10 Money FAQs You Should Be Able to Answer
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"It pays to start investing early, even if you only have a little to spare. The more time you give your money to grow, the bigger your potential gains."

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Only 17 states require that students take a personal finance course to graduate from high school, a number that’s barely budged in years. If you didn’t happen to grow up in Missouri, Virginia, Utah or the other 14 states that offer formal required courses, there’s a good chance you were never taught all the basics of money management. (Which helps explain why an estimated two-thirds of Americans can’t pass a basic financial literacy test.)

But it’s not too late to catch up. Being able to answer these 10 key money questions is a good place to start.

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1. What should I include in my budget?

How much you have coming in each month, and where you want it to go. First, needs (essentials like housing, utilities and groceries) then wants (Netflix, yoga classes—anything you could live without). You should also earmark money for goals like paying off debt, building an emergency fund, investing for retirement and funding mid-term goals like upcoming vacations.

One guideline you can use is the 50-20-30 budget: half your income goes to essentials, 20 percent is saved and invested and 30 percent is leftover for wants.

Related: This Simple Formula Can Make Budgeting Easy for Anyone

2. How much should I save for emergencies?

Financial advisors generally agree that three to six months’ worth of living expenses is a good target. If that’s an intimidating sum, shoot for $1,000 to start. That’s generally enough to cover most unexpected expenses, like a car repair or medical bill. From there, keep saving little by little until you’ve got enough cushion to cover your basic bills long enough to find another job in case you’re laid off.

3. What’s a good credit score, and why should I care?

On a scale of 300 to 850, a FICO score of 700 to 749 qualifies as “good.” Anything higher is deemed “excellent.”

Scoring well can equal significant savings. Your credit score quickly tells potential lenders whether they can trust you to pay them back on time and in full. A high score indicates you’ll be a responsible borrower, so you should get the best interest rates on a loan or card.

4. How can I improve my credit score?

Generally, the best ways are to pay your bills on time every month and have low (or no) debt. That said, asking for an increase in your credit limit can give you a quick boost, as long as you don’t use it—and you pay any balance off each month.

You should regularly review your credit report to see what’s affecting your score. That also allows you to be sure there are no costly errors bringing you down. Get a free copy of your report at AnnualCreditReport.com once every 12 months from each major credit bureau: Equifax, Experian and TransUnion.

5. What is compounding?

When you save and invest your money, it earns interest and grows—and then that growth earns interest, too. For example, if you invest $100 and get a 10 percent annual return, you’ll have $110 in one year, but $121 the next (since your $10 earned 10 percent, too), and so on. It seems like magic, but it’s actually just math. That’s why it pays to start investing early, even if you only have a little to spare. The more time you give your money to grow, the bigger your potential gains.

6. What’s diversification?

It’s when you mix and match investments—like stocks and bonds, real estate and cash—to create one portfolio. Having a well-diversified portfolio means that even when some of your investments are down, others should hold up and stabilize your wealth.

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April 25, 2018

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