CreditNinja has your back with the most-asked financial questions young adults, and new consumers may have.If you are new to handling money on your own, you probably have plenty of personal finance questions. Here, you will learn about core financial topics like:
- Bank accounts
- Credit scores
- Emergency funds
- Retirement funds
- Paying off debt
Do I Need a Bank Account?
If you do not have a bank account already, it is probably a good idea to set one up as soon as possible. A bank is a financial institution that allows users with accounts to safely store their money, receive direct deposits, earn interest payments over time, and more. Furthermore, many lenders often require that borrowers have bank accounts before they are approved for loans or lines of credit.
Usually, you can get a bank account for free. In fact, many banks even offer credit bonuses just for setting up an account!
Do I Need an Emergency Fund?
Along with having a checking account, you may be wondering if you should also set up an emergency fund. While having a savings or emergency fund isn’t required in order to set up a standard bank account, it is most likely in your best interest to have one. Having an emergency savings fund to fall back on can help you pay for surprise expenses or unexpected bills, so you don’t have to turn to payday loans or other potentially unreliable quick cash loans.
How Much Should I Have Saved in My Savings Account?
How much money you should have stored away in a savings account depends on a few different factors. The most important factor would be your income. Generally, it is a good rule of thumb to try and save 10-20% of each paycheck in a savings account. Depending on your income, this could mean putting anything from $50 to a few hundred dollars aside with each check.
However, before transferring money from your checking to your savings account, ensure all your financial responsibilities are taken care of first. It would be a shame to receive a checking account overdraft fee for unexpected expenses when you have enough money stored away in your savings.
How Do I Make a Budget?
In addition to having a checking account and emergency savings, establishing a budget may also be a good idea. Based on your financial situation, it may be most advantageous for you to create a budget on either a daily, weekly, or monthly basis. You may also create a yearly budget.
Creating a budget allows you to see all your due bills and expenses in one place, along with how much money you should have left over after everything is paid for. So, not only can creating a budget help you keep your finances in order, it can help you better plan for financial goals. For example, say you were saving up for a big purchase. In this case, having a carefully planned budget will let you know exactly how much money you will have leftover to contribute towards that big purchase.
Your budget should include living expenses like:
- Regular bills, such as electricity, utilities, etc.
- Rent or mortgage payments
- Health insurance
- Vehicle expenses such as car insurance, payments, gas, etc.
What Is the Best Way to Pay Off Debt (Such as Student Loan Debt)?
One of the most significant financial setbacks consumers have to deal with is debt. Debt can come in many forms, such as:
- Student loan debt
- Credit card bills
- Past due payments
- Loan balances
According to a study performed by the credit bureau, Experian, Americans, on average, owe:
- $6,365 in credit card balances1
- $23,479 on auto loans1
- $241,815 on mortgages1
- $38, 290 on student loans1
In order to achieve financial freedom and knock down your debt, you’ll want to come up with a payment plan. This payment plan should include making regular payments and paying more than the minimum balance due when you can. If you have a significant amount of debt to get through, you may consider applying for a debt consolidation loan so you can take care of everything with one easy monthly payment.
What’s the Point of Having a High Credit Score?
A credit score is a three-digit number that indicates your creditworthiness to lenders and other financial institutions. Credit scores range from a starting score of 300 to a perfect 850. Factors that contribute to your credit score are:
- Credit history length
- Amount of debt
- Payment history
- Types of credit accounts
- Recent hard credit inquiries
Usually, consumers who have a good credit score (a score of 850-670) can enjoy perks like receiving a lower interest rate on loans, approval for a wider variety of financial products, and higher loan amounts. Alternatively, consumers with bad credit (a score of 579 or lower) may have a more challenging time finding loan approval. Or, if they do find approval, chances are they will receive lower loan amounts and high-interest rates.
How Often Should I Check My Credit Reports?
Your credit report is a monthly review of your general financial situation. Credit bureaus collect data regarding your financial accounts and habits and compile their findings into a monthly report. The three major credit bureaus that collect your financial data are TransUnion, Experian, and Equifax. Consumers are granted at least one free credit report from each major credit bureau every year, but it may be in your best interest to check your credit more often. Fortunately, you can receive unofficial credit reports for free via most online credit card or bank accounts. By viewing your credit reports frequently, you can see in real-time how your financial decisions are affecting your credit reports and credit score.
What Is a Credit Card vs. A Debit Card?
Credit cards and debit cards both allow consumers to make electronic purchases. Where these two financial products differ, however, is where the credited funds are coming from. For credit cards, purchases are made using the consumer’s approved credit limit. The account holder can make purchases with their credit card until they have reached their credit limit. At this point, the consumer would either need to pay off part of their balance, freeing up part of their credit limit, or wait until their next billing cycle renews.
For debit cards, purchases are made using the funds currently in the user’s checking/bank account. Once a consumer makes a purchase with a debit card, the funds will be immediately withdrawn from their bank account. Since the funds are coming directly from the consumer’s bank account and are not made via credit, consumers don’t have to worry about a bill or accruing balances when they use their debit card.
How Much Credit Card Debt Is Too Much?
While credit cards can be a great way to make immediate purchases you can pay back later, it’s very easy to rack up a high balance. Since consumers are not responsible for paying back their entire balance every month, many people find themselves falling into the habit of spending their credit card limit every month while simply making minimum payments towards their total balance. Over time, this has caused Americans to owe an average credit card balance of $5,221. To avoid accumulating too much credit card debt, try not to carry a balance on your card.
If you have accumulated a large credit card balance you may be thinking about canceling your account. However, before you do, consider the pros and cons. While cancelling your credit card will eliminate the possibility of accumulating more credit card debt (assuming you only have the one card), it may also negatively impact your credit score. When you cancel your credit card, you are effectively lowering the amount of available credit you have, which will affect your credit utilization ratio. Your credit utilization is how much available credit you have compared to how much you are currently using. Furthermore, if your credit card was your oldest financial account on file, canceling your account will negatively impact your length of credit history. Credit utilization and length of credit history are both financial factors that contribute to credit scores.
What Is My Debt-to-Income Ratio?
Different from your credit utilization, your debt-to-income ratio is how much money you make as income compared to how much money you owe in debt. Generally, credit bureaus like to see people making more money than they owe, resulting in a lower debt-to-income ratio. When you pay off debts like car loans, personal loans, or other lines of credit, you are working towards improving your debt-to-income ratio.
Where Is the Best Place To Borrow Money?
Everybody needs a little extra money now and again. If you find yourself needing to pay for some additional expenses but don’t have enough money saved in your emergency fund, you are most likely looking into your options for borrowing money. But, before you fill out an application, it is important to understand your options, as well as the difference between good debt vs. bad debt. Good debt refers to loans that give consumers something other than funding. For example, mortgages are often considered “good debt” because consumers are gaining a home/property with their loan. Bad debt, on the other hand, refers to loans that give consumers nothing other than funding. After paying off “bad debt” loans, consumers don’t gain any additional benefits like property, a degree, or other perks that come with “good debt” loans. Payday loans are one of the most common example of “bad debt” loans.
When looking for the best place to borrow more money, you first want to identify your financial needs. Ask yourself questions like:
- How long do you want to take to pay off your loan?
- How much cash flow are you looking for?
- Do you have any assets you are willing to use as collateral?
Your answers to these questions will help guide you toward the loan options that are best suited for you. For example, if you are looking for a loan with a flexible repayment schedule and no collateral required, you may consider a personal installment loan. Personal installment loans are available for consumers with both high and low credit via financial institutions such as banks, credit unions, or private direct lenders.
Should I Invest My Money?
Once you feel comfortable with your financial situation, you may consider investing some additional income in the stock market. However, the stock market can be quite fickle, meaning no-risk investments may be difficult to come by. So, be sure you do your research before you invest your hard-earned money. There are financial advisors online as well as plenty of financial resources and blogs that can help you learn more about stocks and investing your money.
It’s also important to consider potential pros and cons when investing:
|– Opportunity for higher returns compared to traditional accounts for savings.
|– Risk of losing money, as returns are not guaranteed.
|– Spreads risk across different assets.
|– Requires knowledge to diversify effectively.
|– Some investments (like stocks) can be quickly converted to cash.
|– Some investments (like real estate) have lower liquidity.
|– Certain investments offer tax benefits (e.g., Roth IRA).
|– Capital gains taxes on profits, dividends.
|– Investments can grow at a rate that outpaces inflation.
|– Not all investments keep up with inflation.
|Learning & Growth
|– Opportunity to learn about markets and personal finance.
|– Requires time and effort to research and manage investments.
|– Compounding interest can significantly increase long-term wealth.
|– Long-term commitment required, not suitable for short-term financial needs.
|– Wide range of investment options available for different budgets.
|– Some high-value investments have high entry barriers (e.g., minimum investment amounts).
When Should I Set up a Retirement Account?
It’s never too early to start saving for retirement. To help with retirement savings, some companies offer employees what is referred to as a 401k account. How do 401k accounts work? Well, each paycheck, a specified amount of an employee’s earrings is transferred over to a special 401k account. Sometimes, companies even will match a portion of employee 401k contributions. The point is to slowly contribute money into your 401k over time and reap the benefits later in life once you stop working. However, if you don’t work for a company that offers 401k accounts, you can always set up a retirement savings fund on your own.
A down payment is an initial, upfront portion of the total cost of a purchase, often used in contexts like buying a home or a car. It’s important because it can affect loan terms, interest rates, and the need for mortgage insurance.
Quick Tip: Contributing a larger down payment upfront may help you save money on mortgage payments down the line!
To negotiate better terms, such as lower interest rates or waived fees, contact your credit card company directly. Explain your situation, your payment history, and any competitive offers you’ve received from other companies.
This depends on your financial situation. A car loan can help build credit and preserve cash for other investments, but paying cash avoids interest. Consider the actual cost, including interest, when deciding.
A financial advisor can provide expert advice tailored to your financial goals, risk tolerance, and other factors, helping you make informed decisions and build wealth effectively.
The actual cost includes the principal amount plus any interest accrued over the loan period. Use online calculators or consult with a financial advisor to understand the total cost, especially for loans with higher interest rates.
Discretionary spending refers to non-essential expenses like entertainment and dining out. To manage it, create a budget, track your spending, and practice delayed gratification to prioritize savings and essential expenses.
A part-time job can supplement income, helping to cover expenses, save more, or pay off debt faster. It can also offer opportunities to learn new skills and potentially lead to full-time employment.
Some loans require collateral, an asset like a house or car, which the lender can seize if you default on the loan. Secured loans often have lower interest rates but come with the risk of losing the asset.
Keeping older accounts open can benefit your credit score by maintaining a longer credit history and a lower credit utilization ratio, both key factors in determining your creditworthiness.
Begin by creating a budget, saving a portion of your income (consider a Roth IRA for retirement savings), and investing wisely. Focus on increasing your income and managing debts to steadily build your net worth.
A Word From CreditNinja on Personal Finances
CreditNinja knows that handling finances on your own can seem overwhelming at first, but once you become familiar with the basics, you may find it’s not so difficult after all. Creating a budget and organizing your money by getting a bank account is a great place to start. Want to learn more about how to save money and handle your finances successfully? Check out the CreditNinja blog for free financial literacy and education resources!
- Experian Consumer Credit Review | Experian
- Retirement Plans | Internal Revenue Service
- Free File: Do your Federal Taxes for Free | Internal Revenue Service
- How Often Should I Check My Credit Report? | Experian
- Debt to Income Ratio vs Debt to Credit Ratio | Equifax
- How to Build a Budget That Works for You | TransUnion
- Is It Better to Save or Invest Right Now? | TIME