What is a 401k? How much should you have saved in your emergency fund? What is a credit score?
It’s never too early to start planning your future. Money can be complicated and we are here to help. Too often, we try to rely on what our parents or teachers taught us, and typically, that just is not enough.
We’ve compiled the top 5 financial planning questions — and answers — everyone should know to plan for a strong financial future.
What is a 401(k)?
A 401(k) is a retirement plan offered by your employer that allows you to take a certain dollar amount or percentage from your income and set it aside for retirement. All contributions are tax-free until the money is withdrawn from your account.
Many plans offer matching funds — the most common being 3% of your salary. For example, if you put in 3% of your $45,000 salary, or $1,350, your employer will put another $1,350 into your 401(k). There are no restrictions as to how much you can put in your account, but your company won’t contribute more than 3%. The rules for matching funds can vary across the board, so be sure to confirm with your employer the specific rules for your account.
What is a credit score?
A credit score is a number that will help creditors determine how likely it is that they will be repaid on time. It essentially ranks you on how high or low of a financial risk you are.
The most commonly used credit score is from FICO which will range from 300 to 850. It’s calculated and defined by how much debt you’ve incurred, how often you’ve paid your bills on time, how many credit cards you have, and if you have any current unpaid bills. The higher your score, the better.
At the end of the day, your credit score affects your entire adult life so it’s important to take care of your credit score.
How much should you have in your emergency fund?
There is no set number to have stowed away because we all have different jobs, expenses, and various life situations. Ideally, being able to save 3 to 6 months of your total living expenses would be the safest option. In the situation that you lose your job or fall ill, that 3 to 6 months of savings would cover you for quite some time.
Even if you can’t save that much, it’s important to save some money per paycheck if possible. Even if you can only save $10, you are practicing discipline and your savings will grow.
How much should you have saved for retirement?
That all depends on how you want to live when you’re retired. If you want to travel a lot, you’ll need to save a bit more than someone who wants to just stay in their hometown.
The earlier you start saving, the better off you will be. If you start saving 10% of your income at 20 years old, you will easily reach your retirement goals. However, if you start saving 10% of your income at 30 or 40 years old, you won’t come close. You’ll have to start making riskier investments which can mean big gains, but even bigger losses.
There are many ways to figure out your future expenses, but using a retirement calculator is the easiest way.
How much debt is too much?
You don’t need us to tell you that you need to pay your bills. In a perfect world, we would all be 100% debt free 100% of the time- but we don’t live in a perfect world. Without some debt, many of us wouldn’t have been able to graduate college, get married, or buy a house.
Paying off debt should always be a top priority, especially debt that carries a high-interest rate.
In summary, there are many small steps you can take right now to focus on planning and creating a strong financial future for yourself and your family.