Tag Archives: retirement
Let’s Ask: UE’s Finance Guru
So far, Sara Hamling has done a wonderful job of effectively enlightening the financially frazzled. But some of us are just a bit more money-muddled than the others, so fellow UE contributor Michael Cox instigated a intense investigation into our investments.
Michael: Hi Sara, thanks for helping us out again! I like the way that you laid out some ideas for what is and what is not okay to spend money on from short-term and long-term spending accounts. Do you have similar advice for credit purchases when the ol’ short-term spending account isn’t up to snuff for (perhaps pet- or car-related) emergencies?
Sara: So your short-term savings account isn’t as full as you need it to be, and you’re facing a true emergency: you lose your job, your car needs new brakes so that you can get to work, you have a medical emergency. In those cases, it’s okay to use your credit card even if you can’t pay it off in full the next month. Pay at least the minimum every month (try to pay a little over) and most importantly, make a plan for how you are going to pay that money off as soon as possible.
That sounds like a good practice to follow. When the hits keep coming, what’s the risk?
Any time you are carrying a balance on your card from month to month you’re taking a risk—credit card companies can change almost any rate or term with little notice. Plus carrying a balance will not help your credit score. But, if you’re facing a true emergency, using your credit card can give you time to get back on your feet without ruining your credit (compared to, for instance, neglecting payments on a home or auto loan).
I’m trying to focus on not getting hurt by interest (too much) and not damaging my credit score. Thanks to some help from mint.com and Google Calendar, I’m pretty on top of paying everything on time, so as long as I’m not at risk of forgetting to make a payment it shouldn’t hurt, right?
Exactly! What I did was setup auto-pay on my credit card accounts and, a week before it’s due, I can double-check that my auto-payment went through and my balance for that month is paid off.
My fiancée and I have a shared credit card that we use for our joint purchases (like the new bathroom towels, Saturday’s “Let’s have amazing food!” dinner, and any Sharks game we can make) so that we can easily divide our expenditures later (and not have to juggle credit cards at the counter in the moment). Assuming we pay it off every month (or very close) to avoid interest, is there a better way to do this? Is doing this actually hurting our credit?
Assuming you pay the card off every month, you should be fine. There’s nothing wrong with having and using a couple credit cards as long as you have the money to pay them off.
Like the seasoning in a recipe for financial success: “Use in moderation,” right? What else?
One other thing to look at is what percent of your credit limit are you using at any given time. Owing more than 30% of your available credit will actually affect your credit score negatively. So, if your card has a $3,000 credit limit and you regularly have more than $1,000 on the card—that will negatively affect your credit. You want to have low balances, pay bills on time, and pay more than the minimum if you’re going to be regularly using your credit cards.
That said, going over that $1,000 is absolutely okay in emergencies, especially if you can pay that balance off right away (and perhaps pay it back before it’s even due, if you can to get it back under 30% of available credit).
You had some great recommendations for online savings accounts in your previous article. Do you have similar recommendations for credit cards?
If you have carried a balance in the past or think you might carry a balance in the future, look into credit cards that have the lowest APRs. The APR is the annual percentage rate you will pay on the money you don’t pay off in full every month. Typically, this is between 10-25%.
It certainly makes sense to just pay off the remaining balance each month.
If you have consistently paid off your balance every month, focus more on rewards. Most cards give you 1 “point” for every dollar you spend. This is typically equal to 1% back on a purchase ($1 back on $100 purchase). So, look for a cards that will give you more than that amount for certain purchases.
I like the sound of that! But from that word, “certain,” it sounds like there’s a catch?
Let’s say you wanted to get a couple credit cards with different rewards. You could get a Bank America Cash Rewards Card which gives you 2% back on groceries and 3% back on gas purchases. If you eat out a lot, you could get the Chase Sapphire Card which gives you 2% back on dining. Or you could look into the Chase Freedom Card which gives you 5% back on different types of purchases every three months (i.e. movie theatres & gas stations, or Amazon & department stores). Just make sure you know which cards give you what rewards and use them accordingly. (Note: All the above credit cards will give you the standard 1% back on other non-category purchases.)
So, we could use a different card for every kind of purchase, or…
Or, if you don’t want to have to remember what cards give you what rewards, you could get a card that gives you 1.5% back on all your purchases like the Quicksilver Cash Rewards Card.
Regardless of what you’re looking for, use credit card comparison sites to figure out which offers you will use most.
That sounds great but… Should holding multiple credit cards be avoided? It seems like a delicate balance between “You have enough credit history to get a mortgage” and “Your credit isn’t quite good enough for a livable mortgage.”
There’s nothing wrong with holding multiple credit cards so long as you’re not abusing them. I wouldn’t get more than about four, but two or three is totally fine especially if they give you points for different types of purchases.
That sounds like a good rule of thumb. So what’s the recipe for success?
The ideal situation for your credit cards is that you have a few, you keep low balances on them, and you pay them off in full every month. Now—that’s not always possible. But that’s what’s going to get you the best credit score if that’s what you’re looking for.
As a gamer, I always want the best score. I’m curious though. You said “low balances,” not “no balances.” Is not using your credit cards bad, too?
It’s not great to never use your cards. But… it’s probably better to not use your card for a short amount of time than to close the account. It’s awful for your credit if you open and close credit cards any more than you absolutely need to. Say you’ve opened too many credit card accounts, and you realize you really don’t need them all: don’t close them (unless you have a tendency to abuse credit) and don’t stop using them entirely. Just charge one small thing a month to them and then pay that off in full every month.
I feel like this should be taught in school; do you have any homework for me?
Sure! Here’s a good article on how balances affect your credit score.
Now, for those 20-somethings who are lucky enough to be investing and not just borrowing: when the world looks messy (I’m looking at you, Russia) or the market looks testy (well, this isn’t the ’90s, so maybe this isn’t so terrible a threat), is it ever the right decision to pull your stock market funds?
I’m already following your advice on using passive investment strategies in Mutual Funds/Index Funds/ETFs because, seriously, who has time to micromanage this?
It depends on what kind of account your stocks are in.
If your money is in a retirement account where your money is in Mutual Funds/Index Funds/ETFs—don’t move your money. Do not move it. Maybe you think you can time the market and avoid a dip, but even the best brokers fail to do this regularly. Money for retirement has a long time to grow if you’re putting it in before age 30, and even before age 40. It’s much better to ride out the market’s highs and lows if you have the time and your money is invested diversely.
Don’t touch the retirement. Got it! What about all the other types of investments?
If you have a separate brokerage account though that is not for retirement but is, instead, say…. money for that wedding, money for a house, money for a big trip… money that you are planning on needing in a couple years—then, you may possibly want to pull your stock market funds. If you know you will need that money and you don’t have confidence in the market (or you just don’t want to take the chance because you know you will need it soon), it’s okay to take the money out and put it in something less risky (hello, high-yield savings accounts or CDs!). Or, take half your money out and keep half in—another way to be slightly more risk-averse.
Okay, so keep your ultimate money goals in mind when deciding where and when investments should be managed. I feel more fiscally fit already! Thanks, Sara!
Michael Cox is a contributing writer. He is also a really tall computer engineer, app developer, musician, computer gamer, and San Jose Sharks fan. Twitter: @TehMiikay.
Sara Hamling is a contributing writer. Graphic Designer, Foodie and Baseball Enthusiast living in San Francisco and exploring the rest of California. Follow me @shamlingdesign
The Stock Market
Well friends, it’s time for the stock market. If you’ve read the other articles in my Finances in Your 20s series, hopefully you’ll have learned how to budget and how to save money for a rainy day. Those concepts were probably at least somewhat familiar to you—but the stock market may be something completely new and completely terrifying. It would be impossible for me to delve into everything you would want to know about investing in the stock market in this article, so I want to give you an overall framework for how to start the process and point you on your way. There are endless resources out there, so if there’s something you want to know that I don’t cover—you know the power of Google. Let’s get started.
What is the stock market?
The stock market is a general term for one of the various markets (like the New York Stock Exchange or the NASDAQ—don’t worry about the specific markets, it’s not crucial) where you can invest your money in companies. The stock market allows companies to sell shares of stock to the public. When you purchase a share of stock you have a (very small) slice of ownership of that company, and have rights to the potential gains or losses based on that company’s future performance.
Not everyone in the stock market is a rich, corporate day trader who follows the stock market on a daily basis. If you don’t have the time or money for that, don’t worry: neither do I. But if you are saving money that you don’t think you’ll need in the next 5–7 years, you should definitely consider putting it in the stock market.
How do I know if I’m ready to put money in the stock market? Do I need to open a new account?
- If you are contributing to a retirement account (401K, IRA), then you’re already ready to start.
You should be able to put the money you’re contributing into stocks, bonds, mutual funds etc. through the account you already have open online. Most retirement plans allow you to invest in individual stocks and many different stock-based funds. If you haven’t already logged into your retirement accounts online, take the steps to do so. Until you actively put that money somewhere, it will be sitting around making even less money than your savings account.
- Once you have financial stability—when you have about 6 months of expenses in your rainy day fund and are contributing to your retirement account—then you should consider opening a separate brokerage account.
If this is the case, then good job you! So, a brokerage account is just an account with a brokerage firm (Vanguard, Schwab, Scottrade, Fidelity, eTrade etc.) that allows you to invest in stocks, bonds, mutual funds, ETFs, CDs or even commodities (like gold or oil). I can’t go over everything involved, so here is some help to opening your first online brokerage account. Look at any fees brokerage firms may have, how much they charge per trade, and any minimums to open an account or to be invested in funds.
Since this account is on top of your retirement account, you may be wondering what this money is for. Well, that depends on you and your goals. Want to buy a house? A new car? Plan to go to grad school eventually? Want to take a year off and travel the world? Figure out your goals and use that as a time-frame for how risky you should be with this money, based on how soon you are going to need it. (What we’re working on is asset allocation. Become familiar with the concept.)
What should I invest in?
Because individual stocks can fluctuate so much, I suggest putting your money in funds like Mutual Funds, Index Funds and/or ETFs (Exchange Traded Funds). While all these funds are different, they are alike in that they group many companies (and other securities) together which allows you to have a diversified portfolio even with a relatively small amount of money. What this means for you is that you’re not subject to the random ups and downs that an individual company can have because your money is spread widely across hundreds of companies even though you’re only invested in a single fund.
Until you are comfortable with the stock market, it’s probably best to put your money in a couple of broad funds (like a total stock market index fund) and let the market take its course. In other words, don’t try to time the market—put your money in and leave it. If the money you’re investing is for the long-term, the ups and downs of the market will even out in the long run.
Note: Don’t feel that you need to be overly involved in managing your funds. The more passive approach of investing in index funds is actually often more successful than investing in heavily managed funds that often don’t perform as well and charge more to manage.
What should I learn about next?
There is a lot to know about investing and this just gives you an overview of the strategy that I think makes sense for beginners. And because this is just a start, I’m giving you a list of things to learn about next so that you’ll feel familiar with these terms when you come across them: Expense Ratios, Making Money with Dividends, Asset Allocation, Diversification, Rebalancing, and Stock Sectors.
I know, those may sound scary too. But I promise, the sooner you gain a basic understanding of these concepts, the easier this whole “stock market” thing will be.
Thinking About Your Money
Once you reach your twenties, you’re expected to know a lot of things. You’ve gotten to a point where you are expected to know how to work, feed, and clothe yourself—but having an actual plan for your paychecks may not be something you’ve figured out yet. We all have a sense of the lifestyle we want to live—whether that’s buying a house, starting a business, or traveling the world—but often we don’t spend enough time on the road map that will actually get us there.
Financial planning is a subject that young people are often uncomfortable with. There are so many technical terms you’re magically supposed to understand—but what if no one ever told you which ones really matter? I get it. I went to school for design, and no one was teaching me how to make the most from my money.
Luckily, my parents understood that this is confusing for those of us just starting out and were able to answer most of my questions. So, the advice I lay out here comes to you from someone who was a novice but has learned a lot recently by making small but important changes to the way I think about my money. This stuff is scary—you’re making decisions about large amounts of money. But it would be scarier to turn 30—or worse, 40—and realize you really have no plan in place to make sure you can buy a house, help your kids through college, take a year to travel the world, or retire before you’re 80.
This is the first of five articles about the basics of dealing with your finances in your twenties. To start, you should be thinking about your money in categories—four categories to be exact. Four categories that are used to buy different things at different times in your life. And because they’re used at different times, for different reasons, they all live in different places. Right now we are going to go over these categories so you can keep the big picture in mind. Each of the next four articles will go in depth with one of the categories so you feel comfortable going out and making informed decisions with your money.
So let’s get into it. Oh! But before we do, if you want to make this as painless as possible, you might want to save (or maybe even print) the following chart.
All right, here we go. The first category you should think about your money in is Immediate Spending. This is the one you probably already have down pat. This is what’s in your checking account, the money that you will need within a year. This is what you use to pay your rent, bills and buy food from as well as those concert tickets you want and the new glasses you’ll need after you break your glasses at the concert. My post will focus on budgeting and my favorite way to keep track of my money painlessly.
The second category is Short-Term Spending. This is money for 1-5 years away. If you have a savings account, you already have a start on this one. But… you might not really use it for savings. It’s just… you know, that other account. While a savings account works here, I’m going to suggest thinking about a Money Market Account (which is practically the same) and/or CDs (certificate of deposit). Both simply give you higher APY (annual percentage yield, or interest rate), meaning you make more money by simply putting your money in the right place. This money is spent if you need to put a deposit down on an apartment or a new car, want to travel for a few months or in case you get unexpectedly laid off from work.
The third category is Long-Term Spending. This is the money you use to buy a house and start a family, start your own business, or to go back to school. You want to feel confident that you will not need to touch this money until 5 to 40 years from now. You want to invest this money in the stock market and/or in bonds. For all our sanity, when we talk about the stock market, we’re going to keep it to investing in mutual funds and individual stocks. Yes, the stock market can definitely seem scary, but I promise to make it as simple as I can.
The last category is Retirement. Please don’t neglect this one, guys. It’s such an easy one, and starting early has an enormous impact on how much money you retire with. This is the money for all expenses you will have post-retirement. It goes into a 401k, an IRA (individual retirement account), a Roth IRA—or some combination of these.
Okay, those are the basics. Four categories of money for four different types of spending. We will go in-depth with each category in each of the next four articles. Hopefully, by the end of this series, you’ll have a better understanding of how to start plotting your financial road map. I promise, no matter how little you have to save it isn’t as hard as it seems. Once you plot your road map, you’ll be well on your way.