What is Insurance & When Do You Need It?

Let me just start by admitting that insurance is a HUGE topic and there’s no way I can cover it all in one post without it turning into a book. The goal in this article is to cover the basics of what insurance in general is and when it’s important for everyone to have insurance.

What is Insurance

All “insurances” are basically an agreement between you and a company. You pay the company a set amount of money, called a “premium”, and they agree to pay you a certain amount if something happens to the person or object you are insuring.

Most insurance premiums are due monthly or every six months.

Why does insurance exist?

Insurance exists because disasters are expensive. If insurance didn’t exist and you wrecked your car, you might be stuck having to pay thousands of dollars to replace it, plus possibly thousands more in medical expenses. If your house burned down and you didn’t have insurance, you would be faced with replacing the house and everything in it with your own money. Very few of us have that kind of cash lying around.

Basically, when life dumps us in the deep end, as it sometimes likes to do, insurance acts as the life vest that brings us to the surface again. Without it, we could wind up in debt or bankrupt.

 

What can be insured?

Almost anything can be insured, as long as it has value of some kind.

Home, car, boat, motorcycle, and RV insurance all exist in case something drastic happens to any of those possessions. Any vehicle you own will need insurance.

You can buy renters insurance in case your possessions are ruined while you’re renting. In fact, many landlords require their tenants to show proof of renters insurance before they are allowed to move in.

If you own any valuable art, jewelry, or collectibles, you can usually insure those.

Some people buy pet insurance which helps keep costs down if their pet becomes very ill.

Travel insurance can be a good option if you’re going on a big trip because it keeps you from being stranded if part of your plans falls through.

You can even insure yourself and your family with health, disability, and life insurance.

Psst. Don’t understand a term or phrase in your insurance documents? Check out the National Association of Insurance Commissioners’s glossary. Many insurance companies also provide glossaries of terms they use. Don’t sign until you know!

What kinds of insurance do I need?

There are a couple types of insurance that everyone should have. Which additional types you need depends heavily on your stage of life.

Everyone needs…

Health insurance:

Currently, everyone in the US is required to have health insurance or face a fee at tax time. Most of us will get this benefit through our employers, but those who don’t can buy their own through the Health Insurance Marketplace. Open enrollment only happens once a year, but if you experience a “life-changing” event, such as marriage, the birth of a child, or losing a job, you can get special permission to enroll outside of that enrollment period. I know it’s expensive, but a medical emergency can destroy your savings. The last thing you want to be worried about in a medical crisis is money.

Car insurance:

You only need this type of insurance if you own a car, but most Americans do, so I figured I’d include it here. It is illegal to drive a car without insurance, and cars are expensive enough to maintain without having to pay out of pocket should it be in an accident. Most car insurance will also provide some coverage for injuries or other medical costs resulting from an accident. The same applies for any vehicle you drive, whether it’s on the road or water: insure it!

Homeowners or Renters insurance:

Everyone should have one of these, since we all either own or rent our homes. It’s obvious why you would want homeowners insurance, since a home is a massive investment and losing it to a disaster would destroy the finances of most people. A lot of renters, however, tend to skip buying renters insurance. If you’re one of those people, I would strongly recommend getting at least a little bit. You might be surprised how cheap renters insurance is and what it covers. Don’t let a burst pipe, fire, or natural disaster leave you with nothing but an empty wallet.

Some people need…

Personal property insurance:

If your homeowners or renters insurance doesn’t provide enough coverage or has exceptions for certain types of disasters or events, you might want to purchase extra personal property insurance to make sure you’re covered for all possibilities.

Valuable personal property insurance:

This kind of falls under the previous category, but it’s more focused on special, valuable items you own, like collectibles, art, jewelry, cameras, instruments etc. Usually, these items have to be worth over a certain amount to qualify for valuable personal property insurance. Otherwise, they would just fall under regular personal property insurance.

These things don’t have to be worth a million dollars to count as valuable. Many people insure their wedding or engagement rings, and remember, if you use expensive equipment like instruments or cameras to create income, those things are much more valuable to you than just their sticker prices!

Life insurance:

Most of us will need life insurance at some point. It usually pays out after the death of the insured person and is meant to help keep a family financially stable even when the breadwinner has died.

Most people buy life insurance during the years they have dependent children or when a spouse or parent is relying on their income to survive. When you’re single or in a coupled situation in which the death of one partner would not cut off the only income, life insurance is less important.

Some jobs will provide life insurance as a benefit, but even if we have to buy it ourselves, all of us with living family should at least consider having life insurance, especially if our jobs involve physical risk. Even a few thousand can make a difference to those left behind who will have to handle funeral and other estate expenses, all while grieving.

Long-term disability insurance:

This one is a little like life and health insurance combined. It will help provide income in the case that you become unable to work for long periods of time. This is especially important if you are the only source of income for your household. Long-term disability is another type of insurance that employers will sometimes offer.

Travel insurance:

Some people have never heard of travel insurance, and others never go anywhere without it. Travel insurance comes in a wide range of flavors that cover anything from canceled trips, to lost luggage, to medical emergencies abroad.

If you’re planning to go abroad, especially for several weeks or a month, it might be a good idea to look at buying some travel insurance in case something goes wrong and you find yourself stuck in a foreign country and having to replace your whole wardrobe or buy last-minute tickets to replace your canceled ferry or flight.

You can buy travel insurance from your insurance company, but some credit cards provide free or discounted travel insurance on trips booked with their cards, so check your card benefits before booking.

Pet insurance:

Of all the insurances we’ve talked about here, this one is probably the least necessary. A dog or cat of average health and life-expectancy won’t cost enough over its lifetime to make pet insurance worth the cost. However, insurance is always meant to protect against huge, catastrophic costs, which can happen with pets who develop a serious illness or need surgery.

If you get a specific breed that is known for having medical problems, you might consider getting some level of pet insurance, but remember that those breeds will cost more to insure because the insurance companies know that they are more likely to need treatment. In most situations, setting aside a little cash in “Fido’s Emergency Fund” is a better option for covering expenses than buying pet insurance.

Wrap Up

Should you decide to get some or all of these types of insurance, consider buying them all through the same insurance company. Most big companies will offer discounts for customers purchasing multiple types of insurance. Just be aware that the company might try to up-sell you on policies you don’t really need because they’re “deals”. As always, shop around for the best price, and don’t be afraid to ask questions!

It can be tempting to think of insurance as a luxury. Watching money leave your account every month to pay for something that may never happen can be frustrating. Resist the urge to “save money” by dropping your insurance, though.

If a disaster does strike, you will spend far more money recovering without insurance than you would with it. Plus, there’s something to be said for the peace of mind that comes with knowing that, if something should happen, the cost of recovery will be the least of your worries.

What is a Social Security Number?

If you’re a citizen or legal resident worker of the US, you have a Social Security Number (SSN). You’ve probably heard the term thrown around a lot, especially when something like the Equifax hack happens, but you might not know exactly what a Social Security Number is or why it’s so important. That’s what we’ll be tackling today.

What is Social Security?

Social Security is a program that helps provide income to people once they retire or become disabled. Its name comes from the fact that the program gets society to work together to provide financial security to retired workers.

It can be a little complicated, so I’ll cover just the basics here.

The way it works is that current workers put money from their paychecks into the Social Security program while current retirees take money out. If you look at a pay stub, you’ll see the Social Security contribution listed as part of what’s been taken out before the employee got paid.

When today’s worker’s retire, their Social Security money will be provided by the people who are in the the workforce then, and so on.

To be eligible to collect Social Security, people must meet certain age requirements and have worked for at least a certain number of years. The amount of money people are allowed to get from Social Security in retirement depends on how much they earned while they were working.

What is a SSN?

Your Social Security Number is a 9-digit number you are assigned when you become a citizen, permanent resident, or temporary worker resident of the United States, which might be when you’re born or later in life.

Everyone’s SSN is different. These numbers were originally used to keep track of how much you contribute to the Social Security program, but they have become a way to identify people and in fact are probably the most important piece of identifying information in the US.

Everyone who has a SSN is issued with a Social Security Card that lists his or her number. It looks something like this:

inside_ssc card template

Image credit: www.nyc.gov

Why is it important to know your SSN?

You will be asked to provide your SSN in basically any situation that requires a major financial interaction. These include getting a job, getting a loan or mortgage, and even opening a bank account, although some banks will accept other forms of ID.

You shouldn’t carry your Social Security Card with you every day or store your SSN anywhere it might be lost or stolen. Memorizing it is safer and more convenient and allows you to fill out forms without relying on your card.

Who should know your SSN?

Be SUPER picky about who knows your SSN. The fewer people who know it, the lower your chances of having your identity stolen. Immediate family members like your parents, spouse, or children are really the only people who might need access to your SSN, and never let anyone have this info without knowing exactly why they want it. It’s probably safer to just let your family know where to find your card if there’s an emergency rather than telling everyone the number directly.

How to protect your identity

Never give out your SSN online without knowing who is asking for it and why. Legitimate companies and banks will never ask for that information through email.

When possible, only fill out forms in person or through a secure internet connection. That means no random public WiFi or cell service.

Ask if you can just not give your SSN when you’re asked for it. You might be surprised how often it’s optional. Medical offices, for example, often put a space for your SSN on their forms but don’t actually require it.

I wish I’d known that years ago before frantically calling my parents to find out my SSN at the dentist’s office (back before I’d memorized it). I took so long to finish that form because I got hung up on putting in my number, which probably didn’t even need to be there! Sigh.

Keep your Social Security Card somewhere safe and secret. I’ll say it again: that place should not be your wallet. If you keep it in your wallet and your wallet gets lost or stolen, you’ve basically just handed a stranger the keys to your identity. Losing your cash, ID, and credit cards is bad enough without worrying about your SSN being out there. Also, it’s a huge pain to get a new Social Security Card.

A fire-proof safe is the ideal place for something this important, but at least keep it in a file or box with other important papers so you can grab it at a moment’s notice.

By the way, I know the card seems flimsy and easy to destroy because it’s paper, but you’re not supposed to laminate your SSN. It makes it more difficult to recognize some special qualities on the card that prove it’s real.

You can store your card in a specially-made holder, but a nice, simple way to protect your card while it’s in storage is to keep it in a sandwich bag that zips closed.

Wrap Up

I hope it’s now clear what your Social Security Number is and why it is important. Make friends with it. It will be with you longer than most things in your life: jobs, pets, furniture, and maybe even your hair.

Just remember:

keep it secret

What is an IRA?

When I graduated from college, my dad sat me down and explained that he wanted to help me open up a Roth IRA.

A what-now?

This did not sound like fun.

I figured anything that is named by a bunch of letters is usually complicated and when it comes to money, complicated is scary.

scared boy meets world

Basically me when I first heard the words “IRA”

As he explained what it was and how it worked, though, I started getting a little excited. And when I did my own research, I got a lot excited. Turns out, IRAs, particularly Roth IRAs, are pretty darn cool.

If you’re nervous about finances the way I used to be, it may sound crazy-pants to get excited by something that sounds both boring and confusing.

Fear not. I’m going to walk you through the important basics of IRAs and before you know it, you’ll be able to throw the term “IRA” around like you’ve always known what it means. You MIGHT even get a little excited.

Let’s get started.

What does IRA stand for?

IRA stands for “Individual Retirement Arrangement” although many people just say “Individual Retirement Account” because it makes more sense that way.

What is an IRA?

It’s a retirement account. This means it’s designed for you to put money in it, then invest that money in stocks and bonds, then sell those and take your money out gradually when you retire. Money in your retirement accounts is the money you will live off when you aren’t earning an income anymore.

Where can I open one?

You can open an IRA for yourself without going through an employer. Most brokerage firms, like Vanguard, Fidelity, Charles Schwab, and even E*Trade offer IRAs.

Who can open an IRA?

Anyone, including children, can open and put money into an IRA as long as they earn money somehow. It doesn’t matter whether you have a full-time job or if you babysit or shovel snow as a side gig, you can open an IRA as long as you earned some money and are reporting it to the government. No earned money? No IRA.

Parents can contribute to their child’s IRA as long as the contribution isn’t more than the child earned that year.

How many types of IRA exist?

There are four types of IRA, but we’re going to focus on the main two today: Traditional and Roth IRAs.

The Traditional IRA

The OG IRA.

You can put money into a Traditional IRA before you pay income taxes on it, so you avoid paying taxes on that money right now.

Instead, you pay the taxes when you withdraw the money in retirement. Anything you take out once you reach age 59½ will be taxed like income.

Taking anything out of the IRA before that time will cost you a 10% penalty.

The maximum amount you can put into this account per year (your “contribution“) is $5,500.

**UPDATE: Starting in 2019, the new max is $6,000!

Traditional IRAs are great for when you’re making a really nice salary and are getting closer to retirement.

The Roth IRA

Roth IRAs are the best for young or lower-income people.

Roths allow you to put money into them after you’ve already paid the income tax on it, which means you pay taxes now.

However, all the money you pull out after age 59½ is tax-free, INCLUDING any money you make by investing what you put in (money you make with investments is called “gains“). Income that’s tax-free?! Yes, please.

If you need to, you can take out the money you put into a Roth IRA for free at any time. You CANNOT take out your gains before age 59½ without paying the 10% penalty, but at least you have access to some of the money in the account without having to pay extra. Not that you should ever take money from your retirement account before retirement, but it’s nice to know it’s there.

The maximum amount you can put into this account per year is $5,500.

**UPDATE: Starting in 2019, the new max is $6,000!

Roth IRAs are great for when you aren’t making a ton of money because you pay smaller income taxes now and avoid paying taxes later.

PSST…if this is all a lot to take in, here’s a printable that lists these differences:

The ABCs of IRAs Printable

Which is better?

If you start your IRA early, the chances are good that you will make significant gains on that money, so a Roth is the better choice. Paying taxes on your lower income now will allow you to pull out a nice income during retirement without paying a dime of taxes on it.

As you get closer to retirement, Traditional IRAs often become the better option. The more money you make, the higher your taxes are. Most of us will make more as time goes on, and Traditional IRAs let you avoid paying heavy taxes on some of your income when you’re earning the most.

When you retire, as long as you pull less money out of your account than you used to make, you will pay less in tax than you would have using a Roth.

Confusing? Let’s look at some numbers.

Warning- Math Ahead

Let’s say you make $35,000 at the age of 20.

Using a Traditional IRA

In 2017, you would be expected to pay $4,784 in income tax. That’s not a fun number, so what if you contributed $5,000 of your salary to a Traditional IRA? Your income would now be taxed as if it were $30,000 instead.

That lowers your tax bill to $4,034, saving $750! Nice. If that $5,000 grows at about 5% for the next 30 years, even if you never add anything else to the account, you’d have $21,610 when you were 60 years old.

You could then pull out that money, but you’d have to pay $2,775 in tax when you pulled it out (assuming the tax rates are the same in thirty years!). That brings your total tax paid to about $6,809.

Using a Roth IRA

But let’s say you pay that $4,784 of income tax and then put $5,000 into a Roth IRA. You would make that same $21,610, but wouldn’t have to pay any tax on it when you used it at age 60, so you’d end up paying $2,025 less than you would by using a Traditional IRA.

If you contributed regularly to your IRA, you’d see this play out with much bigger, sexier numbers, but the basic idea is the same. As long as you can, you should contribute to a Roth IRA.

What’s the catch?

These IRA things are starting to sound pretty awesome, right? But, of course, there are some rules that limit how much we can take advantage of that awesomeness.

First, you can only contribute $5,500 per year to your IRAs, total. So, if you have both a Traditional and a Roth IRA, you can put part of that amount, say $2,500, into one, and the rest, $3,000, into the other, but you can’t contribute more than $5,500 between the two.

Also, Roth IRAs have income limits. This means if you make more than $118,000 as an individual, you aren’t allowed to contribute the full $5,500 to a Roth IRA until your income drops below that number again. Once you make more that $133,000, you aren’t allowed to contribute to it at all. Similar rules apply if you are married. For a chart that helps clarify what the income limits are for a Roth, check out Fidelity’s chart.

There are no income limits for a Traditional IRA, though, so if you are lucky enough to be making too much to put money in a Roth, contribute to a Traditional IRA instead.

Lastly, the early-withdrawal penalty I mentioned above can be painful if, for some reason, you HAVE to take money out of an IRA. All the more reason to set up an emergency fund.

Wrap-Up

The Benefits of IRAs

An IRA is a great way to stash away extra money for retirement. If you are already contributing to a work retirement account or if you don’t have an account through work, an IRA can help you stay on track to afford retirement.

Also, the fact that anyone earning income can contribute to an IRA means you can get a jump start on saving before you’re even in a full-time job.

The Potential Pitfalls

Like most retirement-specific accounts, IRAs have rules that punish you if you take money out too early. That doesn’t mean you CAN’T get to that money if you absolutely need it, but you may pay a 10% penalty for taking it out early.

There are exceptions to these rules, especially with a Roth, which is yet another point in its favor, but try to think of money in an IRA as off-limits.

And now you know the basics of an IRA! Congrats on making it through. As a reward, here’s a puppy in a cup!

chihuahua-dog-puppy-cute-39317.jpeg

Now, go open yourself a Roth and start stashing those extra dollars!

 

Disclaimer: None of the companies, apps, or websites mentioned in this article paid me to mention them.

How to start getting your finances together

crazy cat nebula

Does the topic of money make you feel like this? You’re not alone.

Probably the most daunting hurdle in your quest to get smart about your money and build wealth is the very first step: getting started.

Dealing with money can seem scary and feels like a huge chore, so it gets treated like the laundry you don’t really want to do — left in a dark corner until it starts to smell a little.

Ew.

The trouble is that time is one of the most important parts of the wealth equation. Given enough time, even a small amount of money can grow into a tidy sum.

So how do you get started building that little nest egg of yours when you are young, inexperienced, and probably not rolling in cash?

The trick is to keep it simple to start. By taking advantage of 4 types of accounts, you can build yourself a great financial foundation.

The Basic Accounts

Checking

Checking accounts are one of the basic bank account everyone needs. They are usually where your paychecks get deposited and where the payments for credit cards, checks, and even PayPal, Venmo, and other online payment systems come from.

Quick Tip: Look for checking accounts that allow you to pull money from any ATM with no fees or will refund your ATM charges. It’s a nice little perk that you’ll appreciate when you don’t have to hunt down the “right” ATM in a hurry.

Most checking accounts don’t pay interest; you may find one that has an interest rate, but it’ll be really low, so don’t count on your checking account to make you any money. It also shouldn’t be the place you stash your cash for the long term. Keep a comfortable amount in it to pay your bills, but your savings belong somewhere else.

Saving

As boring as it sounds, the best place for your emergency fund or savings you might need soon is in a savings account. Savings accounts can do a lot of what checking accounts can, but, with higher interest rates and no checks or debit cards attached to them, they are designed to be better places for money to sit than checking accounts are.

Not every checking or savings account is alike, however, and I would suggest using a tool like Magnify Money to shop around and find accounts with a decent interest rate and no weird hoops to jump through. Remember, there’s no rule that says your checking and savings accounts have to be with the same bank. Mine aren’t.

Many of the savings accounts with the best interest rates are online-only banks, which means you’ll have to have a checking account to connect to the savings account in order to add or remove money.

Personally, I like the idea that I have to wait a couple days for access to my online savings. The delay makes it really hard to spend that money. However, if you want or need access to your money more immediately, you might want to stick to a checking account or a savings account with a big-name bank that has physical locations. Just know you will be sacrificing interest rate for convenience.

As you get further along in your financial journey, you’ll be able to move some of that cash around and maybe make some more advanced decisions on how to save or invest it, but for your initial emergency fund, I think a savings account is the way to go. Hop over to our post on choosing the right savings account for more help with getting yours set up.

Investing Accounts

Investing is where you can really kick up your wealth-building game. Once you’ve gotten the hang of using your checking and savings accounts, investing is the next step. Without investing, anyone with an average salary is just not going to be ready for retirement.

If you’re a little lost when I say “investing” take a look at our What is investing? article, then pop back!

Retirement Accounts

Everyone needs some kind of retirement account. If you’re lucky enough to have a job that offers a 401(k), that should be your primary retirement account while you’re in that job. Other people might have IRAs, 403(b)s, or another type of account. Many have some combination of these.

Why open a retirement-specific account? Unlike standard savings accounts, these accounts are designed to be ideal places for your retirement savings. By investing your money in a retirement account, you’re likely to see much greater returns than in even the highest-yielding savings account.

Also, if you get on board with a retirement account offered by your employer, you’ll probably also have the opportunity to get some free matching money from that employer.

Even better, contributing to your retirement account often comes with immediate tax benefits, so you could be doing yourself a double favor by saving for your future and getting a tax break. Even those accounts that don’t give you a break on the money you put in usually make up for it with a tax break on the money once you begin to pull it out of the account in retirement.

Every type of retirement account allows you to invest the money you put into it. Some accounts offer more limited options than others, but there’s always a way to help your money grow while you’re just going about your everyday life.

Brokerage Accounts

If you’ve got a full, safely stashed emergency fund AND you’re maxing out your retirement accounts, the next easiest way to invest is through a brokerage account.

Brokerage accounts allow you to buy and sell stocks and bonds. These are TAXABLE accounts, so any gains you get when you sell what’s in them will be taxed as income that year, so be careful. For those of you with money nerves, a couple of low-cost funds and maybe a bond or two are the easiest and least dangerous ways to invest a brokerage account’s money.

The advantages of a brokerage account include the fact that the money in them is pretty liquid, which means you can take it out of the account at any time without penalty, unlike a retirement account. You could think of a brokerage account as like a checking account, except you invest the money instead of keeping it in cash. The danger, of course, is that your investments could lose value and you could end up with less money than you started with. A good rule is to not invest any money that you think you will need in the next couple of years.

I strongly encourage you to learn all you can about how stocks and bonds work before jumping into this pool. It can be rewarding, but it can also be dangerous for anyone who thinks they can game the system and make tons of money on trading. The market doesn’t work that way.

Wrap Up

And there you have it: a basic, 4-account map of how to get started with money.

Can be money be way more complicated? Heck, yes.

Does it have to be? Not if you don’t want it to be.

By keeping things simple with your everyday money in checking and savings, you’ll minimize the effort it takes to track your income and expenses. Taking advantage of your retirement and brokerage investing options guarantees that your future self will have money when he or she needs it.

Quick Tip: Using a platform like Mint or Personal Capital can take the effort out of checking on your finances. After linking all your accounts to the program, you just need to open the app to see how much money you have in each account.

How do you keep your money simple? Share your methods!

 

Disclaimer: None of the companies, apps, or websites mentioned in this article paid me to mention them. I just like ’em!

What is an emergency fund?

This one’s pretty easy.

An emergency fund or “rainy day fund” is any money that you have set aside to use ONLY IN CASE OF EMERGENCY.

The purpose of an emergency fund is to be a safety net in case you have an unexpected bill that would wipe out your checking account.

Experts recommend keeping 3 to 6 months of expenses in your emergency fund. That means enough money to pay your rent or mortgage; essential bills like food, water, gas, and heat; and any other recurring costs like debt payments.

What is an emergency

Losing your job

Probably one of the most stressful things that can happen to most people is the loss of a job. For people living paycheck to paycheck, losing that income can spell disaster for their financial life. Having an emergency fund to keep you afloat while you hunt for a new job can take an incredible amount of pressure off you.

Car repair bills

Cars are expensive, man. When one breaks down on you unexpectedly, you might be faced with a bill totaling hundreds of dollars. If you rely on your car to get to work, that bill needs to be paid right away. Your emergency fund can swoop in and save the day, allowing you to pay that bill and get back on the road with minimum life disruption.

Medical or dental bills

If you, a family member, or a pet get ill or need dental surgery, medical bills can come at you fast. Of course, health and dental insurance will cover some of the costs, but you’ll be responsible for the deductible, at least, which can be thousands of dollars.

 

What is not an emergency

A great sale

Seriously. I know the pull of those great sales at Nordstrom Rack, Target, Sephora, etc. But just because something is on sale does not mean you should buy it. If you were already going to purchase that thing anyway, then get it, but with your normal spending money, not your emergency fund!

Upgrading anything

If it ain’t broke, don’t replace it. That’s the saying right?

Raiding your emergency fund to pay for the newest phone, computer, coffee maker, or whatever just because you want an upgrade is not a good idea. If your current whatever-it-is works fine, keep it until you can truly afford to replace it without weakening your savings.

Keeping your emergency fund in a separate account from your spending money is usually a good move. Keeping it just slightly out of reach will help you pretend it’s not there until you need it. Hopefully you’ll never need it, but you’ll be so glad you have it if you ever do.

What is a 401(k)?

Welcome back to our What Is? series of posts. Today, we’ll tackle an exciting topic with a snooze-fest name — the 401(k).

The term 401(k) may look like something out of Algebra class, but it’s actually one the most important perks any job can offer.

More important than free food and a foos-ball table?

Oh yeah.

What is this mysterious number-letter combo and why does it matter so much?

401 huh?

Very simply, a 401(k) is a type of retirement account. Retirement accounts are designed to help you save money while you’re working to live off after you retire.

The name “401(k)” comes from the section of the Internal Revenue Service (IRS) rules that defines the rules for this account.

In 2018, you are allowed to contribute any amount up to $18,500 a year to a 401(k). Starting in 2019, that goes up to $19,000!

What’s the big deal?

These accounts are awesome for several reasons.

Reason #1:

If you sign up for your employer’s 401(k), you can assign a percent of every paycheck to be automatically put into that account. This means that money is safely squirreled away where you’ll never miss it. You’ll be saving with basically no effort on your end.

Reason #2:

Your 401(k) contributions are taken from your salary pre-tax, or before your income taxes are taken out. This lowers your income in the eyes of the IRS, which in turn lowers the amount of money used to calculate your taxes. So, by contributing to your retirement, you could also be saving your current self some moolah in taxes. When you retire and start withdrawing that money from your account, you will have to pay income tax on it, but you won’t be working, so ya know, it’s still not a bad deal.

Reason #3:

Probably the best thing about 401(k) accounts is that employers who offer a 401(k) usually “match” a certain percent of your contribution. What does that mean? If your employer matches up to 3% of your 401(k), that means that the first 3% of your salary you assign to be put into your 401(k) will be doubled by your employer, so you are effectively contributing 6%. That money is in addition to your salary and won’t be taxed until you withdraw it.

Let’s look at some numbers.

Say you earn about $35,000, and you contribute 3% of your salary to your 401(k). That works out to be about $1,050 a year. If your employer matches that 3%, you’ll actually be getting $2,100 a year going into your retirement account.

If you contribute more than 3%, good for you, but your employer will only match that first 3%.

How amazing is that? You’re essentially doubling your retirement contribution by taking advantage of your 401(k) — free money!

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What happens to that money?

When you sign up for a 401(k), you will usually be given a list of funds that you can choose to invest your 401(k) money in. Once you’ve done your research and chosen a fund or two, your money will be invested and will start to work for you, growing even beyond what you are contributing.

Once you reach age 59.5, you will be able to start taking that money out of the 401(k). If you take it out before then, however, you will be hit with a 10% fee, so try to imagine that money as off-limits until retirement.

Other types of accounts

Some professions have retirement plans that are different from a 401(k). If you work for a non-profit or for the government, for example, your retirement accounts will have different names.

Teachers and non-profit employees are often offered a 403(b) plan — named, shockingly, after section 403(b) in the tax code — which allows similar contributions to an account. These accounts work differently from a 401(k), however. We won’t delve into them in this post, but the fees and rules around each type of retirement account can vary significantly, so educate yourself on what those are before signing up for any account.

Can I wait to open my 401(k)?

No. Why would you?

It’s a lot to think about when I’m starting a new job.

Better to get the paperwork out of the way when you’re filling out all the other forms for your job than put it off for some mythical future date when you’ll magically have time.

I’m making so little money! Won’t it be better to wait until I make more?

If you start right away, you’ll never miss the money that comes out of your check, and you’ll be taking advantage of your most valuable asset — time. The longer you give that money time to grow in your account, the more money you’ll end up with down the line.

What if I need every penny?

Even if your starting salary is tiny, try to assign at least a percent or two for retirement. That’s about $200 a year from a $20,000 salary, or $17 a month. You can do this.

Future-you will thank you.

Equi-what? Why the Equifax Breach is a Big Deal for Everyone

You may have heard of the big Equifax breach from your parents, friends, or co-workers.

So what is this mysterious company and why is its data breach a big deal?

Equifax

Remember when we talked about credit scores?

Equifax is one of the three companies that tracks your credit history. The others are TransUnion and Experian. Your credit score is determined by the reports that these agencies create.

Why all the fuss?

There are a couple of things that make this data breach potentially worse than others.

  1. The number of people affected is pretty huge. About 143 million Americans’ information was exposed during the hack. That’s almost HALF of the total US population.
  2. Because Experian tracks people’s credit, it has access to basically every important piece of everyone’s personal financial information. This includes Social Security numbers, credit card numbers, and bank accounts, along with addresses, birthdates and driver’s license numbers. With these details, someone could easily steal your identity and take out loans or make big purchases in your name.

What should I do?

  • Go to experiansecurity2017.com, the ONLY official site to check whether you’ve been affected, and enter your last name and Social Security number. It will inform you whether your information might have been compromised.
  • Even if you are not over 18, it is a good idea to check whether you’ve been affected because children have Social Security numbers, even if they have never held a line of credit. Someone using your SSN could ruin your credit before you ever have a chance to build it.
  • If you have been affected, pull your credit reports from annualcreditreport.com and check them carefully for errors.
  • Also look over statements for any credit cards you have and check for fraudulent purchases.
  • Contact the credit bureaus — all three of them — to freeze your credit. This will temporarily prevent ANYONE from opening a new line of credit in your name, including yourself. If you want to open a new line of credit, like a credit card or loan, before the freeze period ends, you’ll have to unfreeze it. Depending on the state in which you live this may cost $10 – $30, and you may have to pay to unfreeze it, too.
  • Equifax is offering affected customers a free year of credit monitoring. At first, it seemed that signing up for this service would also prevent you from potentially suing Equifax in the future, but the contract has since been amended so that it no longer implies this. Signing up for the service will only freeze your credit from Equifax, so you’ll have to request a freeze from the other two separately. Whether or not to take Equifax up on its offer is definitely a personal call.
  • Be vigilant. Check your credit reports regularly, which you should be doing anyway, and keep an eye out for anything suspicious.

Wrap-up

If any good comes out of this data breach, let it be a reminder to all of us to pay attention to our finances and not let them be “out of sight, out of mind”.

Finding a Reason to Save

Saving money is easy. Don’t spend it!

Okay, so maybe it isn’t always as easy as it seems. As a teen or freshly-minted adult, it can be frustrating to be caught between having your parents pay for everything and paying your own way. Most jobs that are available to high school and college students don’t pay very well, so, although it’s nice to have some cash of your own, it’s pretty easy to blow through it with online shopping or dinners out.

If you can sock away some of that money now, however, you’ll be better off than most of your peers in the future.

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Blah blah blah the future blah blah

It’s really hard to imagine that anything you do at 16 could have any real effect on you at 26, 36, or even 46, but with money, it totally can.

Hang on for a minute, we’re going to explore some numbers.

Let’s pretend…

Say you get a part-time job making $9 an hour. If you work ten hours a week, that means you’ll earn $360 a month for the time that you hold that job. Over the nine months of the typical school year, you’d rake in $3,240. Save that up over two school years and you’d have almost $6,500 just from that low-paying, part-time job. If you work over the summer, that could probably double. Note, however, that making over $6,300 as a dependent means you have to file a tax return at the end of the year, and each paycheck will be a little less than than $360. Still, that’s so much better than zero, and you’ll be building some job skills, too.

But what if you actually want or need to spend some of that hard-earned cash? I know many of you work so you can put gas in the car or pay for your cell phone. In that case, figure out how much you NEED to cover those charges, and save as much as you can of the rest. Say you buy $25 of gas per week, that’s $100 on gas per month. Depending on your family’s phone situation, that’s probably another $100. That leaves you $100 for other stuff. Save half of it. Putting $50 a month into savings would still net you $450 in nine months, and you’ll have $50 of fun-money to play with.

Of course, the above scenario is pretty basic, and everyone’s situation will be a little different. The point is, building your savings into your expenses helps train you to see saving as a natural, essential part of life, instead of a chore.

What’s even better is having a specific goal or reason to save. Something that will help motivate you when the temptation to spend every dime gets too much.

Reasons to save

Short-term goals like a new pair of shoes, or a gaming console, or even a car work as motivators because we crave the thrill of coming home with our new thing. These goals, however, lose their power as soon as they’re met, and they usually involve buying things that only lose value once we have them.

Long-term goals like finishing college, traveling to every continent, or starting a business are better because they have the potential to add some kind of lasting value to your life or career.

I would suggest coming up with one or two of each type of goal. Little wins in the form of saving for short-term goals can help keep you moving toward the long-term ones, which can sometimes seem impossible to reach when you’re just starting out.

Whatever your reason, the important thing is that you start a healthy habit of saving money. That maybe-not-so-distant future you will be so happy you did.

Think you’re not a saver? I doubt it. Check out The 4 Types of Savers to see which one you are!

What is investing?

Investing.

It sounds so big and grown up and scary. It’s the shadowy thing rich guys in movies do. Kids who talk about their “stock portfolio” on TV are supposed to be little geniuses. So of course, only the very smart or the very rich invest, right?

Nope!

Everyone, including you, can invest.

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What does it mean to invest?

Investing, at its core, is simply buying something and expecting it to return something to you.

Most of the time, the return is money. Sometimes it’s something else.You and/or your parents might “invest” in your education, for example, because getting a degree will create a better future for you. The return your parents get is mostly the satisfaction they get from seeing you succeed. Your return might be a better job, salary, and stability.

For the purposes of this article, however, when I talk about investing I mean investing money with the goal of getting more money.

Will investing make me rich?

Overnight? Nope. Over time? Probably.

Here’s the deal. Despite what movies would have you believe, throwing some money in the stock market isn’t going to make you wake up tomorrow with a yacht, mansion, and more money than you can count. Unless you already have a yacht, a mansion, and almost more money than you can count. Then, maybe.

True investing is all about the long game. It’s about slowly adding to the money you have invested and watching your wealth build over time.

You’d be surprised how thrilling it can be just to know that you have some money working away in the background to make you more money. Really, how cool is that?

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Ways to invest

There are countless ways to invest your money. Here are three of the most common ways to invest and some essential facts you should know about them.

The stock market: The stock market is the classic place people think of when they think of investing. When you own shares of stock in a company, you own part of that company and hopefully profit from the success of the business.

The stock market can be a great place for young people, especially, to invest because it historically goes up over time, which means you make money over the years. It can be unpredictable in the short term, however, which is why people see it as scary.

The bond market: When you buy a bond, you are essentially loaning your money to the government or a company for a set period of time. That money gets repaid to you at the end of the agreed period of time, with interest.

Bonds are more predictable than stocks, but tend to produce lower returns. Traditional wisdom says the older you are, the more your investments should be in bonds. This protects your money from the fluctuations of the stock market while still giving you some guaranteed return.

Real estate: Real estate is property like land, houses, commercial buildings, etc. People will usually buy real estate hoping it will increase in value over time. The most common type of real estate for people to own is a place to live like a house or condominium.

Unlike when you buy stocks and bonds, you usually take out a loan, called a mortgage, to buy the property. Then, over 30 years or so, you pay that loan off. Real estate can be a good investment if property prices go up. It can also be a terrible one if those prices drop. Never invest in real estate without having a plan and research to back up your choice.

 

Most of us will invest in a mix of the three choices above over our lifetimes. You might decide to invest on your own, or maybe you’ll do it as part of a retirement plan at your workplace, or you could opt for a combination of both.

What is NOT an investment?

Anything that does not appreciate, or gain value, over time should not be called an investment. They are expenses. Some examples are:

Cars: A new car loses about 10% of its value the second it leaves the dealer, and the value of cars generally drops steadily over time.

Clothes/Accessories: No matter what brand name they are, used clothing, hats, and shoes are usually worth very little. On the plus side, if you are a brand junky, you can usually find gently used pieces for way below their new prices.

Diamonds: Sorry ladies (and gents). Diamonds are so not an investment. They may be beautiful, but as anyone who’s tried to resell one will tell you, you will never make money back on a diamond. This is true with most precious stones, but diamonds especially.

Gambling: Even though there’s a tiny, itty bitty chance you could win money from gambling, it is not an investment. Smart investments should always have a higher chance of return than loss, and gambling is ALWAYS rigged to favor the house. Always.

The exceptions to these are, of course, true collectors items or show pieces.
A car from the 1930s is worth a lot if it’s in great shape, for example. Before you go spending money on something you think will be a collector’s piece, however, make sure you do your research about the item and remember that nothing is guaranteed.

 

If you’re still confused or you want to know more, I’ll address a lot of the terms from this article in separate pieces. Investing does sound scary, but it doesn’t have to be complicated and you don’t have to be a millionaire to invest. However, investing can help you become a millionaire. Just not overnight.

How to write a check (and other check-related stuff)

When you open a checking account, you’ll usually be given or sent a box with a bunch of checks in it. Even though they are much less popular than cards or cash for everyday spending, checks are still a viable way to pay for stuff, and sometimes they are the best or only way.

They also come in handy when you need to pay someone but don’t have the money right away. You can write the check and tell whomever you’re paying to wait until a certain date (when you know you’ll have the money) to cash it. 

If you’ve never had to use or write a check, however, they can be a little scary. The first time I wrote a check I messed it up majorly. So get psyched, because today we’re going to go over everything you need to know about checks!

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This is a check:

sample-check

Some will look a little different, but the basic layout of a check is always the same.

In the top left will be the information of the person or company who is writing the check. On your checks, your name and address will be here.

In the top right corner will be a number, which represents the number of the check. The first one in your pack should be something like 001.

On the bottom of the check should be a bunch of numbers in three groups. The group on the left is the routing number for your bank account. The middle group is the account number itself, and the last group is the check number again. When you pay for things online using your account or set up direct deposit payments, you’ll be asked to provide the routing and account numbers.

Then there are a lot of blank lines for you to fill out. Let’s look at how to do that.

How to write a check:

  1. Use a pen, never a pencil. You don’t want anyone being able to change the info on the check after you’ve written it. Also, as much as I love colored or sparkly pens, stick to blue or black ink for checks. 
  2. Write the date.
  3. On the line next to PAY TO THE ORDER OF, write to whom the check is addressed. For example, pretend Pinocchio is paying Jiminy Cricket for being his conscience. He’s going to write “Jiminy Cricket”. If you’re writing the check to a person, make sure you write the name that appears on that person’s bank account. In other words, don’t make it out to Bobby if his legal name is Robert.
  4. Next, on the big line under the PAY TO THE ORDER OF line, write the dollar amount you are paying in words and the cents as a number over 100. For example, Jiminy Cricket might charge $106 for his services, so Pinocchio writes “One hundred six dollars and 00/100”.
  5. In the box or on the line that has a $ in front of it, write the amount you are paying in numbers. Don’t forget the decimal! This is $106.00 in Pinocchio’s case.
  6. At the bottom of the check are two lines. The left one should say FOR. This is where you can write a note about what the money is being given for. You can write stuff like “Birthday gift” or “Gas money” here to help you keep track of where your money’s going or to remind the person you’re giving it to what it’s for, but this line is technically optional.
  7. Lastly, sign the line on the bottom right of the check. Hooray! You’re done.

Pinocchio’s finished check would look like this:

sample-check-filled-out

How to deposit a check:

  1. Double check that all of the information on the check is correct, including who is giving it to you and how much it’s made out to. Fixing errors after the money has been deposited may be difficult or impossible.
  2. Sign the back of the check on the line that says ENDORSE HERE. By endorsing the check, you are saying you have received it and the information on it is correct. Some banks have added a box on the back of their checks that needs to be marked if you plan to deposit your check through a mobile app.
  3. Take your check to the bank, or use your bank’s app to deposit the check.
  4. NOTE: If you use an app to photograph and deposit a check, make sure you hang on to the check until it clears and the money appears in your account. If something goes wrong, you don’t want to have to go back to the check writer and ask for another check. After the money is in your account, destroy the check by shredding it before trashing it.

I’m sure Jiminy Cricket needs his money for…top-hat maintenance? Whatever. He’d endorse his check like this:

sample-check-back

What to do if you make a mistake:

If you’re anything like me, you’re going to make at least one mistake on a check. Since checks are always written in pen, correcting errors has to be done carefully. Never use white-out on a check.

If you make a mistake, correct it neatly and with as little scribbling as possible; then write your initials next to the correction. This proves that you made the change, not the person you’re paying.

What to watch out for with checks:

  1. This may seem obvious, but make sure there’s enough money in your account to pay the full amount of the check. Checks act like debit cards in that they take the money from your account as soon as they are cashed. If you don’t have enough money to back it up, a check will “bounce”. A friend might just be annoyed by this, but businesses often charge fees of around $25 if a check you give them bounces.
  2. NEVER give anyone your blank checkbook, and especially don’t pre-sign a check for them. Once a check is authorized with your signature, someone could write any number they wanted in the money box and clean out your account.
  3. It’s also not a great idea to walk around with checks in your wallet or purse. If you lose your checkbook, it’s basically like losing a debit card. You’ll have to call your bank to freeze your account so no one can access your money, including you. Then you’ll have to go through the process of closing your account and opening a new one with a new number since checks have both the account and routing numbers on them. It’s a whole messy thing, so leave the checkbook safely tucked away at home unless there’s a very specific reason for taking it with you.

Whether or not you use checks regularly, knowing how to write them is an important skill. Now, when you go to pay your first month’s rent, split bills with your roomies, or pay your parents back for a loan they gave you, you can fill out your check with confidence and sign it with a flourish.