FAQs

Earn

Q:
How long will it take before I receive my first paycheck?

A:
All companies are different, but you can generally expect it to take a few weeks. Ask if you can fill out paperwork in advance of your first day in order to speed up the process. 

Q:
What's the difference between gross and net pay?

A:
Gross pay is your salary, the total dollar amount your employer agrees to pay you over a given time period. Net pay is your “take-home pay”: the amount you earn after your employer makes any deductions for taxes or employee benefit programs. Common deductions include federal and state income taxes, Social Security taxes and the cost of employee-benefit programs like health insurance. In essence, your net pay is the money you have to live on. It’s the money you have to cover necessary expenses – food, housing and savings – and, after that, any “discretionary” purchases like cable TV or movie tickets. In general, net pay is approximately 60 percent to 70 percent of gross pay. So, for example, while you may make a salary of $50,000 a year, you may only get $30,000 a year to live on.

Q:
My paycheck is confusing. What are all those deductions?

A:
Paycheck stubs list a lot of numbers and can be difficult to read at first. To help simplify, you should know your paycheck conveys this basic information: your gross pay, an itemized list of deductions and your net pay. Two kinds of deductions are typically made to paychecks, those for mandatory taxes and those for optional benefits. Mandatory federal and state income taxes will probably be the largest deductions you will see on your pay stub. Rather than pay your income taxes all at once in April, most employers help you spread out the payment throughout the year by deducting a portion of the income taxes you owe from every paycheck. Income tax rates vary widely depending on where you live and how much you earn – and some states don’t levy income tax at all. Another mandatory deduction you will see is for the Federal Insurance Contributions Act, also known as the FICA tax. Revenue from this tax goes to pay for U.S. Social Security and Medicare programs – benefits you receive in retirement. The 2010 FICA tax rate is 15.3% of your gross income, only half of which (7.65%) comes out of your paycheck. Your employer pays the other half.

Optional paycheck deductions help cover the cost of your employer’s benefit programs including health and dental insurance, retirement plans (like 401k) or subsidized commuter passes. Opting to participate in these programs is a useful way to pay for necessities and also reduce your taxable income since the money used to pay for these programs is deducted from your paycheck before your income tax is calculated. How big of a chunk optional deductions take out of your paycheck depends on the type of programs your employer offers and which ones you choose.  Overall, the more deductions you have the lower your net pay. 

Q:
How do I estimate my income tax rate?

A:
Every U.S. citizen owes federal income tax. To estimate your federal income tax rate, refer to the tax bracket tables the IRS releases every year. Generally speaking, you will find that the more money you earn, the higher your income tax rate. So if you are single and your taxable income (the amount of money you earn after deductions and exemptions) was $50,000 in 2009, you are in the 25 percent tax bracket. However, that doesn’t mean all your $50,000 is taxed at 25 percent. The income tax system is progressive, meaning the rate at which you are taxed gets incrementally higher along with your taxable income. So for 2009, of that $50,000, the first $8,350 you earn is taxed at 10 percent, the next $25,600 at 15 percent and the remaining $16,050 at 25 percent. In this case, as a result, the percentage of your income paid in taxes – or your average tax rate – is 17.38 percent. But the tax rate of an additional dollar  – your marginal tax rate – would be 25 percent. On top of federal income taxes you will likely owe state income taxes. Income tax rates vary widely from state to state so the easiest way to figure yours out might be to Google “tax brackets 2010” along with the name of the state where you live. You should also contact a tax adviser.

Q:
I’m switching jobs. Can I still get my 401(k) out?

A:
Yes. If you decide to switch jobs you will maintain control over your vested 401(k) account. (Your employer’s 401(k) contributions “vest” or become yours immediately or after a predetermined period of time, depending on your 401(k) terms. You are always entitled to your own contributions). You have a few options for what to do with your 401(k) when you change jobs. You can cash it out, leave it right where it is or transfer it to either your new employer’s plan or a rollover Individual Retirement Account (IRA). Though cashing it out may sound appealing, it comes at a cost: not only will you have to pay federal and state income taxes on the money but if you are younger than 59 ½ you will also be required to pay a penalty equal to 10% of the size of the withdrawal. If you’re happy with the investment opportunities offered by your former employer’s plan and your 401(k) balance is more than $5,000 you can simply let it sit and continue to grow. If you’d like to consolidate your retirement savings in one place or you’d like a different 401(k) plan, you can transfer your 401(k) balance either into your new employer’s retirement plan (if that plan allows transfers) or you can “roll over” the balance into a traditional IRA. A direct rollover is a seamless transfer of the funds from your old account into the new one. The money never passes through your hands – it goes directly from the trustee of one account to the trustee of another – and continues to grow, tax-free.

Q:
How does my employer take out deductions?

A:
If you opt to get employee benefits like health, dental, disability or life insurance, the fees for those benefits will be deducted from your gross pay each payment period. How much of an impact that makes depends on what benefits your employer offers and which ones you decide to take.

Your employer might also offer flexible savings accounts to cover dependent care, train fare, or health care costs that aren’t paid for by insurance (like co-pays for doctor visits). Money also goes to these accounts before tax deductions are made. Typically, the money is taken out of your paycheck a little at a time. You then get reimbursed over the year as you incur the expenses.

Q:
What is a bonus, exactly?

A:
A bonus, often known as supplemental wages, is not to be confused with your regular salary. It is given in addition. A bonus can include things beyond a merit-based extra. It can also include severance pay or sick pay. 

Q:
Why are some of my paychecks for different amounts?

A:
Some of your paychecks probably have deductions taken out during certain pay periods. For example, money for transportation could be taken out of the first paycheck of the month. Also, another benefit may have upped your gross income during one pay period. This can affect your net income, too.

Q:
How do allowances work on a Form W-4?

A:
The fewer allowances you claim on a Form W-4, the more money you will have taken out of your pay for taxes. If you claim zero allowances you will have the most amount of money deducted for taxes. 

Save

Q:
How do I know how much money in my budget should be going to housing? 

A:
To give you plenty of flexibility, your housing payment (rent or mortgage) should be no more than 25 percent of your gross pay or 35 percent of your take-home pay. If you are spending more than this, you likely do not have enough money left in your budget to cover other necessary items, or even to afford any unnecessary ones. 

Q:
I hear a lot about wants vs. needs. What does this mean?

A:
When you set up a budget or a spending plan, part of your process should be to prioritize your spending. You have a limited amount of money to spend each month and you need to make sure that, first and foremost, what you have covers everything you need to live. These are your "needs" and usually include housing, utilities, food and clothing. Once your needs are taken care of, any remaining money can go to unnecessary “wants.” Wants are those items that are nice to have but not required to live and usually include cable TV, DVDs, restaurant meals and cell phones with many features, among others. You need to be careful not to confuse wants and needs. For example, you need a place to live, but you don't need a 5,000-square-foot home. A home is a need; the extremely large home is a want. When people refer to wants vs. needs they mean that, if money is tight, needs have to come first when you spend your money and wants should only be bought once all the needs are taken care of.  

Q:
What does "live within my means" really mean?

A:
When you "live within your means" you spend what you earn. Your income equals your expenses. You are able to meet your short-term and long-term obligations and maybe have some frivolous fun as well. You are not creating debt for yourself every month, but you are not getting ahead either. Your goal instead should be to live "below your means." When you live below your means, your income is more than you spend. You are able to meet your obligations, pay for some fun perks, and save some money every month, too. When you live below your means you are on the path to creating your secure financial future.

Q:
How do I best track my spending?

A:
People have different tastes and aptitudes when it comes to tracking spending. Some like to use computer programs like Quicken or a spreadsheet that they develop themselves. Others like old-fashioned pencil and paper. Still others use a combination of methods. Choose a method that you are comfortable with and that you will actually use. Tracking your spending consistently is vital, but the best method is what works for you.

Q:
How can it be that my spending has a larger impact on the world?

A:
When we spend money, that money doesn't just sit in a cash register drawer at the store. Part of the money goes back to the company that made the product you bought, paying salaries at that company and paying for the development of new products. Some of the money goes to local and federal governments in the form of taxes and some is used to pay for the programs and services that you and others will use. Some companies even donate a portion of your money to a charitable cause. Every dollar you spend has an impact on the world because it pays for labor, product development, services and, sometimes, charitable causes. This is why you need to carefully consider the stores you patronize and the goods you buy to ensure that your money is going to companies, people and causes that support your values. 

Q:
How much money should I have before I can give to charity?

A:
Anyone can give to charity, no matter your income level. As long as you don’t exceed your means, you can determine the amount of money you’d like to devote to investing in charities or causes you care about and want to support. Giving money – or time – can be for everyone.

Q:
What is a budget?

A:
A budget is a financial plan for forecasting your income and expenses. Simply put, it’s what you project you’re going to spend, be it for something specific (holiday budget) or a time period (2010). It is designed to help you manage your money over time.

Q:
What is a cash flow statement?

A:
A cash flow statement shows how much money you are bringing in, how much money you are spending and what you are spending it on. It differs from a net worth statement because it is dynamic (whereas a net worth statement is more like a snapshot). The important thing to pay attention to on a cash flow statement is that you are not spending more than you are bringing in.

Q:

What is a net worth statement?

A:

A net worth statement, also known as a financial statement or a balance sheet, gives you a snapshot of your financial condition. It shows how much own as well as how much you owe and to whom you owe. In other words, assets minus liabilities determine your net worth. It is a good tool to track your progress by comparing to previous net worth statements.

Q:
What’s the best way to budget for the holidays?

A:
The best way to plan for an event that’s recurring is to look at how much you spent in past years. That way you’ll have a sense of your spending patterns. If you don’t still have your receipts, look through your bank statements to see what you spent, both on presents and on any travel, decorations, cards, clothes and entertainment. Those all count, too. Consider contributing money — starting early in the year — into in a bank account you’ve designated just for holiday spending. Some banks even offer these, and they often come with higher rates.

Q:
What should I save for?

A:
Saving is one of the most essential steps to achieving financial security. In the short term, saving gives you emergency resources for handling a crisis, like an accident or an unexpected layoff. (In general, people with the equivalent of at least three months worth of expenses saved in an emergency fund are much better able to cope with a layoff.) In the long term, saving will help you accomplish longer-term financial goals, like paying for a child’s college education or for retirement. To save, you’ll need to spend less than you earn. 

Q:
Where should I save money? 

A:
As you save money, preferably from every paycheck you receive, you have many options for where to put it. Your saving options include basic savings accounts, high-yield checking accounts, certificates of deposit (CDs) and money market accounts (MMAs), all of which are explained in Save Lesson III.II Savings Options. In general, when you save, you want to achieve the highest interest rate for the best terms possible and the lowest amount of risk. Also look for savings institutions that are insured by the Federal Deposit Insurance Corp. (FDIC) or the National Credit Union Administration.

Q:
What percentage of my money should I save each year?

A:
While much depends on your income, your expenses, and your financial goals, a good rule of thumb is to save 20% of your income. That should be split between putting money in an emergency fund (5%), saving for specific goals (5%) and retirement (10%). 

Q:

Do I need a checking and a savings account? 

A:
Yes. When you mingle your savings with the money you use to pay your everyday expenses, it is very difficult to track how much you have saved and it's easier to accidentally spend your savings. Keeping your checking and savings accounts separate makes it much easier to track how much you can spend without tapping your savings, as well as how much you have saved toward your goals. Additionally, many checking accounts do not pay any interest, which is a benefit you want for your savings. Interest is what helps your savings grow over time, so you want to get the highest interest rate you can. 

Q:
How many savings accounts can I have?

A:
You can have as many as you want. Many people keep multiple savings accounts to keep their savings for various goals separate. You may want an account for a new car, a vacation, an emergency fund or a down payment on a home. Separate accounts make it easy to see how much you have saved toward each goal. If you amass more than $250,000 in any one account, you will need to open another account at a different bank because the Federal Deposit Insurance Corporation (FDIC) as of March 2010 insures a maximum of $250,000 per depositor, per insured bank. To keep your deposits safe you may have to open multiple accounts. 

Q:
How is a credit union different from a regular bank? 

A:
A credit union is a non-profit organization, founded to serve a specific membership or group. You can join the credit union only if you are a member of the group it serves. When you join a credit union, you are considered a member rather than a customer. As a member, you have voting privileges when electing the board of directors and a say in how the credit union operates. Credit unions do not answer to stockholders, but rather to their members. When a credit union is profitable, the profits go to members in the form of dividends rather than paying dividends to stockholders who may or may not be customers of the bank. Credit unions typically offer more favorable interest rates on loans and savings accounts than banks, and they charge fewer fees. 

A bank is generally run by a group of investors and the bank exists to make money for those investors and anyone else who holds stock in the bank. Because a bank is more profit driven than a credit union, it generally offers lower interest rates on savings, higher interest rates on loans and charge more fees. Anyone may open an account at a bank, but you are a customer of the bank, not a member. You have no voting privileges or say in how the bank operates. 

Q:
What bank fees are reasonable to pay?

A:
If you can avoid it, you should never pay any bank fees other than those for special services such as safe deposit box rental. Shop around for banks or credit unions that offer free checking accounts and free ATM usage. These banks are out there, but you may have to think in terms of smaller, local banks instead of the mega-banks. If you do have to pay fees, shop around for the best deal and then try to minimize fees by keeping the required minimum balance in your account, limiting your ATM usage and avoiding overdraft fees. Before opening any account, make sure you understand exactly what sort of fees you'll be subject to and that they will not cause you undue financial hardship. 

Q:
Is it better for me if interest rates are up or down? 

A:
It depends on your current goals. When interest rates are down, the interest rates on mortgages and other loans are much lower, making it a good time to buy or refinance a home or make other large purchases. However, when interest rates are low, the interest paid on savings accounts and CDs is low. If you're trying to save a lot of money or if you have CDs reaching maturity that you want to renew, lower interest rates work against you. There are positives and negatives to both high and low rates and the benefit to you depends on what your financial needs are at the current time. 

Q:
Why should I start saving for retirement when I won't retire for at least 40 years? I can use that money today! 

A:
When you start saving at a young age, you get to enjoy the full power of compound interest. The power of compounding means that you can save smaller amounts when you are young, yet still end up with more at retirement than the person who starts saving larger amounts at an older age. Here's an example of how compounding works:

At age 19, James begins putting $2,000 per year into a retirement plan that earns a return of 12 percent per year. He does this for eight years, or until age 26. Then he stops contributing altogether and never adds another penny. At age 65, through the power of compounding, he has $2,289,000. John begins saving $2,000 per year at age 27 in the same type of account earning the same 12 percent rate of return. He contributes $2,000 per year for the next 38 years, until age 65. At age 65, John has amassed only $1,532,000, or almost $800,000 less than James.

When you wait to start saving, you have to save much larger amounts to make up what was lost by not starting young.

Q:
What's the best age to start saving for my kid's education? (Both my age and his?) 

A:
While there is no best age to start saving, you do want to start as early as you possibly can. Tuition rates are soaring and some people start saving even before they have children. The earlier you start, the longer that money has to grow and outpace tuition increases. However, you do not want to save for college at the expense of your own financial security. You need to be saving for your own retirement and have your debt load under control before you commit large sums of money to college savings. As the saying goes, "Kids can get loans or work their way through school, but there are no loans for retirement." Start saving for your child's college as early as you reasonably can, but don't jeopardize your own financial plans. 

Q:
What's the difference between an IRA and a 401(k)? 

A:
A 401(k) is a retirement plan offered only by an employer and the employer controls it. In 2010, you can contribute up to $16,500 to your plan. Your investment choices are typically limited to a selection of mutual funds chosen by the plan administrator. All of your contributions and earnings are tax deferred, meaning you pay taxes only when you withdraw the money. Some employers will also match a portion of your contributions, giving you free money.

An Individual Retirement Account (IRA) is an account that you open and control. You may invest the money in CDs, mutual funds, stocks, bonds or in a simple IRA account that earns an interest rate similar to a savings account. How much you can contribute is determined by your income and your contributions to other retirement savings plans. Unlike a 401(k), contributions made to an IRA are made with after-tax income. However, you are allowed to deduct some or all of your contributions on your taxes. Your earnings are tax deferred until you withdraw the money.

Q:
How do I get started investing? 

A:
The first step is to educate yourself. Read books and magazines about investing and watch TV channels like CNBC to get a feel for how the market works and the terminology you'll encounter. You might even want to practice by picking some stocks or mutual funds and tracking their performance on paper before you commit real money. Once you understand the basics, you can start investing through your 401(k) at work or through an online brokerage that caters to the small investor. As you get more comfortable, you can increase the amount you invest and branch out into different types of investments. 

Q:
If I need to tap my retirement fund now can I do it? 

A:
You can, but the penalties and taxes you will incur vary depending upon the type of account you're tapping. If you have a Roth IRA, you can withdraw any of your principal contributions at any time, just as if you were withdrawing from a savings account. Any earnings you withdraw will be subject to taxes and penalties. If you have a 401(k) or a regular IRA, you must pay taxes and penalties on any money you withdraw before retirement age. (There are a few specific exemptions but unless you qualify, prepare to pay penalties and taxes.) These can add up to substantial sums, so consider carefully whether or not it's worth it. Some 401(k) plans allow you to take a loan from your 401(k) that avoids the taxes and penalties, but if you leave your job (whether voluntarily or involuntarily) that loan must be repaid within 60 days or it is considered an early withdrawal and becomes subject to taxes and penalties. 

Q:
I want to retire at 50. How do I make this happen?

A:
You need to start saving as much as you can as soon as possible. You need to start young so that your money has the maximum time to grow. Since you're retiring about 15 years earlier than the average, you'll also need to save much larger amounts of money to make up for the additional time that you won't be working and earning. Not only do you need to begin saving when you are young, you need to save some of your money in investments that you can tap at age 50. You can't touch a regular IRA or 401(k) until you're 59 1/2 without penalties and taxes. You can tap your principal contributions to a Roth IRA at any time, but you cannot touch the earnings penalty-free until age 59 1/2. You don't want to retire early only to find that much of your nest egg is unavailable to you, so you need to put some money into taxable investment accounts, savings accounts or CDs. 

Borrow

Q:
What’s good debt and what’s bad debt?

A:
Good debt is a loan that helps put you in a better financial position. Taking out a loan so you can pay over time for a big necessary purchase, like a washer and dryer, is one example, especially because you could pay off the loan and still own the equipment for 10 more years, at no significant additional cost. Taking out a mortgage to buy a home could be another good form of debt. You will have to be able to afford a down payment, but while you pay off your mortgage the value of your home could significantly increase. Student loans can be another example, particularly if a college or graduate degree will improve your earning power in the future. Bad debt is debt you take on to allow you to spend more than you could otherwise afford. This can easily happen with credit card debt or store-charge-card debt, for instance.

Q:
What sources can I borrow money from?  

A:
If you decide you can afford to borrow money (because you’ll have to pay back your loan), you have many borrowing sources you can choose from. When it comes to financial institutions, you can borrow from retail banks and savings banks, credit unions, consumer finance companies as well as insurance companies. Other borrowing sources include credit card companies, your retirement funds, the U.S. government – and, of course, family or friends. 

Q:
What do I need to know before I take out a loan? 

A:
When you take out a loan, you should know that you will owe your lender the initial amount of money you borrowed – the principal – as well as compensation for lending you the money, which is called interest. The interest rate is the percentage of the principal you owe for borrowing over a certain time period, usually a year. Interest payments are calculated with either simple interest, which is a flat percentage of the principal, or compound interest, which is a percentage of the initial principal plus the interest payments that have already accumulated over time. If you miss a loan payment, your lender will charge you a late fee and the interest rate could increase. What you ultimately owe will not only be more than you borrowed but it will be more than you originally agreed to pay to borrow. A missed payment can also adversely affect your long-term ability to borrow. 

Q:
What’s a credit score?

A:
Your credit score is a three-digit number calculated using your bill-paying and debt histories as well as a statistical comparison to other borrowers. There are several different credit score computation methodologies but the most widely used is FICO, named for the Fair Isaac Corp., which developed the calculation. FICO scores range from 300 to 850 points.

Q:
What’s a good credit score?

A:
Typically, people with a credit score of 700 or higher are best positioned to qualify for favorable loan terms with best (lowest) interest rates. Scores lower than 600 are often considered “sub-prime,” meaning the score-holder poses a higher risk to lenders.

Q:
How often can I check my credit score?

A:
You can check your credit score as often as you like. And since your score can change at any time, you should do it often. Checking it yourself will not have a negative effect on your score and is a good way to keep tabs on your creditworthiness in the eyes of lenders. Note that your credit score does not automatically come with your credit report. To find out your score you will have to pay for it. Your best bet is to order your FICO scores at myFICO.com from both Equifax and TransUnion. Check your score frequently—quarterly or even monthly—particularly if you are planning to ask for a loan in the near future. In accordance with the Fair-Credit Reporting Act (FCRA), every 12 months all Americans are allowed one free credit report from each of the three national credit agencies: Equifax, Experian and TransUnion. To get an official report visit AnnualCreditReport.com, a site that was set up by the three national agencies and is the only source for obtaining authorized reports. It’s a good idea to order reports from all three agencies since they collect information from different sources and can sometimes have different information about your credit. Read your report carefully to find out about any late credit payments, inaccuracies or signs of fraud.

Q:
I heard missed payments can negatively affect my credit for seven years. Is this true?

A:
Yes. If you miss a credit card or mortgage payment the lender will share the information with the credit agencies and it can negatively affect your score. Even if you pay off overdue debts, the credit reporting agencies can keep marks on your report for up to seven years. So even if you no longer owe money it could take some time for you to improve your credit score.

Q:
Do the charge cards I get at stores count as real credit cards?

A:
Yes. Store-brand credit cards, like the ones Macy's and J.Crew offer, function just the way those from the likes of Visa do. Retail stores use the cards as a way to encourage customer loyalty and big-ticket purchases by offering perks like discounts, free delivery or scoops about upcoming sales. While the savings might be useful if you do a lot of your shopping at a particular store, you should also know most store-brand cards have very high annual percentage rates (APRs) — significantly higher than “normal” credit cards — as well as steep late fees if you are behind on a payment. Even if you are diligent about paying your bills on time, you should know that applying for multiple store-brand cards can also hurt your credit score since credit agencies could count new applications for credit against you.

Q:
How many credit cards should I own?

A:
Generally speaking, you should not own more than two credit cards at any given time. Having a small number of accounts to track and manage will help you pay bills on time, keep debt levels low and avoid having inactive cards canceled by your credit card company.

Q:
I heard I can’t cancel more than one credit card a year. Is this true?

A:
No. There is no limit to the number of credit cards you can cancel in a year. But go ahead and pay down your balance in full before you do so. (Otherwise, it could hurt your credit score.) Also, be aware that canceling a credit card will not erase history: if you have already missed a credit card payment, the issuer will have shared the information with the credit agencies who will keep marks on your credit report for up to seven years. So while canceling is a good way to limit overspending it won’t negate a poor track record of irresponsible borrowing.

Protect

Q:
How can I mitigate the financial risk of unexpected situations?

A:
You can mitigate risk and protect yourself financially from unforeseen circumstances by learning your insurance options, having an emergency fund and understanding identity theft as well as other types of fraud.

Q:
Which insurance options are important for me?

A:
To avoid financial catastrophe down the road, insurance options that are worthwhile are those that help protect you and your family from potentially large financial losses. Those include disability, health, property and auto insurance. That is, if something out of the ordinary wrecks your home, say, or affects your health and your ability to do your job, it could have significant financial (not to mention, other) consequences to you and your family. To protect yourself you may transfer risk to an insurer who can agree to take it on, for a fee.

Q:
How much money should be in my emergency fund?

A:
Having an emergency savings fund to draw on in the event of some unforeseen financial setback, such as a medical emergency or job layoff, is critical, particularly in uncertain economic times. In case you suddenly find yourself without a steady paycheck you will want a source of cash to tap for living expenses so you aren’t forced to rely on a credit card and fall (or go deeper) into debt. You should aim to build an emergency fund equal to approximately the amount of three months to six months of living expenses. So if rent, food, utilities and transportation costs you roughly $2,500 a month, strive to build an emergency fund between $7,500 and $15,000. If you aren’t currently earning a salary because you are starting a business, you’ll need even more. Aim for 12 months to 18 months of living expenses or, roughly, between $30,000 and $45,000, in this example.

Q:
Can homeowners insurance really cover me for things that happen outside my house?

A:
Yes. Homeowners or property insurance is invaluable because you would be liable not only for damage to your property but also for injuries you, your family or pets may cause others on—or even off—your property. Homeowners insurance covers the cost of damage to the interior or exterior of your home, any personal belongings that are harmed in an insured disaster and personal liability for any damage or injuries caused by you, a family member or pet. So if your child shatters a neighbor’s valuable sculpture, you can file a claim to reimburse the neighbor—even if the accident did not occur on your property. Life is full of accidents and mishaps and homeowners insurance is your best guarantee against this unavoidable cost.

Q:
Do I really need renter’s insurance?

A:
Yes. Renters insurance can protect your belongings in the case of damage or loss from dangers like fire, theft, vandalism, falling objects, even weather. While your landlord probably has property insurance that covers the physical structure of the building itself, a landlord’s policy won’t protect your personal property (clothes and furniture, for instance) in the event of say, a fire. Relative to other types of coverage, renters insurance is fairly affordable and well worth the peace of mind. Note, however, that there are some events and items renters insurance usually does not cover. Earthquake and flood damage for example, often needs to be covered with another policy or at an extra price. Also if you have very valuable items, like jewelry or fine art, you will need extra coverage.

Q:
I just lost my job. What are my health care options?

A:
First, check to see if you are eligible under a spouse’s plan. If you are older than 65 or have a disability, you may be eligible for Medicare or Medicaid. If not, consider Consolidated Omnibus Budget Reconciliation Act (COBRA), a federal law that gives workers and their families who lose health benefits the right to continue coverage under their former employer’s group plan for a limited amount of time. You will have to pay your plan’s monthly fees plus what your employer paid but that still may be less than private insurance. You can and should also shop around for other group insurance plans. If your former employer’s plan was particularly expensive, you may find it cheaper to sign up for a private plan, but be sure to research your options thoroughly. Whatever you choose, be sure to get yourself insured promptly, as unpaid medical bills are the leading cause of bankruptcy in the U.S.

Q:
I’ve heard about investment risk. What does this mean?

A:
Anytime you make an investment—whether it’s to buy a house, shares on the stock market or certificates of deposit (CDs)—you are taking a risk. You could lose money if, for example, the value of the stock you own falls. Or you could lose buying power, if the rate of inflation outpaced the return of your CDs. With any investment, there is some element of systemic or market risk, which is anything that affects the overall economy or securities market. Examples of market risk include inflation, interest and foreign-currency rates as well as sociopolitical influences like terrorist attacks. Some investment risk is non-systemic, meaning it is specific to a certain industry, company or product. This could be damage caused by poor management, lawsuits or loan defaults. Risk levels vary across asset classes—stocks, for example, are generally riskier than Treasury bonds—but can be managed by doing thorough research, staying attuned to broader economic developments and diversifying across a range of assets and industries.

Q:
Why should I create a will? I’m only twenty-five and in perfect health.

A:
While death may be the furthest thing from your mind, now is still the time to draft a legal will. Anyone with savings and belongings, however modest, needs to ensure that in the case of sudden death, assets are distributed according to his or her wishes. If someone dies without a will, a probate court decides how the deceased person’s assets should be allocated. The process can take months and doesn’t guarantee that the individual’s estate is properly valued or that all potential beneficiaries are identified. By drafting a will, you can make sure your money and possessions go exactly where you want them to go. A proper will can also speed up the estate-settling process and minimize conflict among your next-of-kin. Most wills are straightforward documents but you should enlist a lawyer to help draft one to make sure your wishes are explicit and will hold up in court.

Q:
I’m scared of identity theft. What can I do?

A:
You are right to be concerned. Identity theft—when someone uses your credit card information or Social Security number to open accounts and obtain unauthorized loans—is on the rise. Having your identity stolen is not only emotionally traumatizing, it can do serious harm to your credit score and financial security. Fortunately there are concrete steps you can take to protect yourself. First, be extremely vigilant about giving out your Social Security number and only do so when you are required to. Shred all bills and other documents containing financial and personal information before you throw them away. Whenever possible, pay using a credit card rather than a debit card because credit cards offer more security protections. Change passwords and logins once a month and be careful about what sites you visit and transactions you do online when using a public computer or public wireless network. Also be on the lookout for phishing scams—emails from seemingly legitimate agencies or individuals that request personal information—and wary of how you respond to them. In addition, make a point to carefully review your credit card and bank statements as well as your credit report regularly as those documents are usually the first places where you can spot suspicious activity.

Q:
If I am the target of identity theft can I ever reestablish good credit?

A:
Yes. You can recover your good name and standing with lenders but its important to act quickly. Federal laws prevent identity-theft victims from being held responsible for illicit transactions but authorities need to be made aware of the crime right away. As soon as you discover the theft, contact the FTC and local police as well as at least one of the major credit agencies so they can put a fraud alert on your file. If you act quickly, fraudulent purchases made in your name can be easily identified by lenders and, hopefully, will not count against you.