Week 13: Personal Finance Guide Review - Part II

So You Think You Know Personal Finance?

It's now time to review more of our previous Personal Finance Guide articles as we gear up for Financial Literacy Month in April. Starting next week, we'll be highlighting an important article each issue that we believe will help you to expand your financial knowledge.

If you missed one of our previous newsletters, visit our archive below:


Personal Finance Guide Archive


Making the Right Investment Choices

As we have discussed in previous issues, money left over after paying your bills each month should always be first used to pay off any existing credit card debt.
Also remember that you should always be striving to have 6-8 times your monthly expenses saved in a “rainy day fund”. Once you have achieved these milestones, it is time to start thinking about investing your money.

The first investment you should always fund is an employer-matched 401(k). If your company offers to match a percentage of your salary into a retirement account, it is like they are giving you FREE MONEY. Be sure to fully fund these accounts up to the maximum matching percentage that your employer offers (if any) before making other investments.

- Check out the Risk Tolerance Quiz

The Fool-Proof Guide to Taxes

You might think that taxes are a necessary evil better left for professionals, but understanding the basics can help you minimize the total amount of taxes that you pay.

When planning for taxes, we usually think of the Federal filing deadline of April 15, however, you are required to pay taxes throughout the year. Paying the right amounts throughout the year will save you from having to pay penalty charges for underpayments.

For most of us, the payments we make throughout the year are made on our behalf through our employers. Employers automatically withhold taxes from our gross earnings before giving us our net earnings, the little numbers on our paychecks (or big numbers for you lucky ones). Your employer is also responsible for reporting your total income and taxes paid by submitting form W-2 to the IRS. You must then file your taxes; which tells you the total amount of taxes owed and the total amount of taxes already paid-and either pay the difference (if your automatic deductions were too small) or collect the difference (if your automatic deductions were too big).

Essential Insurances- Are You Fully Covered?

Insurance. We hear about it every day online, on TV and pretty much everywhere else there is advertising. Health Insurance… Life Insurance… Homeowner’s Insurance… Auto Insurance… with all of these different types, how can you be sure you are getting the coverage you need?

- Try out the Life Insurance Calculator

Retirement Planning

Let’s look at 3 different ways to invest in your retirement savings. Your portfolio allocation will depend on your level of risk, which will generally be higher if you have a long time until retirement or lower if you are closer to retirement.

Cash: The safest, lowest-risk investment. However, along with the low risk comes a low return.

Bonds: Also low risk with relatively low, set returns.

Stocks: Higher risk investments. Have the possibility to produce high returns, but could decline considerably.

Finding the Right Bank for You

Before you begin analyzing what you need from your bank, let’s take a look at 5 different accounts that are typically offered by banks:

Savings Account: These are intended to provide an incentive for you to save money. You can make deposits and withdrawals, but usually can’t write checks. They usually pay an interest rate that’s higher than a checking account, but lower than a money market account or CD. Some savings accounts charge a fee if your balance falls below a specified minimum.

Basic Checking Accounts: Sometimes also called “no frills” accounts, these offer a limited set of services at a low cost. You’ll be able to perform basic functions, such as check writing, but they lack some of the bells and whistles of more comprehensive accounts. They usually do not pay interest, and they may restrict or impose additional fees for excessive activity, such as writing more than a certain number of checks per month.

Interest-Bearing Checking Accounts: In contrast to “no frills” accounts, these offer a more comprehensive set of services, but usually at a higher cost . Also, unlike a basic checking account, you are usually able to write an unlimited number of checks. Checking accounts which pay interest are sometimes referred to as negotiable order of withdrawal NOW -0.03% accounts. The interest rate often depends on how large the balance in the account is, and most charge a monthly service fee if your balance falls below a preset level.

Money Market Deposit Accounts (MMDAs): These accounts invest your balance in short-term debt such as commercial paper, Treasury Bills, or CDs. The rates they offer tend to be slightly higher than those on interest-bearing checking accounts, but they usually require a higher minimum balance to start earning interest. These accounts provide only limited check writing privileges (three transfers by check, and six total transfers, per month), and often impose a service fee if your balance falls below a certain level.

Certificates of Deposit (CDs): These are also known as “time deposits”, because the account holder has agreed to keep the money in the account for a specified amount of time, anywhere from three months to six years. Because the money will be inaccessible, the account holder is rewarded with a higher interest rate, with the rate increasing as the duration increases. There is a substantial penalty for early withdrawal, so don’t select this option if you think you might need the money before the time period is over (the “maturity date”).

What You Need to Know About Loans

1. When considering an auto loan, shop around. Many people take out new auto loans directly from the dealer from which they purchased the car without first getting quotes from other lending sources (including their own banks).

2. Before considering a mortgage loan, know your credit score and your debt-to-income ratio (calculate this below). An ideal debt-to-income ratio is below 35%.

3. If you are currently paying off student loans, remember that the monthly payment is the minimum that you need to pay. Increasing your payment by even 10% will allow you to finish the loan quicker and will reduce the total amount that you pay.

4. Before taking out a new student loan for you or your child, be sure to first apply for free Federal aid. Filling out the FAFSA (Free Application for Federal Student Financial Aid) could get you a piece of the more than $150 billion in yearly federal grants and loans, based on income.

5. You can refinance almost any loan. If you took out an auto loan 3 years ago and have since improved your credit scores, it is very likely that you could refinance that loan at a much lower rate. However, you usually cannot refinance a student loan, since you probably agreed to a set interest rate when you signed the Master Promisory Note.


Stay tuned for next week's issue, which will cover Financial Literacy Month: Part 1.


By InvestorGuide Staff

Copyrighted 2020. Content published with author's permission.

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