"If there’s one thing that can make my eyes glaze over, it’s reading about the details of investing or financial planning. I sometimes feel stuck between wanting to make informed decisions for my family and being intimidated by how overwhelming financial planning can appear.
It seems I’m not alone. Earlier this year, we asked our readers about their most pressing financial questions. Over 100 of you responded with questions from budgeting for a home project to budgeting for a new baby and recovering from a layoff to deciding whether to pay down debt. Financial decisions weigh on all of us. So to help, we asked CPA and Certified Financial Education Instructor, Erica Gellerman to answer the most common questions from our readers. Read on for her advice below.
What is the best type of college savings fund for my children and when should I start saving?
Most professionals recommend saving for college in a 529 plan. This is a specific college savings plan. You invest money, and if you withdraw funds to use them for college, you don’t have to pay taxes on the investment gains. But there’s a downside: if you don’t use the money for education, you’ll get hit with a 10 percent penalty when you withdraw the funds.
Your child can borrow money for college, but you can’t borrow money for retirement.
With college costs continually skyrocketing, it’s never too early to start saving for college. That said, don’t save for your child’s college and sacrifice your own savings. If you aren’t in a good place investing for retirement yet, you might want to wait on saving for college. A common piece of advice is to remember your child can borrow money for college, but you can’t borrow money for retirement.
If you have extra money (i.e., the stimulus check), is it better to build up your savings, invest, or pay off your debt?
It truly depends on your situation. Do you have money set aside for a rainy day? If your job is less than secure right now, building up an emergency fund can be extremely important.
If you have an emergency fund and you’re not worried about job stability, what is your debt situation? Do you have high-interest credit card debt? That might be the thing to tackle next. But if you have debt that has a lower interest rate, it might make more sense to invest rather than pay off the debt.
What are the best financial apps to track budget and spending?
Both Mint and YNAB are great! Some people struggle with YNAB at first, but when you get the hang of it, it makes understanding how to manage your monthly finances so clear. I also love Personal Capital to track your full financial picture: cash, investments, debt, etc.
How can I recover financially from a layoff?
Being laid off is such a challenging situation, both emotionally and financially. Take a hard look at your expenses and figure out what you can cut back on while you are out of work. Try to cut out things that aren’t absolutely necessary, even if it’s a small dollar amount.
Next, call any of your creditors and let them know about your job situation. They may be willing to work with you by letting you make lower payments (or no payments) for a few months. While that doesn’t mean your debt goes away, it helps you get some breathing room while you look for a new job.
Don’t forget to file for benefits. You’ll want to look at the COBRA healthcare coverage that you can receive from your employer and compare it to the cost of getting health insurance on the healthcare exchange (the latter is probably going to be cheaper). Lastly, ask your former colleagues for recommendations on LinkedIn. Those will come in handy as you start your job search.
How can you finance a home construction project if you don’t have the cash?
Through a home equity loan, home equity line of credit, or a personal loan. With a home equity loan or line of credit, you’re borrowing against the equity that you’ve built up in your home. So say your home is worth $100,000, and you owe $60,000. A lender might allow you to take a loan out for an additional $15,000 or $20,000 to finance your home project.
A personal loan is separate from a home loan and can be used for a variety of different reasons. It’s an unsecured loan, meaning it doesn’t use your home as collateral (unlike a mortgage). But unsecured loans come with higher interest rates than a secured loan.
I have no idea where to start investing, but I want to begin. What are your tips?
Don’t be afraid to ask questions. The financial jargon is tough to understand, and it makes things so confusing. Financial advisors often say that one of the best places to start investing is with your retirement account. If you have a 401k that offers an employee match, that’s a great place to start because your employer is giving you money just for investing. If not, you can also start investing in an individual retirement account (IRA).
Financial advisors often say that one of the best places to start investing is with your retirement account.
Once you have a retirement account set up, you can always reach out for help from the company that holds your account. For example, if you have a retirement account with Vanguard, you can call them for help. They’ll walk you through their different products and help you understand what everything is. That way you can make an informed decision that is right for you.
You can also look at robo-advisors, like Betterment and Wealthfront. They offer automated investing services for a low fee. When you sign up, they walk you through an easy to understand survey. From that survey, they create an investment plan for you.
How do you evaluate whether a mortgage refinance is beneficial?
Look at the long-term savings. When you refinance, you’ll be hit with fees, and your lender should give you a full summary of those fees before you decide to refinance. If you refinance, you’re also hopefully getting a lower interest rate (and lower monthly payment).
How many months until you break even? For example, if the cost to refinance is $1,500, and you’ll save $100 per month thanks to a lower interest rate, it’ll take you 15 months to break even. If you plan to own the home longer than your break-even point, refinancing could be a good idea.
What are the financial considerations to think about when trying for another baby?
Having a new baby is exciting! [But it] can also be expensive. It can be helpful to wrap your head around some of the additional costs so you can put together a plan to start saving. Think about medical costs and how much you’ll need to have saved for a cushion to help with any leave from work.
What are the pros and cons of keeping you and your partner’s finances mostly separate?
Honestly, when it comes to money and marriage, you really have to find what works for you. Every couple is unique, and you have to find a strategy that is going to fit your relationship the best. Some pros and cons of keeping money separate include:
- Pro: You have more freedom with spending and saving—there’s no need to justify expenses with your partner
- Pro: You have more privacy (and can give gifts more easily)
- Con: it can be more challenging to navigate life transitions (unemployment, going back to school, taking time out of the workforce)
- Con: it’s more difficult to get a single view of spending and saving
What questions should you ask when selecting a financial planner?
- Are you a fiduciary? A fiduciary has to do things that are in the best interest of their client. You’d think every financial planner would be a fiduciary, but unfortunately, that’s not the case.
- How do you get paid? It’s a good idea to stick with fee-only advisors who charge you hourly, a flat fee, or a percentage of the assets they manage. Some advisors who aren’t fee-only earn a commission from selling you products.
- What are your qualifications?
- How do you work with clients?
- Who are your typical clients?
- What is your investment philosophy?