Frequently Asked Questions
Below you'll find answers to some of the most common questions about personal finance. If you don't see your question answered here, feel free to contact us.
Banking Basics
Checking accounts are designed for everyday transactions. They typically include:
- Unlimited withdrawals and transactions
- Debit cards for purchases and ATM access
- Check writing capabilities
- Little to no interest earned on deposits
Savings accounts are meant for setting aside funds for the future. They generally offer:
- Limited transactions (typically 6 withdrawals per month)
- Higher interest rates than checking accounts
- No debit card or check writing capabilities
- A separate location for funds you don't need for daily expenses
Most financial experts recommend having both types of accounts: checking for regular expenses and savings for emergency funds and financial goals.
Overdraft protection is a service banks offer to prevent transactions from being declined when you don't have enough money in your checking account.
There are several types of overdraft protection:
- Linked account transfer: Automatically transfers money from a linked savings account or second checking account to cover the overdraft.
- Overdraft line of credit: A line of credit that covers overdrafts, with interest charged on the amount used.
- Standard overdraft coverage: The bank covers the transaction and charges an overdraft fee (typically $30-$35 per item).
While overdraft protection can help avoid declined transactions and returned payment fees, it's important to understand the associated costs. Many banks charge fees for overdraft transfers or lines of credit, though these are typically lower than standard overdraft fees.
The best approach is to monitor your account balance regularly and maintain a buffer of extra funds in your checking account to avoid overdrafts altogether.
Banks charge various fees for their services. Common fees include:
- Monthly maintenance fees: Regular charges for having an account (typically $5-$15 per month)
- Overdraft fees: Charges when you spend more than your available balance ($30-$35 per transaction)
- ATM fees: Charges for using out-of-network ATMs ($2-$5 per transaction)
- Minimum balance fees: Penalties for falling below required minimum balances
- Paper statement fees: Charges for receiving physical statements by mail
To avoid or minimize these fees:
- Look for accounts with no monthly maintenance fees or clear ways to waive them (direct deposit, minimum balance, etc.)
- Use your bank's ATM network or banks that reimburse ATM fees
- Opt for electronic statements instead of paper
- Set up account alerts to notify you when balances fall below certain thresholds
- Consider online banks, which typically charge fewer fees than traditional banks
- Ask your bank about fee waiver options—many banks will work with you, especially if you're a long-term customer
Always read the fee schedule when opening a new account to understand what charges you might incur.
Credit and Debt
Building credit from scratch or improving your existing credit requires consistent responsible financial behavior. Here are effective strategies:
For those with no credit history:
- Apply for a secured credit card - These cards require a security deposit that typically becomes your credit limit. Use the card responsibly and make on-time payments to build credit history.
- Become an authorized user - Ask a family member with good credit to add you as an authorized user on their credit card. Their positive payment history can help build your credit.
- Consider a credit-builder loan - These small loans are designed specifically to help build credit. The money you borrow is held in a bank account while you make payments, and you receive the funds once the loan is paid off.
- Get credit for rent payments - Services like Experian Boost or Rental Kharma can add your rent payment history to your credit report.
For everyone building credit:
- Always pay on time - Payment history is the most important factor in your credit score. Set up automatic payments to avoid missing due dates.
- Keep credit utilization low - Try to use less than 30% of your available credit limit (lower is better).
- Don't apply for too much credit at once - Multiple applications in a short period can hurt your score.
- Keep old accounts open - Length of credit history matters, so don't close old accounts if they don't have annual fees.
- Monitor your credit regularly - Check your credit reports to ensure accuracy and watch for improvements.
Building credit takes time. Be patient and consistent with these habits, and you'll see your credit score improve over time.
Credit reports and credit scores are related but distinct components of your credit profile:
Credit Report
A credit report is a detailed document that contains:
- Personal information (name, address, SSN, employment history)
- Credit account information (credit cards, loans, payment history)
- Public records (bankruptcies, foreclosures, tax liens)
- Inquiries (companies that have requested your credit report)
Credit reports are maintained by the three major credit bureaus: Equifax, Experian, and TransUnion. Each bureau may have slightly different information.
You can get free copies of your credit reports once per year from each bureau at AnnualCreditReport.com.
Credit Score
A credit score is a three-digit number that summarizes the information in your credit report:
- Ranges typically from 300-850 (higher is better)
- Calculated using a formula that considers payment history, amounts owed, length of credit history, new credit, and types of credit used
- Used by lenders to assess creditworthiness and determine loan terms
- Multiple scoring models exist (FICO and VantageScore are most common)
Your credit score can change frequently based on your financial activities and is calculated only when requested by you or a lender.
Think of your credit report as a detailed history of your credit behavior, while your credit score is a summary grade based on that history.
Getting out of debt requires a strategic approach and commitment. Here's a step-by-step process:
- Take inventory of all debts - List every debt with its balance, interest rate, minimum payment, and due date.
- Create a budget - Track your income and expenses to find areas where you can cut back and free up money for debt payments.
- Stop accumulating new debt - Put credit cards away and focus on using cash or debit cards for purchases.
- Establish an emergency fund - Start with $1,000 to avoid going deeper into debt when emergencies arise.
- Choose a debt payoff strategy:
- Debt avalanche - Focus on paying off the debt with the highest interest rate first while making minimum payments on others. This saves the most money in interest.
- Debt snowball - Focus on paying off the smallest debt first for psychological wins. As each debt is paid off, roll that payment toward the next smallest debt.
- Consider debt consolidation - If you qualify for a lower interest rate, consolidating multiple debts into one can simplify payments and potentially save on interest.
- Explore additional income sources - A side job or selling unused items can accelerate debt payoff.
- Negotiate with creditors - Some may be willing to lower interest rates or set up more favorable payment plans if you explain your situation.
- Track progress - Celebrate milestones to stay motivated.
For significant debt problems, consider seeking help from a non-profit credit counseling agency, which can provide personalized advice and potentially help arrange a debt management plan.
Remember, getting out of debt is a marathon, not a sprint. Consistency is key, and even small extra payments can significantly reduce your debt over time.
Saving and Investing
An emergency fund is money set aside specifically for unexpected expenses or financial emergencies, such as medical bills, car repairs, or job loss.
General guidelines:
- Starter emergency fund: $1,000 for beginners or those paying off high-interest debt
- Fully funded emergency fund: 3-6 months of essential expenses
The appropriate size of your emergency fund depends on your personal circumstances:
Consider a larger fund (6+ months) if you:
- Have variable or unpredictable income (freelancers, commission-based work)
- Are the sole income earner for your household
- Work in an industry with high job instability
- Have dependents or significant financial obligations
- Have health concerns or limited insurance coverage
A smaller fund (3 months) might be sufficient if you:
- Have multiple income sources in your household
- Work in a stable industry with high demand
- Have few debts or financial obligations
- Have other readily accessible assets
Where to keep your emergency fund:
Your emergency fund should be kept in an account that is:
- Liquid - Easily accessible without penalties or delays
- Safe - Not subject to market fluctuations
- Separate - Not mixed with everyday spending money
High-yield savings accounts are typically ideal for emergency funds, offering better interest rates than standard savings accounts while maintaining full liquidity.
Remember, building an emergency fund is a process. Start small and gradually work toward your target amount. Having even a partial emergency fund is significantly better than having none at all.
Both 401(k)s and IRAs are tax-advantaged retirement accounts, but they have important differences:
401(k)
- Employer-sponsored - Offered through your workplace
- Higher contribution limits - $22,500 in 2023 ($30,000 if age 50+)
- Employer match - Many employers match a percentage of your contributions (essentially free money)
- Limited investment options - Typically a pre-selected menu of funds
- Automatic payroll deductions - Contributions come directly from your paycheck
- May allow loans - Some plans let you borrow against your balance
- Required Minimum Distributions (RMDs) - Must begin withdrawing at age 73
IRA (Individual Retirement Account)
- Individual account - Set up independently, not tied to an employer
- Lower contribution limits - $6,500 in 2023 ($7,500 if age 50+)
- No employer match - All contributions come from you
- Wide investment choices - Stocks, bonds, ETFs, mutual funds, etc.
- Manual contributions - You must actively deposit money
- No loans allowed - Cannot borrow against your IRA
- Required Minimum Distributions - Apply to Traditional IRAs but not Roth IRAs
Both 401(k)s and IRAs come in traditional and Roth varieties:
- Traditional: Contributions are tax-deductible now, but withdrawals in retirement are taxed as income.
- Roth: Contributions are made with after-tax dollars, but qualified withdrawals in retirement are completely tax-free.
Recommended approach for most people:
- Contribute enough to your 401(k) to get the full employer match
- Max out an IRA (choosing Roth or Traditional based on your tax situation)
- Return to your 401(k) and contribute more if you can
This strategy maximizes employer matching while taking advantage of the potentially better investment options in an IRA.
Starting to invest with a small amount of money is completely possible and can help you build the habit of investing. Here are approaches to get started:
Low-cost entry points:
- Micro-investing apps - Platforms like Acorns or Stash allow you to start investing with as little as $5 and can round up your purchases to invest the spare change.
- Fractional shares - Many brokerages now allow you to buy portions of shares, so you can invest in expensive stocks with small dollar amounts.
- Exchange-Traded Funds (ETFs) - These trade like stocks but give you instant diversification. Many have share prices under $100.
- No-minimum index funds - Some brokerages offer index funds with no minimum investment requirement.
- Employer retirement plans - Many 401(k) plans allow you to start contributing with very small percentages of your paycheck.
Steps to start investing with limited funds:
- Choose a low-fee broker - Look for platforms with no account minimums and commission-free trades (e.g., Fidelity, Charles Schwab, Vanguard).
- Set up automatic investments - Even $25-$50 per month can grow significantly over time thanks to compound interest.
- Focus on broad-market index funds or ETFs - These provide instant diversification at low cost. Examples include funds that track the S&P 500 or total stock market.
- Reinvest dividends - Set your account to automatically reinvest any dividends to maximize compound growth.
- Gradually increase contributions - As your income grows, increase your investment amount.
Important: Before investing, make sure you:
- Have an emergency fund (at least $1,000 to start)
- Have paid off high-interest debt (like credit cards)
- Understand that investments can lose value in the short term
- Are investing money you won't need for at least 3-5 years
Remember, the most important factor in successful investing is consistency over time, not the amount you start with. Even small, regular investments can grow significantly through the power of compound returns.
Have More Questions?
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