Financial makeover: 10 big millennial money questions -- answered
Jan 14, 2015 | 10:07 AM
Not a lot of people like to talk about money -- particularly how much they have or how much they don't have.
But it pays (heh) to have a good, honest discussion about your finances, whether you're talking it out with yourself or with someone with your best interests (again, heh) at heart.
So we reached out to several local and national financial experts and asked them some of our (and hopefully your) biggest money questions. Let's dive right into the money pit, shall we?
1. What are the most effective ways to build and maintain a good credit score?
Building and maintaining a good credit score starts with knowing how you are graded. On-time payments represent 35 percent of your credit score, followed by amounts owed (30 percent), length of credit history (15 percent), new credit (10 percent), and type of credit (10 percent).
Paying your credit card bill on-time will give a big boost to your credit score. Budgeting for the monthly credit card expense greatly improves your chance of on-time payments.
Paying more than the minimum amount and limiting additional charges reduce the amount owed to creditors and enhance your credit score, as well. If you are just getting started on building your credit, try to charge only what you can afford to pay off each month.
Obtaining new credit can be favorable when starting your credit journey. The key is doing your homework before applying for new credit.
The Foundation For Financial Planning has a great website, What's My Score (foundation-finplan.whatsmyscore.org), which gives "everything you need to know about your credit score." — Lazetta Rainey Braxton, registered investment adviser and founder/CEO of Financial Fountains, a financial planning firm
2. Will student loans negatively affect my credit score? And if so, is there anything I can do about it?
When an individual decides to borrow money to pay for college-related expenses, the loan shows on a person's credit record once it is reported by the lending agency (usually the same semester). At this point in time, it is not "negative" credit because it should show as in deferred status, as long as a person meets the terms to qualify for this.
Once a person either reduces their course load or the six-month grace period has expired after they graduate, individuals have to start repaying it. It is at this point when a person's "credit worthiness" becomes measured, based on whether they make the payment by the due date and pay the minimum amount required per the terms of the loan.
It's understandable that during the course of paying back student loans, which typically have a 10-year repayment period, there might be financial hiccups. What is most important for people to understand is it is always best to contact the lender directly, tell them your situation and ask them whether there are temporary solutions.
Avoiding [lenders'] emails, letters or phone calls does not help the situation.If you do, then they will most likely have to report any payments past due after 30 days to the credit agencies, whereas if you work directly with them, they can possibly make other arrangements which could result in not reporting the delinquency. — Mary Fortier, student financial services manager at Towson University
3. What's the best way to shop around for a credit card and how do I know which one is right for me?
When applying for a credit card, avoid responding to an application in the mail or an ad in a magazine before comparing rates, fees and rewards online.
Simply search for "compare credit cards" and you'll find dozens of websites that show you how different cards stack up. It can pay to check multiple sites, as there are 100s of cards and few sites cover them all.
As you compare, you'll need to decide which kind of card you need. If you'll be using the card to make a big purchase and pay it off over time, look for cards that have the lowest annual percentage rate (APR) or offer 0 percent interest for many months. These cards may not have the best (or any) rewards programs, but that's OK.
If you know that you will pay your credit card statement in full every month, then you'll want to look for the rewards program that's most enticing to you. Plenty of cards offer straight cash back, but some travel rewards cards give you more generous rewards as long as you're willing to bank your points for a future flight or hotel. — Dan Weliver, editor of moneyunder30.com
4. When should I start thinking about drafting a will?
Most young adults think about a will as a document to distribute assets on death or to avoid estate taxes. They therefore say, "I do not need a will as I have no assets to speak of and I certainly do not have enough to generate estate taxes."
Yet when I sit down with my young clients I insist that we discuss not just a will but estate planning in general which includes a will (or trust), a financial power of attorney and a medical directive. I discuss these documents from a financial planning perspective and then send them off to an attorney who will address the legal issues and provide needed documents. So why do I insist on discussing these estate planning documents? Consider:
If you have a child and you and your spouse pass away, do you want to determine who will raise your kids or do you want a court to appoint your mother-in-law or brother-in-law as your baby's guardian? If you want some say in the matter, you need a will.
If you become temporarily incapacitated or stuck overseas because of a visa issue who will pay your bills? You need a financial power of attorney (POA) so your selected designee can pay your bills. Oh by the way:
You also need to tell this individual that you have named them.
You have to tell said individual how to get their hands on the POA.
Even though Maryland has a law to address this, you may want to make sure that key financial institutions will accept your POA and not require their own forms.
And finally, do not forget to tell your POA how to get into your house/apartment, where you keep your checkbook/bills (including how to access passwords if you operate online), and what important bills they may need to be on the lookout for. — Barry Korb, adviser with Lighthouse Financial Planning, LLC in Potomac.
5. How much of my monthly income should be going toward rent or a mortgage?
No more than 30 percent of your gross monthly income (amount you make before taxes) should go toward your rent or mortgage. — Dominique Broadway, D.C.-based personal finance coach, dominiquebroadway.com
6. What percentage of my paycheck should be going toward retirement and what's the most sound approach in terms of where I put my money (401(k), Roth IRA, etc.)?
It is critical millennials start saving for retirement now. At minimum, I recommend contributing the maximum matching contribution the employer offers and when receiving a raise, adding a 1 percent contribution increase.
Realistically, social security pays about $1,000-$2,000/month before taxes. That is a pretty low budget when you are living on your own, so you should save as much of your paycheck as possible. Many 401(k)s have matching contributions, so that is a go-to savings plan.
As a younger person, a Roth 401(k) feature, or additional savings in a Roth IRA should definitely be considered. While Roth is "after-tax," the growth is tax-free and withdrawals are tax-free. Personally, I would rather pay a little tax now than a lot of tax later. — Ted Smith, chartered retirement planning counselor (CRPC) at UBS Financial Services Inc. of Baltimore
7. I finally paid off my credit card. Is it better to keep the same one or cut it up and find a new one with better rates/rewards?
One factor that impacts your credit score is the length of your credit history, so some financial advisers might suggest that you keep that card open even if aren't using the card if it's one of your oldest lines of credit — especially if the card is low or no fee.
However, if you've had trouble making the minimum payments on the card or have a history of accumulating lots of credit card debt and not making on time payments, you might want to decide if a credit card is a good tool for you at all. — Courtney Bettle, program manager for financial security, Baltimore CASH (Creating Assets, Savings and Hope) Campaign
8. Is it a good time to buy a house right now and how much should I have for a down payment?
Not only is now a good time for millennials to buy a house, it's a GREAT time! Mortgage rates have rarely been lower, with some 30-year fixed mortgages available under 4 percent.
I remember back when I was millennial aged, buying my first row home in Rodgers Forge, our mortgage rate was 8 percent (and we thought THAT was low, compared to our parents!) Millennials should take advantage of this tremendous opportunity, since we don't know how long rates will stay this low. — Jonathan Murray, managing director of wealth management at UBS in Hunt Valley
9. How do I know if it's best to use a DIY tax service like TurboTax or if I should get professional one-on-one help?
Preparing your tax return using software can be an easy and effective way to file returns. The downside is it is easy to make mistakes.
Software can help with the process but be leery of its false sense of security. Make sure to be very thorough when entering data and clicking all those buttons.
If you are thinking about filing your own return, consider a few things: How comfortable do you feel about filing your own return? Are you savvy with numbers and accounting or does that scare you? How difficult is your tax return?
If you have a difficult return, it may be worth going to a good preparer. You do not want to incorrectly file a return. The IRS is unable to determine if your return is incorrect until months or possibly years after the return was due and you will then owe large amounts of fines, penalties and interest on top of the extra amount you owed. It is also possible you could miss a decent refund.
Finally, a good preparer will also give some advice. It could be as simple as changing withholding amounts or making modifications to retirement plans. — Rob Bader, director of tax operations, Baltimore CASH Campaign
10. I need cash fast. How risky is borrowing against your own 401(k)?
If loans are allowed, it isn't "risky" per se, but you are paying yourself interest versus having money grow for you. In addition, it is "robbing Peter to pay Paul" – ie: the loan has to be paid before you take out anything else. — Ted Smith, chartered retirement planning counselor (CRPC) at UBS Financial Services Inc. of Baltimore