I Made Financial Planners My 5 Most Embarrassing Money Questions

• I’m late when it comes to money and have been embarrassed to ask some basic questions.
• But I finally got up the nerve to ask financial planners things like, what’s the deal with APY?
• I also asked how 401(k)s really work and if it’s too late to start saving for retirement.

When it comes to personal finance, I consider myself late. As someone who never took a finance class in school (I majored in English) and didn’t receive much education from the people around me, I spent my 30 years trying to learn as much as possible from books and financial experts.

However, despite all my research, there are still some questions I’ve been embarrassed to ask, mainly because I felt like I should have known the answers by now. But finally I decided that, in the interest of reaching my financial goals, It was time. So here are the answers to some money questions I’m embarrassed I haven’t asked before.

1. How does a 401(k) really work?

At most of the companies I worked for before I became a freelancer, I was hesitant to open a 401(k) and invest. The biggest reason I didn’t was because I didn’t understand how a 401(k) works – and I’m still not very clear.

I asked the financial planner Jay Zigmont To explain it to me: You said that a 401(k) is a specific type of retirement account that your employer may offer. You generally have two options: You can save money in a 401(k), either before taxes (traditional) or after taxes (Roth); sometimes you may have the option to do both.

If you contribute to your 401(k) on a pre-tax basis, you get a tax deduction now, but you pay income taxes when you withdraw the money in retirement. If you contribute after taxes, you pay taxes now but come out tax-free in retirement.

“Remember that a 401(k) is just an account, and you must invest the money in the account after you add it,” Zigmont said.

2. How much debt is too much?

One of the biggest regrets I have in my 20s is the amount of debt I took on due to poor spending habits.

Although I am now more strategic about how I save my money, I know that one day I will probably find myself in debt again (be it a big purchase or a pop-up emergency, I don’t have the cash to fund). This got me wondering how much debt is too much debt.

financial planner Kendall Clayborne shared that a good rule of thumb is to try to keep the amount of debt payments you have below 36% of your income, however, every situation is different.

“It’s important to prioritize good debt over bad,” Clayborne said. “The idea is that we want to avoid ‘bad’ debt, which is anything with high interest rates.”

This type of debt can include things like credit card debt or personal loans. In those cases, it is best to prioritize paying off that debt as soon as possible. Debt like a mortgage is considered “good” debt, since the interest rates are usually quite low and the debt finances an asset (ie your home).

3. If I haven’t saved for retirement yet, is it too late to start?

For most of my 20s, saving for retirement was at the bottom of my to-do list. It’s only been a few years since I started putting cash in a SEP IRAand it made me wonder if it’s already too late to reach any kind of substantial retirement goal.

financial planner Evon Mendrin He said it’s never too late to save for retirement. However, it’s important to start as soon as you can, and that may require spending adjustments today to start saving more for tomorrow.

“Retirement security involves many variables, including savings, the amount of assets, sources of income like Social Security and pensions, and most importantly, your expenses,” Mendrin said.

He said that for those who feel they are behind in their retirement savings, their goals may need to be adjusted.

“For example, spending adjustments, working part-time or delaying retirement altogether,” Mendrin said.

4. What is compound interest and how does it work?

When it comes to personal finances, one of the most important things many of my friends and family often tell me is to worry about money. power of compound interest. While I have a general understanding of what that is, I was curious to dive into how it actually works.

Clayborne explained it to me: compound interest is the interest you earn on your interest.

For example, if you have $10,000 and earn 5% interest each year, this becomes $10,500 at the end of the first year and $11,025 at the end of the second year. The extra $25 would be the interest you earned on that extra $500.

“This may not sound like much, but over the course of 30 years, your $10,000 would turn into $43,219.42 due to compound interest,” says Clayborne.

5. What’s the deal with APY?

For the last few years, I’ve tried to be smart about the keeping accounts and CDs that I put my money into so that the money grows as much as possible. I often look for the bank that offers the best annual percentage yield (or APY) but when I sat down to think about that phrase, I found myself confused.

financial planner Tracy Sherwood explained to me that APY is the annual interest rate your cash earns and that rate takes into account compounding, or how often you’ll earn interest not only on your principal, but on the interest you’ve earned on what goes of the year

“You earn a set interest rate on your deposit or savings account and they specify how often they compound the interest, like daily, monthly or yearly,” Sherwood said. “The more frequently the interest is compounded, the better.”

One helpful tip Sherwood shared was that when comparing savings accounts, some may offer an incentive or higher introductory rate for the first six months, but then lower it more than other banks after that. Be sure to check what that rate is after the offer ends.