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

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!

3 Popular Debt Payoff Strategies You Should Consider

Paying off debt is a very personal aspect of personal finance, but it’s one that we discussed and tackled head-on in this week’s episode of the podcast.

Erin, Chonce, Kayla, and guest Kara discussed several debt payoff strategies that  can be used to help you get out of debt in the fastest way possible, or with the most motivation possible.

Ultimately, we decided that while not everyone will choose the exact same option of the 3 popular debt payoff strategies listed below, the most important thing is that you continue to make progress at paying off debt and that you do whatever works best for you.

Not sure what that is yet? Check out these 3 popular debt payoff strategies to help you get started paying off your debt today.

There are several debt payoff strategies to choose from. Here are 3 popular ones you might consider to help you with paying off debt.

Debt Snowball

The debt snowball is one the most popular debt payoff strategies thanks in large part to financial guru Dave Ramsey. This is the method he recommends to people who take his class, Financial Peace University.

Although there are other debt payoff strategies that can save you more money in the long-run on interest, like the debt avalanche listed below, the debt snowball is a popular strategy because it can really help people stay motivated while paying off large amounts of debt.

Here’s how it works.

The debt snowball is Baby Step 2 in Dave’s plan to get you financially secure. It comes after Baby Step 1, which is saving up a $1,000 mini-emergency fund.

With the debt snowball, you list your debts in order from smallest balance to largest balance while ignoring other factors such as their interest rate and minimum payment amount.

You will pay only the minimum payment on all the debts except the smallest one, which you will attack with “gazelle intensity”.

Once that debt is paid off, you take the money you were putting toward that debt and use it to help pay off the next debt on your list by combining it with the minimum payment you were already paying on that debt.

The further you get down the list, the larger the amount of money you will be putting toward the first debt on your list, thus the debt snowball will grow as it rolls downhill. Plus, the small wins you get at the beginning by paying off the small debts quickly will help you stay motivated and make you feel like you are really making progress at getting out of debt.

Debt Snowflake

The debt snowflake method is a spin-off of the snowball method. If making super large, extra payments toward your debt isn’t doable, don’t worry. You can use the snowflake method to gain momentum.

The way it works is simple: you sprinkle in extra debt payments throughout the month. It doesn’t matter how much you can afford to put toward your debt – $5 here, $10 there – it adds up. So if you can only put $10 extra toward your debt one week, that’s fine. Maybe next week you can increase it to $20!

Any “extra” cash you get, whether it be a gift, or money you found on the street or in your pocket, should be used this way. The point is to get into the habit of making these extra payments, and to feel good about it.

Again – these amounts will add up over time! This is a great solution for those who get paid irregularly and can’t say for sure that they can put $X extra toward their debt per month. As Kara said in our podcast episode, each payment should feel like a small victory. You’re getting there!

Debt Avalanche

The debt avalanche method of paying off your debt involves taking your highest interest debt and paying if off first, then moving on to the next account with the highest interest rate, and so on. By doing this, you may not see positive results right away since you may not be paying off the smallest balance first, but you will ultimately minimize the amount of interest you have to pay over time which allows you to save more money in the end.

For example, if you have credit card debt, a car loan, and student loan debt, you’ll probably want to pay your credit card debt off first if the interest rate is highest regardless of what the balance is. Interest is accrued on your debt daily so borrowers who choose to use the avalanche method can help reduce how much money they pay on interest by knocking out their high interest debt first.

With this strategy, you have to be very motivated to pay off your debt because there may be some months where you don’t see your progress or feel like there wasn’t much progress made at all. Even if it takes you a few years to pay down your debt though, you can do the math and see how much you saved by using this method to pay off your debt.

Bonus: Hybrid Method for Paying Off Debt

Sometimes the best method for paying off debt is using a combination of the three methods listed above. For example, when I (Kayla) first started paying off debt, I used the debt snowball so I could feel an immediate win by paying off two small debt balances I was carrying. However, after those two small balances were gone, many of my debt had balances that were within $50 of each other but vastly different interest rates. At this point, I decided to switch methods and use the debt avalanche to help me save money on interest by paying off my highest interest debt next. Switching methods or making up your own method is fine as long as you continue to make progress at paying off your debt.

Listen to the Bloopers!

Are you currently paying off debt? Which of these debt payoff strategies have you used to help pay off debt?

-Erin, Chonce, and Kayla