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.

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!

free money simpsons

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.

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.

What is overdrafting?

My senior year of college, five other girls and I drove down to Daytona Beach, Florida for our spring break. We were there too early in the season for all the crazy, party-hard events Daytona is known for, but we had a good time exploring the area and lying on the beach.

On our last day there, several of us stopped by a stall where a lady let you pick an oyster and then made some jewelry for you from the pearl inside. For $12, I got myself a cute gold necklace featuring my perfect, white pearl.

On the way home, my phone rang. It was my dad, telling me he’d gotten a message from the bank that my checking account was overdrawn.

“Don’t use your debit card for anything else!” he said.

I stared at the soda and snacks I had just bought at a gas station. Oops.

When I got home, my dad marched my brother and me over to the bank to talk to someone about overdrafting and how we had to be careful about our money. I was so embarrassed, I wanted to melt into the floor. It was a rough introduction to the overdraft monster.

How does overdrafting happen?

The overdraft monster appears when you spend more money than you have in your bank account.

Say you use your checking account to pay for something that costs $50. Unfortunately, you only have $45 in your account. Now, one of a couple of things might happen.

  1. Your bank declines the transaction and does not charge you a fee. Lucky you. Of course, you won’t be able to buy the item you’re trying to purchase. This scenario usually happens if you try to use your card for purchases, but sometimes the bank will reject (or bounce) a check or electronic withdrawal.
  2. Your transaction will still go through, but now your account will have a negative balance of $5. You have now overdrafted your account and the bank will charge you an overdraft fee as a penalty. This is what happened to me. Overdrafts usually happen with checks or automated payments that come out of your account, although each bank varies in its policy on what is allowed to trigger an overdraft.

Overdraft fees:

If you overdraft, the bank will charge you an overdraft fee, which is usually around $35. And not just once.

No, no.

Every time you overdraft, you owe another $35, which can really add up if you’re not careful.

The necklace and snacks I had bought had only cost maybe $20 total, but they had racked up $70 on top of that in overdrafts and fees!

Avoiding overdrafting:

Obviously, we NEVER want to pay overdraft fees, but how can we best protect ourselves against them?

Firstly, of course, we should always pay attention to how much money is in our checking accounts, especially if we pay automated bills or subscriptions from them. By being aware of how much money you have going into and coming out of your account, you can save yourself a lot of worry and will never come close to overdrafting.

If you don’t trust yourself to keep track of your money that closely, there’s a backup option available. Most checking accounts come with free “overdraft protection”.

Basically, overdraft protection means you connect your checking account to another, separate, bank account or credit card and give the bank permission to charge any overdrawn amounts to those accounts. I would recommend using a savings account as your overdraft protection. Credit cards are much riskier back-ups, since you’re just borrowing that money and will have to pay it back, perhaps with interest.

Some banks have restrictions on what kinds of accounts can be used for overdraft protection, so check with your bank before you sign up.

If you overdraft

There’s not much you can do if you overdraft, but it’s worth a shot to call your bank and ask about your options. After my dad dragged me to the bank, the woman we talked to was willing to excuse one of the two overdrafts I’d racked up. Someone might at least be able to help you sort out a payment plan.

In the end, however, it’s best to stay aware of your money situation and keep that overdraft monster from invading your life and bank account.

What is a Credit Utilization Ratio?

In my article about what a credit score is, I talked about the factors that affect a credit score. Most of them are pretty straight forward. However, the second-most-important factor, your Credit Utilization Ratio (CUR), is a little trickier because it’s all about percents.

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I can feel all you math-phobes out there starting to sweat, but just hear me out.

Your Credit Utilization Ratio is the relationship between what you can borrow and what you actually borrow. This is represented by the percent of your available credit you’re using at any one moment.

Example

For example, say you have a credit card with a credit limit of $1,000. That means your available credit is $1,000.

Lucky you, you have a date! You go out and end up paying for dinner for both you and your date, and charge $50 to your card.

To find out what percent of your available credit this is, follow this formula:

(part÷whole) × 100 = %

In this case $50 is our part, $1,000 is our whole. Divide them, and we get 0.05. Multiplying by 100 gives us 5, which is our percent. So, you have used 5% of your available credit.

By the way, you’ll need that formula on the SAT, so you might as well memorize it. 

To keep your credit score looking rosy, you want to use 30% or less of your available credit. What is that for our imaginary credit card? Back to the formula!

This time, we’ll plug in numbers for the percent and whole, but we need to find the part.

(part÷1000) × 100 = 30

Using those awesome algebra skills I know you have, you can divide each side of our equation by 100, then multiply each side by 1000 to find that $300 is the most you should spend on your credit card before you pay it off.

Important Notes

  • Just because you can spend up to $300 in our scenario doesn’t mean you should. That’s just the max. Keeping your spending less than that creates an even better Credit Utilization Ratio.
  • Most credit cards and banks report what you owe to the credit bureaus once or twice a month, so if you do have to charge more than $300, it may not affect your score if you pay at least some of it off before it gets reported to the bureaus.
  • Every new line of credit you open increases the amount of available credit you have. Closing those accounts decreases that available credit. Both of these events affect how much you can spend and still stay within the ideal CUR range.
  • If you get offered a larger credit limit, don’t let it convince you to spend a ton more money simply because you’ll be able to. Remember, you still have to pay off the whole amount before the end of the month.

Now you know what a Credit Utilization Ratio is, use that knowledge to give yourself incentive to curb your spending urges. Your credit score and future self will thank you.

What is a credit score?

You might have seen the commercials for sites and credit cards that give people access to their credit scores. All the people in those ads seem so surprised and excited to get their credit score, and it always shows a screen with some number in the 700s on it. But, you might be thinking, what exactly is a credit score?

What are credit scores?

Essentially, credit scores are meant to represent how likely you are to pay what you owe.

Credit scores are based on a formula created by a company called the Fair Isaac Corporation (FICO), so you’ll often hear credit scores called “FICO scores“. There are other types of scores out there, but for our purposes, we’re going to focus on the classic FICO score, as that’s what people are usually talking about when they say “credit score”.

There are three credit bureaus — Experian, Equifax, and TransUnion — that collect credit reports on people and provide credit scores based on what’s on these reports. Scores will often vary a little between these companies depending on what information they have collected in their reports.When a credit card or bank offers you free access to your credit score, it will use data from one or more of these credit bureaus to come up with the score.

Who cares?

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Zendaya may not, but some people do

Money lenders: Banks and other lenders use credit scores to determine if you are someone they want to loan money to for stuff like a car or mortgage. Usually, people with high credit scores will be approved for bigger loans and be charged lower interest rates than those with lower credit scores.

Landlords: Credit scores help landlords decide if you’ll be a good bet as a tenant. A high credit score shows landlords you are responsible and will probably pay your rent on time, so if you’re competing with other applicants for a nice apartment, a good credit score can help put the odds in your favor.

Credit card companies: People with good credit will be approved for a wider range of cards and higher credit limits than those with poor credit.

Employers: Sometimes, employers look at credit scores to get a picture of who they might be hiring, although this practice has been widely criticized.

What do the numbers mean?

Credit scores range from 300 to 850. The higher your score, the better you look to lenders and landlords.  Scores generally break down like so:

Anything 750+ is Excellent

Between 700 and 749 is Good

Between 650 and 699 is Fair

Between 600 and 649 is Poor

Anything below 600 is Bad

How do people get good credit scores?

Credit scores depend on several criteria, some of which are more important than others.

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Source: FICO.com

Payment History: Your payment history is the most important factor that controls your credit score, and the concept is so simple. It reflects whether you pay your bills on time or not. Late payments or debt that “goes into collections” (basically someone has to chase you down for it) cause terrible damage to your score. Pay your bills, people.

Amount of Debt: This category is also known as “Credit Utilization Ratio”. Essentially, the more you owe compared to what credit you have available, the worse your score. More on that in another post.

Length of Credit History: For teens and young adults, this section is tough. The longer you’ve been building credit, the better, but most of you haven’t had a chance to do much credit-building. That makes the other parts of the score even more important when you’re starting out.

New Credit: Every time you apply for a new loan or credit card, the company you are applying to does a “hard pull” of your credit report to check you out, and your score gets dinged a little. “Soft pulls”, like when you request your own report, don’t affect your score.

Credit Mix: Credit bureaus like to see that you’ve had experience with a mix of credit situations, such as credit cards, mortgages, loans, etc. The more types of credit you’ve successfully managed, the better your score looks.

Wrap-up

So there you have it. The credit score system may not be perfect, but it’s not going away any time soon.

Your personal credit score plays an important part in your financial future, so it’s a good idea to at least be aware of it in your teen years and going into college. Debt and late payments when you’re wild and reckless can set you up to spend years re-building your credit. You’ll have plenty to worry about when you get out of college. Whether you’ll end up in a crappy apartment because your credit score is in the toilet shouldn’t be one of them.

What is a debit card?

When you open a checking account, and sometimes a savings account, with any major bank, you receive a debit, or check, card. It looks like a credit card, but it usually has the word “Debit” printed on it somewhere. So what is this card and how should you use it?

A debit card allows you to access the funds in your checking account. It is the card you use to get cash out of an Automated Teller Machine (ATM) and can usually be used anywhere that accepts credit cards.

Let’s look at some of the features of debit cards:

 

Spending:

When you pay with a debit card, the money is drawn from your account immediately. This means that if you spend more than you have in your account, you will overdraft your account, and will usually owe the bank a fee on top of the amount you overdrew.

For example, if you only have $25 in your account, but pay for a $30 dinner, you will overdraft your account by $5. If your bank charges a $35 overdraft fee, you now owe the bank $40 for that five dollar mistake!

Also, if you make ANOTHER purchase with that card, you’ll be charged ANOTHER $35, and so on. Obviously, it’s super important that you keep track of what you have in your account, which is great practice for using a credit card.

 

Limits:

The amount of money you can spend on a debit card is limited by the amount of money you have in your bank account. Spend any more than that and you’ll start racking up overdraft charges.

 

PIN:

Many debit cards require you to enter a Personal Identification Number (PIN) when you withdraw cash from your account and when you make purchases. Others allow you to make purchases using the “Credit” selection on the checkout machine, but still require a PIN at the ATM. When you get your card, it will come with instructions that tell you how yours works.

 

Security:

Because of the direct connection to your checking account, debit cards can be very dangerous if they are lost or stolen. If someone steals or finds your debit card, he or she may be able to make purchases with it, and if the thief has your PIN, he or she can withdraw money from your account. Anything this person uses will immediately be taken from your account. Disputing these charges takes a lot of time and effort, and you may never see that money again.

 

Credit History:

Debit cards do not affect your credit history.

 

Fees:

Banks generally do not charge fees for debit cards, but you might have to deposit a certain amount, usually something like $25 to $100, in the bank to open the card in the first place. 

 

Perks:

Debit cards usually do not carry perks, but a few banks are starting to add cash back, sign-up bonuses, and miles to their checking programs.

 

When should you use a debit card?

I would say that any time you’re buying something in person and the card doesn’t leave your hand, it’s fine to use a debit card. I would avoid using a debit card online or at places like restaurants, where your information is more likely to be stolen. It may never happen, but there’s still the chance your hard-earned cash might disappear.

If you think your information has been stolen, or see charges on your card that you didn’t make, call your bank immediately and tell them to put a hold on the account to prevent that card from being used again until you sort out what’s happening.
Debit cards can be super useful for building responsible money habits without running the risks of using credit cards.

Want to compare debit cards to credit cards? Head on over to What is a credit card?