5 Common Money Questions – Answered!
Let’s face it, we all have questions about money that we’re afraid to ask (but shouldn’t be). So we thought it might be helpful to hit a few of the big ones here, like what is a credit score, what does “investing” mean, and what is an IRA. Let’s get to it!
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1. What is a credit score?
2. What does investing mean?
3. What is a 401(k)?
4. What is an IRA?
5. How much should I have in my emergency fund?
1. What is a credit score?
Your credit score is a three digit number that lenders use to compare you to other borrowers. It measures how likely you are to repay your loans.
Scores typically range from 300 at the low end to 850 for excellent credit. (Technically there are a few different scoring systems, but most are roughly on the same scale).
Your score will come into play when you apply for a new loan. The better your credit (ie the higher your score), the lower the interest rate you’ll qualify for.
► Learn more about how credit works in our Core Content
2. What does investing mean?
Investing is all about putting your money to work so it can earn even more money for you. You do this by buying assets that either generate income, increase in value, or do both. This could include buying a rental property, investing in bonds and stocks, or buying mutual funds.
While investing is often associated with saving up for retirement, it’s a great way to build wealth in general. And the sooner you get started, the better, because of interest compounding. Basically, your money earns interest, and that money can then earn interest, and THAT money can then earn interest. After a while, you’ll accumulate some serious wealth.
► Learn more about investing and how to get started
3. What is a 401(k)?
A 401(k) is a type of tax-advantaged retirement plan you get through work. (Some employers offer them and some don’t). It allows you to set aside a portion of your pay check and invest it for retirement.
The main benefit of a 401(k) is that your contributions are tax-deferred, meaning you’ll pay no taxes on your contributions now and your money is free to grow tax-free until you retire. When you finally take money out, you will have to pay taxes.
Additionally, some employers will even match a portion of your contributions. So it’s pretty close to getting free money. The match, combined with the tax-advantage, can make a 401(k) a great way to start investing.
► Learn more about 401(k)s
4. What is an IRA?
An IRA, which stands for Individual Retirement Account, is similar to a 401(k), except it isn’t offered through your employer. As the name suggests, you can open one on your own as an individual.
Just like with a 401(k), it’s a way to set aside a portion of your income and invest it for retirement. It also offers a tax-advantage, like a 401(k).
With a traditional IRA, you make tax-free contributions and your money can grow tax-free until you take it out in retirement. Just like with a 401(k). With a Roth IRA, you contribute after-tax money. But that money is then allowed to grow tax-free, and you won’t have to pay any taxes when you take it out in retirement.
► Learn more about IRAs
5. How much money should I have in my emergency fund
If you want to be financially secure, you need to have an emergency fund of easily accessed cash. It’s there to protect you in case you lose your job or face an unexpected expense.
The exact amount to hold will be up to you, but we generally recommend having between three and six months’ worth of living expenses on hand. If you need help figuring out how much this would be, we have you covered.
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