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- Money questions may be personal, but they tend to revolve around investing, debt, and real estate.
- Setting yourself up for financial success means answering the easy money questions, as well as dealing with the harder ones.
- There are five essential financial questions you need to be able to answer to make sure you’re on the right track.
Everybody has money questions – but finding good financial advice is tough.
Only 40% of Americans have a financial adviser they can look to for guidance. Even those who do have their doubts about how trustworthy their adviser is. Most people – 60% – suspect financial advisers prioritize the company they work for over what is best for the client, according to a recent survey from the CFP Board.
As a certified financial planner, I’ve seen first hand how hard it is for people to figure out what to do with their money.
It seems like it should be simple: pay off debt, save money, live happily ever after. But life gets in the way – the refrigerator breaks or an unexpected surgery is needed – and taking those setbacks in stride isn’t easy. Especially when you don’t have anyone to answer your money questions.
Most money questions tend to be very personal and specific. But, there are a handful of questions I hear over and over again, typically revolving around investing, debt, and real estate. And there are a couple questions I wish my clients would ask, but very few ever do.
Below, the five most important questions to ask about your money, as well as advice on how to find the answer to each.
When should I start investing?
This is probably the question I hear the most. Many people know they “should” invest, but sorting through piles of investing advice often leads to inaction and confusion rather than confidence.
Here’s the short answer: Start now.
Okay, but where? In a retirement account.
Investing through a retirement account means you save money on taxes, while making sure your financial future is more secure. Investing in a non-retirement account isn’t a bad thing, but it should come after you’ve maxed out your retirement savings accounts.
Unless you are able to invest more than $24,000 a year, you should focus on investing through a retirement account. In 2019, you can save up to $19,000 in a 401(k) plan, and $6,000 in an IRA. If you’re flush with cash, you can use both.
Deciding what to invest in doesn’t have to be complicated. If you aren’t sure where to start, choose a target date fund slated for the year you plan to retire. If you’re 35 today, and want to retire at 67, choose a target date 2050 fund. That means the mutual fund will adjust over time to make sure your investments are appropriate for your age.
Are you on track to retire when you want? Find out with this calculator from our partners:
How much debt is too much?
If you have debt, take a deep breath.
There’s something about owing money that has the ability to overwhelm more so than any other financial topic.
Using debt to pay for something that has value, like a home or a college degree, can help you get ahead. If we weren’t able to become homeowners or graduate college until we saved enough money to pay for it with cash, the vast majority of us would never do either.
But debts that carry a high interest rate (typically over 8%) and weren’t used to strategically help you afford a big purchase, are more problematic.
You don’t need me to tell you that any amount of credit card debt is too much. Paying it off should be your top priority, and we have tips on how to get out of debt for good.
How much house can I afford?
Housing is probably your single largest monthly expense – whether you’re renting or buying.
Technically speaking, your housing costs should be limited to 30% of your pretax income, the standard measure of housing affordability. If you make $75,000 a year, that breaks down to $6,250 a month before taxes. That means you shouldn’t spend more than $1,875 a month (30%) on housing.
The 30% rule is a good guideline, but spending even less will leave you with more flexibility for other spending – like on vacations, or saving for retirement.
I tell my clients to aim to spend 25% of their take-home pay on housing. For somebody who earns $75,000 in New York City, that’s about $1,040 a month on housing. If you found a place for that amount instead of paying $1,875 a month, you’d save an extra $10,000 per year. Don’t tell me it’s not possible – I’ve seen people who pay even less.
Can you afford your dream home? Find out with this calculator from our partners:
Am I earning as much money as I possibly can?
Cutting back on expenses will only get you so far.
At some point, you’re going to need to make more money if you want to achieve all of your financial goals.
Whenever I start working with a new client, I ask them when they last got a raise, and how happy they are with their current salary. I definitely have clients who are paid well, and who are very satisfied with their income. But the vast majority could use a boost.
Sometimes that means switching jobs, or even careers, but often it just means asking. Bosses are busy, and your raise isn’t top of mind for anyone but you. Schedule a conversation to review your progress, and present your case for earning more.
Don’t be afraid to ask for a raise, especially if it’s been over a year or more since your last one. The worst they can do is say no. And if they do, be prepared to ask for concrete goals you need to hit to justify getting a raise. That way, next time you ask, you’ll have even more evidence to prove your worth.
What would happen if something happened to me?
Thinking about what would happen to your stuff and your money if your apartment caught on fire – or worse – isn’t fun. I know.
But it’s a really important part of setting yourself up for financial success.
We can’t control the world around us, and sometimes bad things will happen. You need to have a plan for each. Fortunately, there are some easy steps you can take to make sure you’re prepared for the worst.
Having an emergency fund of cash on hand is a good place to start. Even a cushion of a few hundred dollars can help prevent you from racking up credit card debt if you have an unexpected expense come up. Ideally, you’ll have at least six months of living expenses set aside in a high-interest savings account, just in case you ever needed it.
It also helps to ask yourself, how would I pay my bills if I could no longer do my job? Or, how would I replace my stuff if it was stolen or ruined in a fire? If you can’t answer those questions easily, then you should look into getting an insurance plan that will protect you.
Some types of insurance are required, like if you own a car or a home. But other types of insurance can cover you if you have a bigger emergency – something that your emergency fund wouldn’t be able to cover. For example, renter’s insurance can protect you if your apartment catches on fire or somebody steals your laptop. Disability insurance can be a good idea if you are highly dependent on your income to get by.
Other safety nets exist as well, to protect you and your loved ones if you are no longer around or able to speak for yourself. Everyone should have a health care proxy and living will, and you should always keep your beneficiaries up-to-date on your financial accounts.
Getting personalized advice can be helpful, but it’s not the only way to set yourself up for long-term success. Answering these five questions will go a long way toward making sure you’ve got your bases covered.
Lauren Lyons Cole is a certified financial planner and the director of personal finance at Business Insider.