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We’re doing a little Q&A day here at S&S! You’ve got personal finance questions; we’ve got answers. Here are the 7 most common personal finance questions we get asked and answers to them all!
Q. How do I make a budget?
A. Subtract your monthly expense from your monthly income. Then adjust as needed to cover savings and to fund your dreams.
I love budgets! Budgeting is my favorite.
It’s just a list of your estimated expenses, subtracted from your estimated income to make sure you can cover all your necessities, bills, savings, and still have money for fun stuff.
Budgets aren’t your enemy. Budgets give you the peace of mind to know exactly how you’ll make ends meet. And they show you exactly how much fun money you get to spend so you have the freedom to spend guilt-free on things you love!
So budgets aren’t the enemy. Too-high expenses or too-low income…that’s the enemy! If you hate budgeting, it’s probably for one of those two reasons (or both!). If you’re not making enough money to cover your expenses and your savings, you simply need to spend less or make more. Simple, but not easy, right?
Don’t worry, we’ve got you covered. Check out our post on How to Budget on a Low Income. That post will show you how to spend less and make more. You’ll also be able to get a handy (and totally free!) budget calculator there.
Q. Should I buy or lease a car?
A. Buy!
Leasing is tempting because the monthly payments are usually lower, and you usually don’t need as large a down payment with a lease as with a purchase.
But there are a few big problems with leasing:
1. If you drive a lot, it’ll cost you.
Lease agreements allow you to drive a certain number of miles per year (often 10,000 or 15,000 depending on the lease agreement). If you go over that number, you pay a small fee for every additional mile. That fee is somewhere between 10 and 20 cents, but again, it’s for every mile over your lease limit. And it adds up quick!
2. If you damage the car, it’ll cost you.
If you park on the street or in a tight-space lot where your car is prone to mystery dings, you’ll have to pay for that damage when you lease expires. Have kids or pets? If they make a mess of the interior, you’ll also be paying for that.
3. If you terminate the lease early, it’ll cost you.
If you need to terminate the lease before it expires for any reason, you can expect to be heavily penalized. The fee could be as much as 6 months’ worth of lease payments. Yikes!
4. At the end of the lease, you have nothing.
Here’s the real reason we recommend buying over leasing: when you buy, you own the car free and clear once all your payments have been made. That gives you options. You can continue driving it for years payment-free! Or you can sell it to provide the down payment for your next vehicle.
When you lease, on the other hand, you have nothing at the end of your lease. You would need to start the process all over again, coming up with a fresh down payment for a new lease.
The argument for leasing is that you could pay less overall by leasing when you change cars every 3-5 years. My question is: why would you change cars every 3-5 years when you could have a payment-free car at the end of 5 years? You could have $0 car payment for the next 5 years!
In fact, that’s exactly when hubby and I did. We got married young and could only afford 1 car payment. So we shared a car (not ideal, but doable) until it was paid off. Then we were able to drive that car payment-free for the next 5 years while we made payments on a second car. Once that car was paid off, we sold the 10-year-old car for a few thousand dollars, drove the 2nd car payment-free, and started making payments on a new car.
That cycle works forever! So as a couple, you never have more than 1 car payment!
One More Thing
Buy Certified Pre-Owned, not new. The moment a new car is driven off the lot, it loses almost 10% of its value. By the end of the 1st year, it’s lost about 20% of its value. Let someone else take that hit. You can save a small fortune by buying a 2-year old car.
Side note: We made the mistake of buying a new car once. We could afford it, and we just wanted something brand new that was just ours and never belonged to anyone else, you know? Well, our monthly payment for that stupid new Mazda was $100 more per month than our payment had been for our Certified Pre-Owned BMW. And the resale value on the Mazda sucked because we took that huge value-loss hit from being the first owners. Hubby and I both agree buying a new car was one of the biggest financial mistakes we’ve made, and we’re never doing it again.
Q. When do I need to start saving for retirement?
A. Right now.
The minute you finish reading this post, figure out what you need to do to open a retirement account, and do it!
Why is it so important to start right this second? Because compound interest.
Compound interest is when you make money on the money your money is making. What does that mean? It means you can turn $182,880 in lifetime savings into over $1,000,000! See, you’ll earn interest on your retirement investments. But then you’ll also earn interest on that original interest. And it keeps compounding to grow your money exponentially!
Take Aurora, for example. At a conservative 7% interest, she only saves around $200,000 during her working life. But compound interest turns it into more than $1,200,000 by the time she retires at 65. She makes over a million dollars in interest alone!
How to Start Saving for Retirement
If your employer offers a retirement plan, that’s most likely the best place for you to start. If you’re not sure how to go about signing up for your company’s retirement plan, contact HR right away and ask! They’ll help set you up.
No employer-sponsored plan? No problem. You can open an IRA online in minutes!
Whether you’re going with your employer’s plan or an IRA, the basic steps are the same:
- Open your account
- Select the investments (assets) in your retirement account
- Automate your contributions
For a detailed look at these three steps, check out 3 Easy Steps to the Retirement of Your Dreams.
Q. How much should I be saving?
A. It depends on your financial situation, but you must save something.
I’ll let you in on my personal saving plan. It’s super simple.
12% goes to my retirement savings and 8% goes to my dream fund. The dream fund goal is always changing. For years it was for a down payment on a house. Since buying a house, it’s mostly been for travel 😉
It wasn’t always this way. At 19 I had no emergency savings, no retirement account, and no dream fund. And saving 20% of my paycheck just wasn’t possible.
So I started slowly. I opened a savings account to serve as an emergency fund and a retirement account through my employer. Every payday, 2% of my paycheck went to my retirement account, and 3% went to my emergency fund.
I didn’t trust myself to remember to transfer the money, so I created auto-transfers to whisk my money to the proper accounts before I could spend it on anything else.
Once my emergency fund reached $2,000 (which was enough to cover my expenses for a month if there was some kind of emergency), I opened a new account for my Dream Fund. Then I stopped the transfers to the emergency fund and started the transfers to the dream fund instead.
Every time I got a raise or started a new job with better pay, I increased the transfer amount to my retirement account until it was at 12% (since I was already used to living without that extra income). Then I started increasing my dream fund contributions. Before I knew it, I was saving 20% of every paycheck! Btw, “before I knew it” was actually like 5 years. So it doesn’t happen overnight. But it doesn’t have to.
The important thing is to start with something. It builds a lifelong habit of saving, and watching those numbers grow is really motivating!
Q. Should I invest in the stock market?
A. Absolutely! But you need to go about it the right way.
The wrong way to invest in the stock market is to buy a share of stock in any one company.
Don’t go buy Apple stock. Or Google stock. Or any other company stock.
So how do you invest in the stock market without buying a company’s stock? You buy index funds.
Index funds are like sampler baskets of a bunch of different stocks. When you buy a share of an index fund, you’re automatically investing in a bunch of different companies instead of putting all your eggs in one basket. This is what investors mean when they talk about “diversifying your portfolio”. Index funds = automatic diversification!
This is far safer than investing in individual stocks. Individual stocks can plummet unexpectedly because of E Coli at a restaurant chain or because a Kardashian/Jenner stopped using the company’s app.
As long as you’re investing in index funds, your money will rise and fall with the stock market as a whole instead of with these volatile individual stocks.
Notice, I said “rise and fall“. The market will dip. That’s part of the ride. Over the long-term, you’ll come out well-ahead by investing in the stock market through index funds.
How to Start Investing in Index Funds
The best way to start investing in index funds is by using your retirement account. Once your account has been opened, you’ll get to select the investments within your retirement account. Stick with index funds.
And if you have additional money to invest for the long term, like maybe your dream fund money when you know you’ll need to save for years to reach your goal and make your dream happen, you can open an online investment account and buy index funds.
Q. Is it ok to use debt to pay for things?
A. Sometimes, but you have to be careful about the type of debt and the thing you’re buying.
Believe it or not, there is such a thing as smart debt. Smart debt is any debt that leaves you in a better financial position than you would have been if you hadn’t accepted the debt.
Of course, it can only be smart debt if you’re financially able to repay the debt (with interest!) without over-extending yourself.
Buying real estate is my favorite example of smart debt. Home loans have a low interest rate, so you’re able to leverage the debt to acquire a valuable asset. Then you’re monthly shelter expenses are building equity in the asset instead of being flushed away on rent.
Student loans often fall in the smart debt category as well. Assuming you actually use your degree in your future career, the degree should ultimately lead to better pay. And your degree should generate enough income over time to more-than-cover the expense of the student loan (even with the interest).
If you don’t think your degree will pay for itself, taking a student loan to pay for that degree doesn’t make sense.
Interested in other examples of smart debt? Check out our 4 Ways to Use Smart Debt to Improve Your Life.
Q. Should I refinance my student loans?
A. Hmmm…Maybe.
Refinancing your student loans could potentially save you thousands of dollars! But is a student loan refinance the right move for you right now? That’s actually a trickier question than you’d think.
Refinancing only makes sense if you can get a lower interest rate now than when you first accepted the loans. To get a better interest rate, you need to have better credit and higher income now than you did back them. You also need to know what the national interest rates have been doing.
Check out these recent-year rate trends:
| School Year | Direct Subsidized Loans (Undergrad) | Direct Unsubsidized Loans (Undergrad) | Direct Unsubsidized Loans (Graduate) |
| 2016-2017 | 3.76% | 3.76% | 5.31% |
| 2015-2016 | 4.29% | 4.29% | 5.84% |
| 2014-2015 | 4.66% | 4.66% | 6.21% |
| 2013-2014 | 3.86% | 3.86% | 5.41% |
| 2012-2013 | 3.40% | 6.80% | 6.80% |
| 2011-2012 | 3.40% | 6.80% | 6.80% |
| 2010-2011 | 4.50% | 6.80% | 6.80% |
| 2009-2010 | 5.60% | 6.80% | 6.80% |
| 2008-2009 | 6.00% | 6.80% | 6.80% |
| 2007-2008 | 6.80% | 6.80% | 6.80% |
| 2006-2007 | 6.80% | 6.80% | 6.80% |
These interest rates are just a guideline. Your interest rates will depend on your credit and income, but it would be exceptionally difficult to get a better rate from a refinance if the current available rates are higher than the rates on your existing loans.
You’ll notice in the table above that the 2016/17 school year subsidized loan rates are a very low 3.76%. This is great news for most borrowers looking to refinance!
You also need to consider any federal protection you might accidentally waive by refinancing.
In some cases, there are government programs for student loan forgiveness (like for some teachers and public servants). This isn’t usually the case, but it is something you should look into to make sure you’re not waiving rights that could benefit you more than the refinance.
If you’re interested in refinancing, check out SoFi.
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