Ask Paco: Your Money Questions, Answered

This is super late now… but at the very least I would put it in a high interest savings account (you can get up to 2.25% here!). Depending on your risk profile, I would suggest investing it. The Boglehead 3 fund portfolio is a quick and easy way, though, of course, there are never guarantees with the stock market.

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I agree. I remember my mother clipping out an article about the importance of 401Ks when I was in my early twenties and mailing it to me. I was SO BROKE then and I could not understand why I should sock away retirement money when I could barely pay any of my bills. BUT this article had a helpful graph chart that outlined compounding interest. To be able to visually see how much further your dollar will go if you invest early made all the difference in the world and convinced me to start my 401K.

I love so many of the series here but I have to agree with the comments that requested this be a bit more in depth of a series. One of the reasons I think women claim/are intimidated by finances is they’re either thrown totally in the deep end and give up or are given too basic “fluff” talk about investing. We’re smart, we can understand it. But having more details beyond “yeah, it’s free money do it” (which YES, that’s part of it but there’s more!) would be truly helpful and what I really hope COJ can shape this series to be.

I totally agree, AK! I stay at home with our young children right now so while my husband has a strong term life insurance policy, I wasn’t sure if I needed one for me. But then I realized, if something happens to me, there will be unexpected expenses immediately associated with that, and then our children will need paid childcare. And in the long term, I also wouldn’t eventually become an earner again, which is part of our financial plan. Most importantly, my 20 year term life insurance policy costs us $18.45 a month. That’s less than I spend on coffee! We also try to save a good emergency fund, but the extra peace of mind is definitely worth it.

That’s a great question and usually answered with – do you have any debts (car, house, student loans, etc)? If so, they’ll get passed on to your next of kin, even if you don’t have dependents. A life insurance benefit (the amount of the policy paid out to your beneficiary) is income tax free and a great gift to give should you wish to not burden your loved ones with unnecessary financial strain if you pass away.

When my sister in law passed away they had no kids. Her life insurance policy allowed her husband to fully pay off the mortgage on their home, pay off the car loan, and take 12 months off of work (he quit) to grieve and be with friends. He didn’t have to worry about income or housing and I think not having that added stress went a long way to helping him heal.

Sorry for the double comment! It didn’t post last night so I re-wrote it this morning.

You can declare bankruptcy on student loans. It’s the one loan/debt you can’t bankrupt. I have thirteen years finance experience and I would recommend refinancing your loan with a smaller interest rate and just start tackling payments. It has to be a priority. The other option (if you are a homeowner and depending on the amount of your loan) is to get a second mortgage to pay off your student loans which will ensure a small interest rate and quicker payback. But before you do either of these, I would put yourself on a budget (if you aren’t already on one) and budget to get your loan paid off. Especially considering they are
Private loans which are most likely high interest loans. There are other options but too much to type here. If Paco can’t help you, you can leave your email and I can email and help you at no cost to you. #passionateaboutfinance xx, Tricia

As a mid-20s lady, I can tell you what I do! I should preface this by saying I grew up in a cheap household where my dad’s financial strategies were partially influenced by the Amish near his ag school. It didn’t seem like they had a lot of money, but they had a lot in savings and could buy tractors (which are extremely expensive!) in cash.

My strategy is not for everyone, but since getting my first job at 23, I put 25% into my 401k / Roth 401k when it was available and I’ve also maxed out my Roth IRA whenever I could since I could start working at 16. In my early 20s, I lived with my parents, so didn’t have rent to cover. When I got a new job with a slightly higher salary, I kept at it. ~They~ say that people should save 10% of their salary for retirement, but I got used to putting away a lot and I’ve always just lived with whatever earnings I took home. That means not living in the fanciest apartment or neighborhood (although I really like my apartment and my neighborhood is safe), I bring my own lunch, and I’ve only gone out to dinner or drinks with coworkers twice in the three years I’ve worked at my company. However, I think that it’ll be worth it long term because it’ll give me the option to retire before I’m 60 or start a second career when I’m older and not have to worry about sacrificing anything to make it happen. I also think that because I’m saving now, if something happens later and I’m not able to save because I get laid off or need to leave work for some reason, I’ll still be protected in my retirement because of the compound interest starting from a young age.

My mom said that she didn’t save when she was young and now regrets it because she won’t earn all the compound interest that I’ll get (which I’ve heard is basically equivalent to your savings doubling every seven years).

Hope that helps! And Amy, yes, totally start saving! I was on the 401K board at my last job and we switched from it being an opt-in to an opt-out arrangement. We started people at 2% with their contributions increasing 1% every year. This was a compromise, and lower than I would have liked, but it means that most people will have at least a small amount of money set aside for their retirement.

25-year-old gal here. I make 47k a year at a nonprofit job in Washington, DC. I put 10% of my salary towards my 401k and my organization matches 4%. My org contributes another 6% towards a pension.

As of right now, my contribution will increase by 2% every year until 25% of my salary is going towards my 401k. Fortunately, my organization is wonderful and I have a clear, upward path within my department (meaning promotions/raises) otherwise I might not be able to save as much.

I’d save more if I could, but I’m also paying off undergraduate student loans, building an emergency fund, and letting myself enjoy life. BUT COMPOUNDING INTEREST IS OUR FRIEND.

I’d love to learn more about this too. I’ve been paying for disability insurance for about 5 years, but I’m REALLLLLLLY tempted to stop and just save that money instead. Is disability insurance needed?

One of the suggestions that I thought made a lot of sense about long-term disability insurance came from my Public Agency Budgeting professor: Get long term disability insurance if you are in your 30s, 40s, 50s and 60s, if you are employed and do not have substantial passive income (through investments etc). He offered statistics which showed that the likelihood of injury resulting in long term disability during those years of one’s life is greater than the likelihood of death from that possible injury.
As Paco said, you are insuring to minimize possible loss. (loss of a job etc)

My father-in-law had one of these policies written for my husband when he was in high-school. Turns out, over the years, my husband paid more into it than it was worth- and he was 33 at the time. We were able to close that account and use the money “invested” (tax free, thankfully) for our house renovation (but we could’ve used it for anything). I’m interested in seeing what Paco says!

A question about Brianna’s reply: this might be a really dumb question, but can an insurance agent also act as your financial advisor? Or are they inherently biased since they are selling a product? My husband and I have term and a portion of whole life insurance, and talk about our whole financial picture with our insurance agent, but it always makes me a little uneasy and unsure whether to trust his advice…

Are you applying online? Getting out of college, I had a similar problem when I applied online, but I went in and explained why I had no credit history and talked to a person and they gave me a credit card. Chase Bank is great!

This happened to my now husband when we first started dating. He kept getting denied due to never having a credit card before. Try going to your bank and getting one! If you’ve been a long time client they should be able to give you a cc, although it might come with a low spending limit (my husband’s limit was $250) but that should give you a starting point to build your credit as long as you always pay it in full every month.

I (and many of my colleagues) are relying on public service loan forgiveness, and from what we’ve learned, the forgiveness aspect can’t be taken away from current debtors – it just may not be extended to future student borrowers if the program is discontinued. I would calculate how much you’ll end up paying if you keep making the minimum payment until you hit the ten year forgiveness mark. We did this for my husband’s loans and realized that we’d end up paying way more if he stayed enrolled in an income-based plan and waited for forgiveness than if we just made the standard payments and paid it off earlier. Ugh, student loans are such a pain!

Just don’t forget that you will be taxed on what is forgiven as you are doing these calculations! That comes as a surprise to a lot of people.

I’m not sure if there are any retirement plans available, but I invest with Digit for savings and stock market learning. It’s built for new investors that aren’t that familiar with investing. You personally get to pick what company you want to buy shares from so you can research their values and environmental/wage policies before you decide. I think there are other smaller companies offering the same thing as well that I’m not personally familiar with.