Since starting Bitter to Richer, I’ve gotten a lot of specific questions about personal finance. Because I can’t respond to every question I get asked, I thought I would take the time to answer a dozen of the most common questions I get on personal finance. Some have simple answers, others are more complex, and some required more detailed instructions and how-tos. Hopefully this article can finally put those questions to rest, or at least give you the resources you need to figure out anything else you need.
1. How Much Should I Put Into An Emergency Fund?
The short answer is that it depends. The one size fits all answer is that you should save about six months worth of expenses in your emergency fund. However, personal finance is personal, so one size won’t fit everyone. Six months is a good baseline, and is enough for a lot of people, but not for everyone. If you’re an entrepreneur, have an inconsistent source of income, are retired, or work in a volatile field, you may want to have closer to twelve or even eighteen months worth of expenses saved up. For more on emergency funds, and to figure out exactly how much you may need to save, check out my article on the topic.
2. What Is Credit And How Do I Check My Score?
To put it simply, a credit score is a lender’s way of viewing your financial stability based on your history related to your bills, mortgage, or any other debt you may’ve accrued. It basically determines how much of a risk you seem to be for lenders. A good credit score will make a world of difference when it comes to interest rates and other deals you can get.
If you want to check your credit score, your bank or credit card company may have a way for you to get a rough estimate for free. If they don’t offer those services, or you want a deeper look, try out myFICO. To find out more information on it, like how credit scores are calculated, check out my complete guide to credit scores.
3. How Can I Make A Good Budget And Stick To It?
Well, the key to a good budget is really discipline. If you’re interested in making your budget for the first time, try my beginner’s guide here. If you already have a budget, but need to push yourself harder, look into zero-based budgeting. Of course, it’s also important to tweak your budget as you go, so make sure you add in anything you may have missing from your current budget.
I will mention that, in order to stick with it, you need to make sure the budget is realistic. If your budget is excessively frugal, you give yourself no wiggle room, and you have nothing set aside for fun or entertainment – you’re doomed to fail. Budget wisely, and be a little hard on yourself, but don’t get so caught up in crafting the “perfect” budget that you make it impossible for you to follow through.
4. What’s The Deal With Insurance Premiums – How Do I Get Good Rates?
Insurance premiums are based on a variety of factors, which mostly add up to how high of a risk you are for your insurer. If you want to know the ins and outs of different types of insurance policies and how you can lower your premiums, check out my definitive guide on that.
As a general piece of advice, review the insurance policies you currently pay for and look for red flags. A red flag could be anything that seems too expensive (don’t be afraid to compare online), any gaps you have in your coverage, or any policies that seem superfluous. It’s important to make sure you get the coverage you need, but it’s also important that you don’t pay for a policy that is redundant or doesn’t apply to you at all.
5. How Much Saved Or Invested Is Enough?
This is a trick question. I don’t like it, so I’m not really going to answer it. Only you can know what “enough” is, so this question has a unique answer for everyone asking it. If you’re struggling to figure it out, get in touch with someone who can help you with your specific situation, like a financial counselor or coach.
6. How Do I Handle Losing A Job Or Going Through A Recession?
Fortunately, I wrote a very detailed article on that topic here. Basically, here is what you need to do to handle a recession well:
- Practice good financial habits leading up to the recession (and maintain them during it)
- Don’t panic during a recession and do something drastic that will negatively impact you (like try to time the market because you’re freaking out about how it is crashing)
- Develop additional skills that can make or keep you employable, even if they have to lay off someone on your team
7. How Can I Eliminate My Debt?
This is another part of personal finance where the psychology behind it is the real winner. I usually recommend the debt snowball OR the debt avalanche method to eliminate debt, which you can read about at length here. The debt avalanche usually (when you do the math) works out to be the more efficient method in terms of how much you have to pay in total (i.e. you pay less interest overall than the debt snowball method in most cases).
However, it can be hard to keep on track because it takes a while to see progress with the debt avalanche method. Consequently, with the debt snowball (where you see results much faster) you’re able to stay encouraged and it ends up being more effective for a lot of people. Pick the method that you genuinely think will help you tackle your debt, and stick to it.
8. What Are The Best Banks?
The best bank really depends on your goals. I spoke about banks extensively here. If you want the lowest fees, great service on checking accounts, and the best interest rates on savings accounts, go with an online bank like Axos. Some people feel the need to have their checking account with a brick and mortar bank, which is fine and perfectly reasonable. If you want to do your checking that way, do it, but try to keep your savings in an online bank where you get the best interest rates – particularly if the account is for an emergency fund.
9. How Much Should My Mortgage And Car Payments Be?
Personally, I don’t like having any car payments. It isn’t that bad if the interest rate is below 1% (which it often can be), but I still like to avoid it. Unless cars are your absolute passion and you can’t do without, I recommend buying the cheapest car that will get the job done for you. No, not a junker or anything like that. Get a decent, reliable car that can take you (and your family) where you need to go, but no more. If you do that, on most incomes you’ll be more than fine and enjoy a comfortable amount of wiggle room for other things in your budget.
For your mortgage, that can vary. Again, it’s something that has so many factors at play, which can wildly change the answer on a case-by-case basis. So, I’ll recommend talking to a trusted financial advisor or coach again. However, I will say, for most families the typical amount lenders will tell you how much you can afford is usually antiquated. If your mortgage costs anywhere near 30% of your net income, you’re bound to start feeling stretched thin.
10. How Do I Merge Or Discuss Finances With A Spouse?
Luckily I wrote an article on discussing finances with a significant other and even one on merging finances. It shouldn’t be a difficult task or anything you should get super anxious about. You’ll be fine as long as you’re honest, stay respectful, and learn to compromise.
11. How Much Money Can I Spend On Pure Fun And Entertainment?
A lot of people really like these hard to answer questions! Personal finance is PERSONAL. How much you need to spend on fun and entertainment depends on you, your income, and your personality. However, if you aren’t meeting your minimum savings or investments goals, but you are blowing a lot of money on parties or random toys – it’s time to reevaluate your priorities.
12. How Can I Retire Early, Or At All?
Retiring early is still possible today, just as much as it was in the past. The retirement landscape has changed though, so if you want to retire early you need to invest frequently and consistently. You can read more about how much to invest and what to expect in my article on early retirement.
However, early retirement isn’t for everyone (and that’s not a bad thing). For more information on the ups and downs to the typical retired life, check out this article. Personally, I plan on “retiring early” but I will still be working, just on things I find more rewarding (but may have a lower salary). Figure out what exactly you want first, and then you can come up with a good plan for it!
Conclusion
I hope that answered a lot of your basic questions on personal finance. If you found it helpful, please share it with your friends or anyone else you know who may be struggling with the same topics. Of course, for those of you with any tips related to these questions, let us all know in the comments!
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