March 30, 2015
We can’t all manage money like a superhero, but everyone should have a handle on the basics of personal finance. Don’t let what you don’t know about your own money rule your life. Can you answer these basic questions about your money?
1. Is your emergency fund sufficient? Experts recommend at least three to six months’ of living expenses for a secure financial safety net. This may vary according to the cost of living where you live and work, your income and the long-range security of your job, the job market for your line of work, and whether or not you have affordable health insurance.
2. If your emergency fund is sufficient, other than saving for retirement or your children’s education, are you done saving? In a word, no. Your savings account should stretch to cover periodic but not unexpected expenses such as routine car maintenance, birthday gifts, and vacations. Many so-called emergencies, like repairing the air conditioner or replacing your tires, are not true emergencies—you know these things will always occur at some point.
3. If you have children, how will you help fund their education? Never start saving for your children’s future until you’ve covered your own first—so get that retirement account started today. Then decide if and how much you’ll contribute to your children. Will you pay for none, some, or all of their education? 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 were to lose your job? Think through what’s essential to your budget and what is not. What if your spouse lost their job? Having some idea of what you might be up against will help you make sure your safety net will really hold should you need it.
5. Have you planned for any expected changes in living expenses? The bigger the life goal, the longer it could take to plan and save: buying a house, refinancing your car loan, moving to another city or state, or budgeting around ARM adjustments.
6. What’s the most reliable way to pay off debt? Don’t try to spread your money too thin among your various debts. “Snowball” your payments: Make the minimum payment on all but the largest bill—some people prefer to choose the smallest, so they can see quick progress—and add everything you can to that bill until it’s paid off.
7. What can I do to improve my credit rating? The most important thing you can to do to build your credit score is to pay every bill on time every single time for days after weeks after months after years. A credit rating is a long-range game; consistency wins.
8. How much of my income should go toward housing? Mortgage companies like Fannie Mae and Freddie Mac use a 28 percent cut-off for home loans they buy from lenders, but the old 30 percent rule of thumb may be meaningless in the face of regional differences in housing costs. Don’t panic if your percentage is higher—review your mortgage to make sure you have the loan that’s right for you.
9. How will you manage finances between you and your spouse? 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. Read our guide to money management methods for couples to get a handle on the options.
10. Should you be saving for retirement if you have credit card debt? You might think that knocking out debt should always be your top priority, but saving for retirement is a matter of time—and you can’t make up for that lost time. Start now, even if that means starting very, very small. And always take advantage of any 401(k) matching offered by your employer; that’s essentially free money, and who doesn’t need more of that?
Wondering where to turn with your financial question? The PenFed Advice Center offers resources on financial hardship assistance, online banking, loan and investment calculators, financial forms, and more.