are low , expenses are high, we are taking on more and more debts, and sometimes it seems that we just never make enough money to retire or take the vacation we dreamed of.
One way to ease your monetary tension a little is to know the basics of your financial situation. This may sound obvious, but ask yourself – when was the last time you checked your 401 (k) fees? Do you know the interest rate on your credit card?
So how much do you really know about your finances? If you are like most people, probably not a lot. Here are some questions you should be able to answer.
How much debt do you have?
A 2015 study found that Americans “estimated their debt to be about 40 percent less than their credit card debt as claimed by their lenders,” and “indicated that their total student loans were about 25 percent less than the one on the credit reports, ”according to The Atlantic . This is not good. If you are going to pay off your debt, step 0 is to find out how much you have.
Bonus question: how long does it take to pay off the debt? If you don’t have a good idea, it means you don’t have a plan to pay it off. And you should. Your plan should indicate how long (in months and years) it will take you to pay off the debt, and when you plan to increase payments. If you are married or in a long-term relationship, you need to know how much debt your partner has because that affects you too.
Some debts (such as student loans) will take time to pay off, and that’s okay. But a flexible plan will make it more manageable.
How much money is in your savings account?
This may sound like an easy question to answer, but when was the last time you checked your savings account balance? Knowing how much you’ve set aside will help you learn about your spending habits and be able to make a plan (yes, another one) for accumulating a cash cushion.
If you have hidden expenses in excess of a few months (or even several thousand, depending on who you are), you might consider transferring some of them to an IRA, brokerage account, or some other purpose. Again, if you are part of a couple who share finances but let their partner do it all, this is doubly important. You need to know how much you have. This is the first step towards financial freedom.
What is your credit card balance? What are the interest rates on your credit cards?
Chances are, you no longer use accounts for many of your day to day expenses. It is easier to swipe ( or wave ) a plastic card or transfer funds through an application than to hand out cash. This means that you can easily overspend.
But it’s important to keep track of your credit card balance every month. You can usually receive text messages about transactions and balances, or make it a habit to check your bank’s app every day. To maximize your credit rating, try not to exceed 30 percent of your limit and repay it within a month.
If you can’t pay your credit card bill every month – hey, life happens – you need to know how much interest you will be charged. This will help you prioritize which debt to pay first (highest annual interest rate), which card to use in an emergency (lowest annual interest rate), and may prompt you to look for a card with a higher rate overall.
What are your 401 (k) fees?
This is not something you need to remember, but you should look at the commission when you sign up for a 401 (k) and add funds. A recent survey by TD Ameritrade found that 60 percent of investors “either didn’t know if their plan was charging a commission, or they mistakenly thought they were not being charged anything,” writes Walter Upgrave of Real Deal Retirement.
This is a costly mistake. Even a seemingly small difference in royalties (say 0.25 percent versus one percent) can make a big difference over the course of 30 years. Not only because the board is eating up an increasing portion of your savings, but also because those losses are getting worse.
Another reason? This Morningstar study shows that “lower cost funds tend to perform better than their higher cost counterparts.”
What should be your fees? According to Josh Robbins , director of strategy for America’s Best 401k, “somewhere between half a percent, and at a high level, maybe three-quarters of one percent.” And all-inclusive means not only the fees charged by your plan provider (such as Vanguard or Fidelity), but also by the mutual funds that you invest in.
So check your fees that most companies provide on their websites. And if your employer doesn’t provide enough low-commission options, consider starting an IRA.
How much money do you want to make?
I want to make it clear that money is not everything, and that there are many factors beyond our control that affect how much we earn. It’s easier to work in order to make more money – this is not the way to live. Nevertheless, I include this question because I believe in the fact that you need to set goals and there is something to strive for and what to strive for in different areas of life. In your financial life, having a number can help you make career decisions and make your life better.
Ask yourself: What are you working towards? If it’s financial independence, well, you need to earn a certain amount of money in order to be able to save enough to retire early or retire on your own. If it’s for your family, they have needs and wants that are likely to be worth the money. Only you know what this number or range is. It should be flexible and you shouldn’t berate yourself if you don’t get there by date X (again, you can’t control everything).
Of course, not everything is and should be connected with money. But since 99% of us must work to earn our living, there is nothing wrong with setting goals in order to get the most out of them.
If you can’t answer these questions, take some time this weekend or the next day of your personal inventory to sort them out.