Hello, friends! It is always so fun and rewarding for us to be able to help our community feel more financially confident. Today, we have a chance to answer some of YOUR most frequently asked questions. A few days ago, we asked you to share what was on your mind – your frustrations, your concerns, your financial questions. We’re excited to be able to answer some of those for you today because, at the end of the day, we are here for YOU – to empower you, to support you, to encourage you. You’re WORTH it!
Question #1: What is a great start as a savings goal per month?
Generally speaking, it is really wise to try and save anywhere from 10-20% of your take-home pay each month. Now, we know this isn’t completely feasible for most right away, but it can be something you work towards. If you are struggling to find room in your budget to save, try documenting your expenses for a few weeks. Challenge yourself to try and discover ways to cut back by eliminating those unnecessary expenses and re-purposing those dollars for your emergency fund or other savings funds. Every little bit counts!
Question #2: Do you have to get a credit card to build credit? If so, how many credits should you have to establish good credit?
Building and establishing good credit is so important – glad you asked! That said, you don’t necessarily need to have a credit card to establish strong credit. What creditors care most about is that you are responsible with your money and that you pay your bills (and other financial obligations) on time. So, if you don’t currently have a credit card, focus on your other financial expenses such as your student loans, your rent/mortgage, or your utilities. Continuing to chip away at your student loans and making on-time payments will only improve your credit.
Paying your mortgage each month will also demonstrate responsible behavior. If you rent, contact your landlord to see if they report your monthly payment history to the appropriate credit bureaus. If not, consider reporting your rental payments to RentalKharma.com. Not all credit agencies accept this type of information, but some do, and in your case, the more positive information you’re able to provide, the better! You can also check with your utilities companies to see if they report your payment history. These are great ways to ensure even more information can be added to your account to improve your overall score.
Another good option for building credit without an actual credit card is to use a secured credit card. Essentially, a secured credit card is like a debit card that you can pre-load with available funds. This way, you can only spend what is available on the card. Once you run out of funds, you can reload the card and continue your spending. This is one good option if you don’t feel a credit card is right for you, but would still like to demonstrate good money habits.
Finally, if you do have a credit card, make sure you can afford your purchases. Having a credit card is a big responsibility. To ensure you are behaving responsibly, only spend what you can afford, and try to keep your credit utilization ratio below 30%. What does this mean? It means that if your credit limit is $10,000 – for example – you’d want to keep your balance below $3,000 (or 30%). This way, you demonstrate to the credit agencies that you are keeping your spending in a reasonable place and not living beyond your means.
There is no magic amount of cards to have to improve your credit, but we recommend you start with one to see how you handle the responsibility. Once you’re able to demonstrate that you can routinely pay off the balance each month on time and in full, then perhaps you may want one other card (or two) in order to take advantage of travel perks or other credit card rewards. However, having more than one card is not completely necessary and can quickly over-complicate things. Stick with one until you’re comfortable and confident in your ability to manage more.
Question #3: Vanguard vs. Fidelity vs. others …which is the best institution to invest with?
Investing is all about doing your homework and putting in the appropriate amount of research. We love both Vanguard and Fidelity, but before we invest in anything, we make sure we do our due diligence and understand the fees associated with each fund/investment, the investment holdings (what is included in the fund), the Morningstar rating, the general trends of the companies included in the funds, and much more. It certainly pays to do your homework or to work with a professional in this case. There are so many good options, but you do need to know what you’re looking for, what your investment goals are, and have a good idea of your tolerance for risk. We cover all of this and more in our Investing for the Everywoman course!
Question #4: Are balance transfers a good way to pay off credit card debt?
Balance transfers can be a great tool to use in order to pay off your debt while saving on interest, but keep in mind there are definitely pros and cons for doing so. We write all about them here!
Question #5: Saving for retirement – HELP!
No doubt about it – saving for retirement can feel like a daunting task. However, it is so important to save for this stage in your life as it will eventually become your reality. Curious how you can get started? Focus on beginning with your employer-sponsored plan or whatever is available to you via your employment.
For many individuals, this comes in the form of a 401(k), 403(b), or pension plan. If you do have these plans available to you, make sure you’re contributing to them. It may seem difficult to see a portion of your paycheck go right towards these accounts, but trust us, it will be worth it. If you’re able to contribute enough to these plans to take advantage of your employer matching your contribution, then by all means, do so. Taking advantage of your employer matching your contribution is so incredibly important because it is essentially taking free money. If your employer will match up to 5% of your salary (as long as you contribute), then be sure to contribute at least 5% so that you can capture their contribution as well! So, step number one is to make sure you contribute to these types of retirement accounts.
Step number two is to make sure you know how those accounts are invested. You’ll want to ensure you are staying diversified (aka: not putting all of your eggs in one basket) and are keeping expenses low. If you’re not sure how to begin here, reach out to a representative from the company managing your company’s retirement plans. Often times, they’ll walk you through the available options for free and help you determine which makes the most sense for you. Otherwise, we do cover all of that in our Investing course.
Step number three is to open either a Traditional or Roth IRA (if you’re eligible). As long as you have earned income, you can open one or both of these accounts and can contribute up to $6,000/year towards your retirement. The money in these accounts is then invested according to your goals and risk tolerance with the hope being that this money grows in value over time into a nice nest egg for your retirement.
Now, if you’re self-employed, having an IRA is really a great first step, but you also can open your own type of retirement plan. More on that here!
If you’re currently saving for retirement and have already maxed out your workplace plan and your IRA, you could also look to fund an HSA (more on those here) or open a standard investment brokerage account to have your money work harder for you!
Question #6: What is the best way to save for a house when the cost of living is high?
Saving money for a down payment is not easy. When it comes to saving money, it really all comes down to prioritization and maintaining a budget. If you have not established a budget, now would be a good time to do so. Start by analyzing the past few months of your spending behavior (as evidenced by your receipts, credit card statements, and bank statements) and get a feel for what you’ve been spending each month by category. Then, once you know how much you’ve been spending, make a goal for each category of what you’d like to spend. So, for example, if you notice you are spending $300/month on dining out, perhaps make it a goal to trim that part of your budget to $250 for the next month so that you can find some savings.
In general, we recommend you allocate your monthly budget by using the 50/30/20 method. This means you would have 50% of your take-home pay cover your necessary expenses (those fixed expenses that you absolutely MUST pay for, such as housing, utilities, loans, etc.). Then, 30% of your monthly take-home pay would go to things like fun/personal improvement (i.e. all of your “wants”), and the remaining 20% would cover your savings, investments, and other goals.
However, in your case, since you’d like to aggressively save for a home, I’d tweak your budget so that you’re saving more around 20-25% and spending less on your “fun” expenses. Every little bit counts, and setting goals, prioritizing your spending, and truly maintaining a budget each month will help you get there!
Thanks for all of your wonderful questions! Stay tuned for our next Reader FAQ post!
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