5 Things You’ve Always Wanted to Know About Money – Investing and Credit Edition

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This week on the podcast, we tackled some of your burning questions about personal finance.

It’s common to have questions about money, but sometimes you may be hesitant to ask them of your friends and family. We get it! At one time or another, we’ve all had questions about personal finance that we wanted answered but were afraid to ask for various reasons.

This is why we decided to tackle some of these popular questions in our podcast, and in the summary below.

Here are 5 things you’ve always wanted to know about money, the investing and credit edition.

Everything you wanted to know about credit and investing but were too afraid to ask answered here.

What is the best way to start investing in your early 20’s?

This question can depend a lot upon your personal financial situation, but in general, we decided some of the best ways to get started investing are by contributing to your employer sponsored 401K if you have the option at your job. Otherwise, there are several other ways you can get started investing on your own with an IRA, or a Roth IRA.

The most important thing is that you start investing as soon as possible so you can take advantage of compound interest working in your favor so you don’t have to invest as much of your own money, but instead can take advantage of the interest earned on your interest for years to come.

Why is buying a house a good investment?

This question was fun to discuss despite the fact that we have no first-hand experience with using a house as an investment.

Our opinion is that you should NOT treat your primary residence as an investment unless you truly plan to use it as such in the near future (1-5 years). Otherwise, your primary residence shouldn’t be seen as an investment other than as an “investment” into your family or your life, not a financial investment.

Buying houses specifically for investments, however, is a good strategy, but you need to be well-versed in the best practices for this strategy before you get started.

What do finance experts thing about buying vs. renting a house?

Ahh! The old buying vs. renting debate. We actually dedicated an entire episode of the podcast to this very question a few weeks ago.

In the end, we decided that there are definitely pros and cons to both sides of this real estate debate, including both financial and non-financial factors that must be considered.

The answer to this question is really “it depends”, and this is something that has also been echoed by real estate expert Paula Pant of Afford Anything.

What are the best ways to invest money?

Once again, we touched on investing strategies with this question. One of the most important things to do when you are investing is to “set it and forget it” rather than being an investment micro-manager.

We also discussed using automated investing options such as lifecycle funds that will automatically adjust as you age and get closer to retirement and the need to withdraw your funds. Lifecycle funds will be more aggressively invested when you are young and will slowly get less aggressive so you are exposed to less risk later on.

Erin also advocated for the use of index funds to help your investment portfolio with diversity without having to select multiple funds yourself.

Most important of all is the need to understand and educate yourself about investing options before you buy into them.

Will closing old credit cards and setting up a new one hurt my credit score?

Your credit score can be hurt both by closing credit cards, as well as opening a new one. Here’s how:

  • Your score may be damaged if you close an old credit card because your credit history length may be shortened.
  • Your score may be damaged if you carry a balance on other credit cards because your credit utilization ratio will be higher if you close a card once the balance is paid off.
  • Your score may be damaged if you open a new credit card because creditors will do a “hard pull” on your score. However, the effects of this will be short-lived and rather minimal.

If you aren’t totally sure what a credit utilization ratio is, here’s an example. If you have two credit cards with a combined credit limit of $10,000 and a balance on one card of $2,000, your credit utilization ratio is 20%. If the card you close has no balance and a limit of $5,000, your combined credit limit will be decreased by $5,000 but your balance of $2,000 will stay the same. Now your utilization ratio is $2,000/$5,000 or 40%.

We also offered some alternatives to closing a credit card if your main reason is to avoid temptation of racking up more debt. You can hide your credit card, shred it, or freeze it in a block of ice so it’s hard to access it to spend money.

You can also call and lower your credit limit so you have less access to credit. Even if you rack up debt then, you won’t be able to dig as big of a hole. Lowering your credit limit will still have a negative affect on your credit utilization ratio though, so be considerate of that before asking for a lower limit.

Can you withdraw money from a credit card?

Our final question was if you can withdraw money from a credit card. The short answer is yes, but the better answer is that should NEVER do this if you can avoid it.

The interest rates on cash advances are often several percentage points higher than the interest rate for regular purchases, plus you may also be charged a fee for taking out a cash advance at an ATM.

Although we never advise people to take on more debt, if you are in a jam, you should consider all other options, like a personal loan, before taking out a cash advance to help pay your bills.

Do you have any questions about things you’ve always wanted to know about money?

If so, shoot us an email or reach out to us on Twitter. We’d love to hear from you!

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