Personal Finance Questions You Need to Answer
When it comes to personal finances, it pays to be informed.
That means understanding as much about reducing debt or saving for your retirement as improving your credit score or starting an emergency fund. Having a handle on these and other fundamentals will help you make better bottom-line decisions.
Here are 10 personal finance questions you need to address sooner rather than later.
1. Is your emergency fund sufficient?
Experts recommend that you keep enough money in your emergency fund to cover at least three to six months’ worth of living expenses. This may vary based on a number of factors, including:
• Your lifestyle
• The cost of living in your area
• Your income and the long-range security of your job
• The job market for your line of work
• Whether or not you have affordable health insurance
So, if you spend roughly 4,000 each month on essential living costs, your emergency fund should have at least 12,000 to 24,000 in it.
2. Are you ever done saving?
In a word, no. Your savings account should stretch to cover periodic but not unexpected expenses such as routine home and vehicle maintenance, vacations, and gifts for special occasions.
You should also have enough regular savings to pay for acute emergencies like replacing your car’s tires or paying off credit card debt. These aren’t true emergencies because you know these things will occur at some point, but you can’t always predict when they’ll happen so you should still plan for them.
3. If you have children, how will you help fund their education?
As much as you may want to save for your children’s future, don’t neglect yours in the process. Our advice? Get your retirement account started today and contribute to it regularly. Then decide if and how much you’ll contribute to your child’s post-secondary education.
If you do plan to pay for some or all of their college, begin setting aside money and making other financial preparations as soon as you decide. Popular options include:
• Starting a 529 Plan when your child is young
• Taking out a student loan
• Tapping into your Roth IRA
• Researching and applying for scholarships
You might also consider other forms of support such as letting them live at home while they pay their way through school themselves.
4. What would happen if you lost your job?
Although it’s unpleasant to think about losing your job, it’s a good idea to be prepared in case you or a supporting member of your household ever faces unemployment.
Determine what’s essential to your budget and what isn’t. This will show you how much money you need in your emergency fund to get you through tough times. Essential expenses include:
• Rent or mortgage
• Utilities
• Car payments
• Groceries
• Healthcare
If the unthinkable does happen, the sooner you can gather your wits and take steps to get back on track financially, the better.
5. Have you planned for any expected changes in your living expenses?
Over time, your living expenses will change. So, if you haven’t already made a plan for the future, establish some short- and long-term financial objectives. These might include:
• Paying off student loan debt
• Refinancing your car loan
• Buying a house
• Saving for your child’s education
• Starting and funding a retirement account
• Taking a once-in-a-lifetime vacation
• Renovating your home
And remember, the bigger the life goal, the longer it might take to achieve.
6. What’s the most reliable way to pay off debt?
The most reliable way to eliminate debt is to avoid spending beyond your means, particularly with credit cards. Ideally, this will allow you to pay your bills in full and on time each month and avoid racking up interest on balances carried over from one statement period to the next.
If you have multiple accounts and can’t zero out all of them each month, consider “snowballing” your payments. By paying off smaller debts first, you’ll see results quickly and be inspired to continue. Here’s how it works:
• List all of your debts, from smallest to largest.
• Make sure you can pay the minimum balance on each account.
• Now direct as much extra money as you can each month to the smallest bill until it’s paid in full.
• When that debt is cleared, move to the next smallest balance and repeat.
• Continue working your way to the largest balance until all you’ve paid all debts.
Not sure this approach is right for you? There are a number of other ways to pay off credit card debt and reduce your number of financial obligations.
7. How can you improve your credit rating?
The most important thing you can do to build your credit score is to pay every bill on time, every time over a period of months and years. If you need or want to improve your credit, you should:
• Review and correct any errors on your credit report
• Settle your outstanding balances as quickly as you can
• Reduce credit utilization to 30% or less
• Limit requests for new credit
• Keep old accounts open and resolve late payments or other issues
Your credit rating is a long game, so consistency will get you there most effectively.
8. How much of my income should go toward housing?
Whether you lease or own, the most common rule of thumb is to not spend more than 30% of your gross monthly income for housing. This amount which includes rent or mortgage payments, utilities, insurance, and property taxes if you own a home, is what you or your family can reasonably spend and still have enough money to comfortably pay for other expenses.
So, for instance, if your household has a combined income of 80,000, you should try to keep your total housing costs at or below 20,000 each month.
Regional differences in housing costs can sometimes make it difficult to stick to the 30% rule. Don’t panic if your percentage is higher. Instead, review your budget and look for ways to trim costs.
9. How will you manage finances with members of your household?
Deciding how (and if) to combine your financial resources with a partner or spouse should depend more on your personalities and spending styles than any beliefs about splitting things evenly down the middle.
The same goes for households you share with siblings and other adult family members.
10. Should you be saving for retirement if you have credit card debt?
You might think knocking out debt should always be your top priority, but saving for retirement is a matter of time and you can’t regain any that you lose. Start putting money away now for life after work, even if that means beginning very, very small.
Opening a traditional or Roth IRA is the easiest way to get in the retirement savings game. You should also participate in any 401(k) matching plan offered by your employer. This is essentially free money, and who doesn’t need more of that?
Once you get your retirement savings up and running, shift your focus to paying off your credit card debt. Soon, you’ll be debt-free and well on your way to financial freedom in your golden years.
The Takeaway
Life is filled with surprises, which makes it impossible to prepare for everything that lies ahead.
However, by asking yourself some basic questions, revisiting them from time to time, and adjusting your answers when needed, you can put yourself on a path to personal financial success now and for years to come.
