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Frequently asked financial questions are questions that I’ve seen pop up over and over again. I thought I’d take the time to answer them in this new Series.
So each post has a short quick answer to these frequently asked financial questions followed by a longer more detailed answer. Toggle to find the short quick answers below and then you can choose to read the longer more detailed answer if you want.
Do I Really Need a Budget?
Yes, if you find yourself struggling living paycheck to paycheck, then yes a budget would be a good idea. You should know that a budget isn’t about restricting yourself it’s about prioritizing what is important to you and creating a plan for your money.
There are even different kinds of budgeting methods, like mindful budgeting, zero-sum budgeting (YNAB is a great tool for zero-sum budgeting), cash-only budgeting, and balance money budgeting.
Related Post: How to Budget Successfully Every Time
How Much Do I Need to Have in Savings?
Depends on what you are saving for, if it’s a specific savings goal like a car, look at the price of the car you want.
If you are saving for an emergency fund, the average of your last three emergencies is a good goal to start with savings wise.
If you are not sure about the average cost of your last few emergencies than start with $1,000. Once you hit that goal, set a new one to be able to cover multiple emergencies (I like to have enough for three), because when it rains it pours.
If you still struggle with setting aside money for savings, then I recommend using Chime to start saving an emergency fund for you. Chime works by starting a spending account (takes 5 minutes) and opting into the automatic savings plan.
Every time you use the Chime Debit Card it rounds up your purchase to the nearest dollar and puts in in savings. Right now they also offer a 10% bonus on those savings. All those withdrawals add up over time. Chime is free to use, with no monthly fees. With Chime, you end up saving money without having to think about it.
How Important is My Credit Score?
Pretty damn important if you ever want to borrow money or open up a line of credit. If you’re already rich and can pay for everything in cash, your credit score may not be so important.
Lenders use your credit score to determine if you are someone likely to repay money that you borrow. Basically, they use your credit score to determine your creditworthiness. If you have a low credit score you may not be able to get the line of credit you need, be it a car loan, mortgage, personal loan, or new credit card.
Your credit score ranges from 300-850. The higher your score, the better. Ideally, you want a score above 700 since your credit score can also determine the interest rates offered to you. The better the interest rate, the less you have to pay the bank for the privilege of borrowing the money.
Can I Afford to Buy a House?
There are loans available that only require you to have a down-payment of 3.5%. That being said there is a lot more to owning a home than just a mortgage.
There is the upkeep of a home, repairs, and whole responsibility for everything. So it’s smart to make sure you have enough to not only cover a down payment and closing costs but also enough to cover any repairs or changes you might want or need to make to the home.
While you may only be required to put down a small percent, the more you put down the less you have to pay back later. This is particularly important if you want to avoid paying mortgage insurance.
If you have a significant amount of student loans then you might have trouble obtaining a mortgage due to a high Debt to Income Ratio (DTI). Your DTI is the amount of money that has to go towards your debt each month in relation to your income.
For example, if you make $3500 a month and have to put $750 towards debt each month your Debt to Income (DTI) ratio is 21%.
However, if you are on an income-driven repayment plan, your mortgage lender may be required to use a different amount other than your monthly payment when calculating your DTI. Typically, you need your DTI to be less than 41%.
Should I Pay Off Credit Cards or Student Loans First?
So long as you don’t default on either, it is probably best to pay off credit cards first. Why? Because credit cards are considered revolving debt. Meaning they can have a bigger negative impact on your credit score if you maintain a balance on them.
Although student loan debt is still debt, and you should want to eliminate it, it will most likely not affect your financial standing as harshly as credit card debt over time.
For example, student loan debt typically has a lower interest rate, can be tax deductible, and can actually help your credit score in certain circumstances. All of these factors play a part in why you should pay off credit card debt first.
Will My Student Loans Really Be Forgiven?
Lots of student loan borrowers take advantage of income-driven repayment plans for federal loans and think that at the end of it any loans they have left will be forgiven.
In my case and in the case of many of my friends, the reason for using income-driven repayment plans is because it’s all we can afford. It can be extremely frustrating because my payments each month do not even cover the interest. Which means, my loans are growing, I’ve made payments for nearly 6 years and owe more now than when I graduated. But at least at the end of 25 years, my loans will be forgiven, right?
Not really, unless you are looking to have them forgiven through the public service loan forgiveness program in which case yes, after 120 qualifying payments the remainder is forgiven. The other federal income-driven repayment plans require the forgiven amount after the 20-25 years be considered taxable income.
This means that if, like mine, your student loans are growing, after 20-25 years you are going to have a big effing tax bill. You can use the Student Loan Hero Dashboard to find out what your approximate tax liability might be.
Related Post: What is Student Loan Forgiveness & How to Qualify
Am I Totally Screwed with Private Student Loans?
Private student loans might not have the flexibility in terms of repayment that federal loans do, however, with federal loans you can’t refinance them without losing that flexibility.
No, private student loans, unlike federal student loans, can be refinanced without losing flexibility. In fact, depending on who you refinance with, might give you some flexibility. Also, if you’re doing it right you will actually save money since you will be repaying the loan at a lower interest rate.
Most of my loans are federal loans, however, my bar loan was and is a private loan. I refinanced with SoFi, saving me over $1,000 over the life of the loan. While I do recommend SoFi, don’t be afraid to shop around for different rates. If you do decide to go with SoFi, you can earn a $100 welcome bonus by using my link.
How Can I Afford to Travel When I Have Debt?
When you’re drowning in debt and dreaming about travel, it can feel like the world is against you. Always having to make up for past money mistakes, you eventually start to think, can’t I just take a break from it all? While finding the money to travel while in debt can be difficult, it’s not impossible. You can set yourself up to take some really nice trips, but you have to plan and be patient.
You can afford to travel while paying off debt, by being strategic. Don’t just resign yourself to saving a travel fund, though it is something you should do.
Also get a credit card (so long as you pay it off each month) and earn points to help you travel. If you have to do any travel for work sign up for the hotel rewards points and earn as many as possible, forgo room cleaning for an extra 500 points. Find out all the ways you can earn points and take advantage of all of them.
Money tools & resources i recommend
Chime (for saving) works by starting a spending account (takes 5 minutes) and opting into the automatic savings plan. (Learn more about getting started with Chime). Every time I use the Chime Debit Card it rounds up my purchase to the nearest dollar and puts in in savings. Right now they also offer a double round-up bonus on those savings. All those withdrawals add up over time. Chime is free to use, with no monthly fees. With Chime, you end up saving money without having to think about it.
Qapital (for building savings & reaching money goals) Qapital can help you reach savings goals. Once you have the Qapital App installed and a bank account (or in my case three) connected you set up a goal or goals. Then you set savings rules for each of your goals. For example, I have a round up to the nearest $2 rule, a guilty spending rule -when I buy Dominos. Qapital is free to use. Bonus, when you use my link you’ll get $5 after your first savings.
Qoins (for debt repayment) When you sign up for Qoins, you connect your bank account and then spend as you normally would. Qoins will round up your purchases to the nearest dollar and put that change towards an extra debt payment. Learn more on How Qoins Can Help You Pay Off Debt Faster
SoFi (for refinancing) If you have private loans or your debt to income ratio allows, consider refinancing with a company like SoFi. Learn more about what it’s like to refinance with Sofi. Refinancing my bar loan with SoFi ended up saving me over $1,000. Use my link to refinance your student loan and you’ll get a $100 bonus.