Managing your finances effectively is crucial for a secure and successful future. Unfortunately, getting started can sometimes be challenging. This blog, curated by the Fidelity Federal team, answers common questions about financial management and shares practical tips and clear strategies to help you maintain financial health.
Financial Literacy FAQ
1. How much cash should you have on hand?
Having cash on hand is about finding a balance. While it’s important for emergencies, too much cash sitting idle can mean missing out on potential interest or investment gains. How do you determine the right amount for you?
A general rule of thumb is maintaining an emergency fund of three to six months’ worth of living expenses in cash or a readily accessible account, like a savings account with a low or no minimum balance to avoid fees. This can help you manage unexpected costs, such as medical bills or car repairs, without relying on credit cards or loans to cover the additional expenses.
2. How much money should you save each month?
The amount you should save each month can vary based on your income, expenses, and financial goals. A common guideline is the 50/30/20 rule, which suggests allocating 50% of your income to necessities, 30% to discretionary expenses and 20% to savings and investments.
If you have specific saving goals, such as a down payment on a home or an early retirement, you may need to adjust these percentages to accelerate your savings rate.
Get tips on building an emergency fund >>
3. How do you budget for big life expenses?
Budgeting for significant life expenses starts with identifying your priorities and setting a timeline. Whether it’s buying a house, funding an education or planning a wedding, you’ll need to estimate the overall cost and break it down into manageable monthly savings goals.
Consider opening a separate savings account specifically for this purpose to avoid temptation and to track your progress easily. Additionally, researching and understanding any potential costs associated with loans, insurance or retirement accounts can help you budget more effectively.
4. How can you improve your credit score?
A good credit score is crucial for obtaining loans with favorable terms, like a mortgage or auto loan. To improve your credit score, make sure to pay all bills on time, reduce your credit utilization ratio (the amount of credit you’re using compared to what’s available) and regularly check your credit reports for errors.
Additionally, if you’re just starting out, responsibly managing a credit card or a small loan can help establish a positive credit history.
Find out how to teach your kids about budgeting >>
5. What is the best way to pay off debt?
The best strategy for paying off debt depends on your individual circumstances, but three popular methods are the avalanche method, snowball method and debt consolidation. The avalanche method involves paying off debts with the highest interest rates first, which can save you money over time.
Alternatively, the snowball method focuses on clearing the smallest debts first, providing quick wins that can motivate you to continue. Lastly, debt consolidation means you use a special loan or credit card to combine your debt into one monthly payment, ideally at a lower interest rate.
Whichever method you choose, ensure you make at least the minimum payments on all debts to avoid penalties and fees.
6. When should you start saving for retirement?
The simplest answer is as soon as possible! The earlier you start saving for retirement, the more time your money has to grow through the power of compound interest.
Even if you can only contribute a small amount to a retirement account such as a 401(k) or an Individual Retirement Account (IRA), it’s crucial to make regular contributions. Many employers will match your contributions up to a certain percentage — consider participating to take advantage of the “free money.”
Additionally, as your income grows, try to increase the amount you’re saving each year to help ensure a comfortable retirement.
7. How can you protect your finances against inflation?
During times of inflation, the purchasing power of your money decreases. To protect against this, consider investing in assets that historically outpace inflation, such as stocks, real estate or Treasury Inflation-Protected Securities (TIPS). Additionally, maintain a diverse portfolio to spread risk and potentially mitigate the impacts of inflation on your overall wealth.
Financial Literacy = Financial Stability
Financial literacy is an ongoing journey, and each step you take can lead to a more secure financial future. Remember that personal finance is personal — no single approach works for everyone.
Tailor these answers to fit your unique circumstances and goals, and don’t be afraid to seek professional financial advice to guide you along the way. Learn more about financial literacy on our resources page.
