As usual, we continue our never-ending mission to provide you with the best money-related answers to the top money questions. Today we will cover the top 10 most important money questions you need to answer by 30.
1. What is your net worth?
It is surprising how many young people do not know, neither care about their financial worth. Although it might be true that your personality worth cannot be measured in money, you need to be aware at every moment what is your financial stats. In terms of money – net worth means the monetary sum of all your assets (real estate, car, furniture, cash, saving accounts, investments, stocks) minus all your liabilities (debt, financial obligation, mandatory spending).
Precise calculation of your net worth is not an easy task. You need to consider the current market value of your assets, not the price you bought them for, but the price you can sell for. Calculating and understanding your net worth provides you with complete insight on how you are doing, and helps you elaborate your future financial goals.
2. What is your credit score and why is it important?
(we already deeply answered the money question in What is a credit score? article)
Your credit score number is a three-digit indication to potential lenders of your ability to repay money you borrow. The FICO score is the most commonly used, ranging from 300 (worst) to 850 (best) and is calculated based on the following factors: payment history, length of credit history, credit utilization ratio, the mix of credit types in use and number of credit inquiries.
You should aim for an excellent FICO score It includes anything from 750 to 850. The next category down is between 700 and 749. It is still considered good, but it might not get you approved for the best deal the lender offers Anything below 700 – you should consider fixing and improving before even consider borrowing money. Otherwise, even if you qualify for a loan, you might not be getting the lowest possible interest rates on that loan. Mortgage lenders and credit card companies usually reserve their lowest rates and largest loans for people who have exhibited a quality track record when handling credit.
3. How much money do you have, saved in your emergency fund?
It is advisable to have enough money in your emergency fund to cover your living expenses for you and your family for about 6 months. It might sound a lot, but you will be grateful to have access to the money in bad or even worst-case scenarios – losing your job, coping with emergency repairs, or even medical conditions.
Your first goal should be saving 100USD, then eventually growing the saving to 500-1000USD, until you reach the sum of your 6-months expenses. For some people this could be as low as 1000USD, for others it could go up to 10000USD and above. The worst case that could happen to you is the need to declare bankruptcy (we will cover extensively the disadvantages of bankruptcy, and those are not trivial), due to some extreme event.
4. Where do you put an excessive amount of money; you will need in 1 to 10 years?
Plan carefully your financial future. If you are going to need the money in 1 or 2 years, consider buying a Certificate of deposit. They provide a better interest rate than saving accounts (also have some disadvantages). If your timeframe is longer, consider investing in stocks, shares, and bonds. Just be aware that, while the stock market has historically gone up over time, it can go up or down in the short run. Keep in mind that past performance doesn’t guarantee future returns. While stocks may provide higher growth opportunities than Certificates of deposit and Bonds, you want to allow enough time to ride out the downturns and may consider relocating funds into more conservative options to cope with shorter periods of time. Investing in a mix of stocks and bonds is advisable as it lowers your risk.
5. What dividends and interest money do you get?
Interest money is usually paid by the bank on your deposited money, while dividends are periodically paid by companies to you as a shareholder. Dividends are typically paid in cash or additional stock shares. If you are an investor, this is a good way to collect some income while still investing for higher returns. Always keep in mind that dividends might be subject to taxes.
6. How do you diversify your financial assets?
Diversification means spreading your investments across a variety of assets. Those include cash (in different currencies), real estate, stocks, bonds, certificates of deposits, and so on. You don’t want to be putting all your eggs (erg… we mean ‘money’ :)) in one basket. An example of a good stock market allocation would be to invest in companies in the US and abroad, small, medium, and large, well-established (usually considered safer), and rapidly growing businesses. Ideally, you are aiming for a well-diversified portfolio, including deposits, cash, real estate, other properties, to cover for market fluctuations – when some go down, others go up.
7. When are you going to be debt-free?
Calculating your numbers is only one part of the equation. You also need a solid repayment plan with a solid end date. Create your schedule and include a plan for repaying mortgages, student loans, and other loans. If you managed to secure the best term loans and the rates are very low - you might not need to bother paying your debt faster.
On the topic of the credit cards – be very careful with them. If you only pay the minimums, you’re wasting a lot of money on interest and losing a lot of money you should not. Always be careful with credit cards and always pre-calculate how your financial balance change if you are up to paying more and faster.
8. How much money can you comfortably spend on housing and mortgage?
As a general guideline, experts’ advice is to limit your housing expenses to a maximum of 30% of your income. Many lenders obey that number and don’t even consider approving mortgages unless your proposed home expense compared to income ratio is 30% or less.
It doesn’t matter if you rent, lease, or own the place. Always try to lower your housing costs as upkeep and repayments could become huge and threaten your financial stability.
9. What types of insurance do you have and need?
Again, the experts suggest considering life insurance, home insurance, and automobile insurance as the minimum – in order to avoid sinking down in cases of emergency.
If you own your home or car, often you’re required to have insurance, and the minimum mandatory requirements vary depending on your location and specific case. Renters insurance may seem optional, but sooner or later you will realize that it is essential to protect your personal belongings, not to mention some modern buildings require it. Life insurance is a great way to ensure your relatives will be covered in the worst-case scenario. Consider it – especially if you have kids dependent on you.
10. How much do you save for retirement?
There is no golden money advice, as everyone has different goals for retirement finance, but most of the experts suggest you save between 10 and 20 percent of your annual income. Again, it depends on your vision and goals. Some people prefer investing, instead of putting money into retirement plans. Nevertheless, retirement plans are a good option. If you can’t afford much try to just save something there and increase a little with time when possible.