This past year, I officially transitioned from my 20s to my 30s and began working on new goals as a more mature adult. However, as I evaluated my future finances, I realized I still had a lot of money questions that were left unanswered.
Financial literacy is an important part of knowing whether or not you’re on track with your money. The better you understand money management, the easier it’ll be to reach your goals.
So if you’re headed for the big 3-0 (or even if you are well past it), ask yourself if you can answer these 30 money questions.
30 important money questions, answered
1. What is a budget?
The foundation to staying on track with your money is to understand 1) how to create a budget and 2) how stick to it.
A budget is a method of tracking your income and expenses on a weekly or monthly basis. It includes essential expenses such as rent and bills, as well as non-essential spending such as eating out and entertainment. Having a budget will help you keep your spending in check.
2. What is an emergency fund?
An emergency fund, also known as a “rainy day fund,” is usually three to six months’ worth of expenses saved up in a separate savings account. This money is only used in emergency situations, such as an unexpected job loss or car repairs, and prevents you from going into debt to handle surprises like these.
3. What are liabilities and assets?
An asset includes all of the cash in your bank accounts, as well as your investments such as stocks and bonds. Assets contribute to your net worth.
A liability, on the other hand, is any debt or other financial obligation. Liabilities reduce your overall net worth.
4. How do you calculate net worth?
To calculate your net worth, simply add up all your assets and subtract all your liabilities. An asset minus a liability will equal your total net worth and this can be a positive or negative figure.
5. What is amortization?
Amortization is one of those big, fancy words that gets thrown around when talking finance, but the meaning is pretty simple. It refers to the process of dividing up a loan, including principal and interest, into installment payments over a certain period of time.
6. What is a debt-to-income ratio?
Your debt-to-income rate (also known as DTI) is a number financial institutions use to gauge your ability to take on new debt.
DTI is calculated by dividing your total monthly debt payments by your gross income. For example, if you earn a monthly income of $3,000, plus you have a $300 per month car loan and $150 credit card bill, your debt-to-income ratio is 15 percent ($300 + $150 / $3,000 = 0.15).
The lower your debt-to-income ratio, the more likely it is you’ll be approved for future loans, especially a mortgage.
7. What is profit and loss?
Profit is any amount of surplus of cash you have at the end of a specific period by means of producing an income, minus any expenses and other operating costs. A loss is taken when your income is not as much as your monthly overhead. Profit is always a positive figure and a loss is always a negative figure.
8. How do you check your credit report?
Your credit report details all your personal financial information in order for lenders to gauge your behavior as a borrower.
It’s important to monitor your credit report regularly for any errors or suspicious activity. Doing so will help keep your information from being compromised. By law, every individual is allowed to access their credit report from each of the three major credit bureaus every year for free at AnnualCreditReport.com.
9. What is a good credit score?
A credit score is a three-digit figure that allows potential lenders to quickly view your chances of repaying money you borrow. The higher your credit score is, the more appealing you will be to creditors.
There are dozens of credit scoring models, but FICO is a common one used by lenders. An excellent FICO credit score is anything above 750, while a good credit score is between 700-749. A fair credit score is 650-699 and a poor credit is any number below 649.
10. How is a FICO credit score calculated?
In order to build better credit, you need to have a basic understanding of the five main factors that affect your credit score. They are:
- Payment history: 35%
- Total amounts owed: 30%
- Length of credit: 15%
- New credit accounts: 10%
- Types of credit used: 10%
11. What is an APR?
APR stands for “annual percentage rate.” It’s the interest rate charged to any unpaid debt balances.
An APR can vary depending on what type of financial institution and loan you have. It will likely also be based on your credit history, with the best rates reserved for good credit. It’s important to seek loans with low APRs, as the higher the rate, the more money you’ll pay in interest over time.
12. What is diversification?
Diversification often relates to investing – it’s a strategy for spreading your money across many different investments to mitigate risk. For instance, rather than putting your entire investment portfolio into a handful of stocks, you spread it across stocks, mutual funds, index funds, bonds, real estate, and more.
13. What is passive income?
In simple terms, passive income is money earned on a consistent basis with minimal effort to maintain it. This is a way to generate additional income streams, however small or large they might be, so you’re not always exchanging time for money.
14. When will you be debt free?
Do you know your debt-free date? This is an important date to know, as it will allow you to work backwards and create a step-by-step debt repayment plan. The sooner to know your debt-free date, the sooner you’ll be able to plan for future financial goals like saving money or buying a house.
15. What is an IRA?
IRA stands for Individual Retirement Account, which is a type of retirement savings account with several tax advantages. The two most common types of IRAs are the Roth IRA and Traditional IRA. An IRA is a good option for workers who don’t have access to other employer-sponsored retirement options or want additional savings options.
16. What’s the difference between a Roth and Traditional IRA?
Up until 1997, there only the Traditional IRA existed. Now, there are several types of IRAs, including the Roth IRA.
With a Traditional IRA, your contributions are made with pre-tax dollars. Additionally, you can claim a tax credit on your annual tax return. A portion of any distributions you take during retirement must be allocated towards paying taxes.
A Roth IRA is the complete opposite; contributions are made after taxes have been taken out. You won’t receive a tax break, but any funds withdrawn during retirement are completely tax-free.
17. What is a 401(k)?
Like an IRA, a 401(k) is a type of tax-advantaged retirement savings account. A 401(k) is generally offered through an employer and allows you to contribute pre-tax money out of your salary towards retirement.
Often, employers will match a percentage of what you save as a workplace perk. It’s basically like getting paid free money to save for retirement.
18. How much should you save for retirement?
Your exact figure to save for retirement varies based on your personal situation and your desired standard of living later in life. A good goal to aim for is saving 10 to 20 percent of your income every year. To find out exactly how much you should be saving, use this retirement calculator from AARP.
19. What is the difference between an insurance premium and deductible?
It’s easy to confuse insurance premiums and deductibles, but there is a simple difference. A premium is the amount of money you have to pay each month to maintain insurance coverage. A deductible is the difference you have to pay when your insurance covers a claim.
20. What is an HSA?
A Health Savings Account (HSA) allows you to save pre-tax dollars for qualified health care expenses, co-pays, and prescriptions.
To qualify for an HSA, you must participate in a high-deductible health plan (HDHP). In 2016, the minimum annual deductible for a high-deductible health plan was $1,300 for an individual and $2,600 for a family. Any medical costs less than this amount must be paid out of your HSA and allow you to claim a credit on your tax return. Any funds left over at the end of the year will roll over into the next.
21. What is a FSA?
Much like an HSA, a Flexible Spending Account (FSA) is a smart way to use pre-tax dollars for certain qualified health care costs. The biggest difference compared to an HSA is that the funds in a FSA don’t rollover year-to-year – if you don’t use them, you lose them.
22. How much life insurance do you need?
While every person’s situation is different, the rule of thumb for how much life insurance coverage you need is to multiply your annual income by 10.
For instance, if your income is $50,000 a year, you’ll need at least a $500,000 life insurance policy ($50,000 x 10 = $500,000). Adequate life insurance coverage ensures loved ones who depend on you financially will be able to live comfortably if you pass.
23. What is your tax filing status?
Your filing status is used to compute your taxable income and defines the type of tax form you’ll use every year. It’s based on your marital status and number of dependents in your family.
There five main tax filing statuses:
- Married Filing Jointly
- Married Filing Separately
- Head of Household
- Qualifying Widow(er)
To see what your filing status should be, use the Interactive Tax Assistant on the IRS website. If you qualify for two statuses, choose the one that allows you to pay the lowest amount of tax.
24. What is a dependent?
In the simplest terms, a dependent is anyone who relies on you for financial support. This can be a child, parent, sibling, or other close relative. Whether or not this dependent is a qualified dependent for tax purposes is determined by the IRS and your CPA during tax time.
25. What is a personal exemption?
Every person in the United States can claim themselves as a deduction on their taxes. In 2016, personal exemption amount is $4,050. In most cases, you are allowed to claim both a personal exemption and dependent deductions.
26. What is a tax credit?
A credit on your tax return is different than a tax deduction. A credit is applied to the back of your tax return and is considered a below-the-line figure. It reduces the amount of tax you pay, dollar-for-dollar.
27. What is a tax deduction?
Tax deductions and credits are often confused because they both reduce your tax liability. However, a tax deduction is applied to the front of your tax return (an “above-the-line” deduction). It reduces your taxable income, which in turn, helps you pay less in taxes overall.
28. How does compounding interest work?
Compounding interest occurs when interest earned is reinvested and also begins to earn interest. This helps your money grow at a much faster pace than simple interest.
29. What’s the difference between credit, debit, and prepaid cards?
While all plastic, these various types of cards have different functions and can be an advantage or disadvantage depending on how you use them.
A prepaid card is simply cash in plastic form. You pre-load the card with money and use the card to spend the balance until it’s all gone.
A debit card allows you to access the funds in your bank account and draws down that balance every time you swipe.
A credit card comes with a revolving line of credit. You pay using the balance without first having to load the card with funds or withdraw from your bank account. Cardholders usually have 30 days to pay off the balance on a credit card or else be charged interest.
30. How do you build wealth?
“Wealth” means different things to different people, but at its core, wealth allows you to spend and save money according to your priorities with a long-term goal in mind.
This could mean retiring, having multiple passive income streams, investing in the stock market or venturing in the real estate market. The goal is to spend less than you earn and save as much as you can while enjoying your life.
Now that you have a basic understanding of these important money questions, you are better prepared to accomplish your financial goals. But don’t stop here – the more you educate yourself, the more wealth you can enjoy.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 6.97% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.30% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate|
|2.47% – 6.30%1||Undergrad & Graduate|
|2.51% – 8.09%4||Undergrad & Graduate|
|3.02% – 6.44%2||Undergrad & Graduate|
|2.69% – 7.21%5||Undergrad & Graduate|
|2.79% – 8.39%6||Undergrad & Graduate|