We Don’t Know How Money Works

So here’s a mildly embarrassing personal truth I will admit: I’m 29 and I have no idea how money works.

Budgets? Investing? Interest rates? I think the Fed does something important? Totally lost on me. I am aware that these things exist, but that is the extent of my financial acumen.

banking loan, or cash conceptThe sad consolation is that most of my peers aren’t doing much better: Only 24 percent of millennials have “basic financial knowledge,” and just 27 percent are getting professional financial help, according to a study this year from George Washington University’s Global Financial Literacy Excellence Center and PricewaterhouseCoopers. Half of millennials are concerned about student loan debt, nearly half couldn’t come up with $2,000 in 30 days in case of an emergency and only a third are satisfied with their financial situation, according to the study.

Not good. But there is help. Let’s meet Ron Lieber.

Ron is a New York Times columnist who writes a weekly column called Your Money, which focuses on personal finance advice and knowledge. He’s worked at The Wall Street Journal, where he also wrote about money, and he was the managing editor of a website aimed at helping people in their 20s and 30s manage their money.

He was kind enough to chat with me on Slack about basic financial know-how, and he gave me tips that anyone my age can use.

(This chat has been edited and condensed.)

TIM: Hi, Ron! I’m just an average 29-year-old who doesn’t know anything about money. I have a tiny bit, and I have even less knowledge. I need some major help here. So, really, this is an exercise in selfishness.

RON: Ha. It’s also an exercise in smarts. The smartest people are the ones who admit what they don’t know.

TIM: Let’s start with an easy one I’ve always been embarrassed to ask: What is a credit score? How is it calculated? And what if mine is bad?

RON: Credit scores are how lenders figure out whether to lend you money and what kind of interest rate to charge. It’s based on your credit report, which shows how or if you’ve paid your bills on time and how much you’ve borrowed. It’s also wrong a fair bit of the time. So it’s worth checking your credit report once each year for mistakes. You can get free copies of the report from the three big companies that keep track of you here. Don’t Google “free credit reports.” There’s lots of nasty stuff out there intended to trick you into buying stuff — go here instead to get your FICO score, which companies use to measure your history with debts and paying your bills on time.

What should I do with my 401(k)?

TIM: I’ve had a 401(k) since I started my first job, and it’s been following me around ever since. But do I need to do anything with it? I’ve heard people say you should contribute 10 percent of your income to it, but for many people (i.e. me) that’s not really possible.

RON: That’s good — all the money is in one place. The downside of that is that you have to pick from whatever investments your employer offers — each employer decides how many and what kinds of mutual funds you can invest in. But the New York Times plan is pretty good, so you’re O.K. there. No need to do anything else.

Now, about those percentages. Ten percent is a pretty good number for people in their 20s. And if your employer offers a matching contribution (tossing some money in, up to a certain point), that 10 percent might effectively turn into 12 percent or 14 percent, which is really good.

TIM: Let’s say my job didn’t offer a 401(k). What would I do then?

RON: You’d find a brokerage firm and set up an individual retirementaccount or a Roth I.R.A. there. Schwab, E-Trade, Fidelity or Vanguard are good places to look.

What should I do with my savings account?

TIM: Staying on this idea of saving, I am finally at a place where I have saved a (tiny) amount of money in my savings account. But now, it’s just kind of sitting there. What should I do with it?

RON: No need to do anything with it as long as it’s for short- or medium-term use. It’s good to have an emergency fund in case some kind of unexpected something comes up. There are online savings accounts that earn about 1 percent, and that’s a fine place to park your money since you know you’ll get all of it back at some point.

Some people do invest outside of their retirement accounts, but I’d probably focus more on putting that money away for retirement or use it for paying down student loans, perhaps.

TIM: Oof, you had to mention student loans here, didn’t you? Fine, let’s talk about student loans.

RON: Sorry. Two-thirds of people coming out of college have them.

Can I refinance my student loans?

TIM: I have about $13,000 left on a few student loans, each with around 5 to 7 percent interest. 1. Are those decent rates? Should I consider “refinancing,” which is a term I have heard many times but understood zero times? And 2. Is it better for my long-term financial health to pay off my student loans by increasing my monthly payments as much as I can, or is it better to save/invest in other ways?

RON: Refinancing means taking those loans, turning them into one new loan and paying a single interest rate. That interest rate might be lower than 5 percent, if you have a good credit score. But it might not. Also, that new rate might be variable, which means it could change (go up, most likely) over time. Your current loans are probably fixed — the interest rate doesn’t change. But with debt that small, a change in interest rates doesn’t save you much money — and the new loan may tempt you with lower monthly payments over a longer period of time (that is, longer than it’s supposed to take to pay off your current loans).

So if you’re lucky enough to have a bit of extra money, it’s tough to know whether to put that toward a) a bigger emergency fund, maybe enough to pay three months of expenses if you lost your job or got injured, b) more retirement savings or c) paying down student loan debt faster. I wrote about it here.

Should I get a rewards credit card?

TIM: So let’s talk about credit card rewards.

RON: This one is making quite the splash now, but I’m not sure I’d recommend it unless you’re already a big spender.

The most important thing — LET’S USE THE ALL-CAPS KEY HERE — do not mess around with credit card rewards unless you’re paying your bill on time (every month) and in full (every month). Late fees and interest charges will cost you more than you’ll gain from any card reward.

TIM: Is it a good strategy to use a rewards card on day-to-day purchases and pay off the balance every month?

RON: Look, I do it, so it would be hypocritical of me to tell you not to.

But there’s some pretty good evidence that people who do all their everyday spending on cards spend more than they would if they used cash.

That evidence comes from professors who … still use their rewards cards, though! I wrote about them here.

TIM: Yes, I can verify that theory.

RON: Ha. Well, then, boring debit cards for you.

The card industry is trying reallllly hard to get you to use credit instead of debit. Why? Two reasons. 1) The merchants pay more to the banks to accept their credit cards than they do to accept their debit cards, in general. 2) If you spend more than you have, then you start paying interest. Ergo, more profit for the banks than if you used debit.

They want you to lose. And I want you to be an unprofitable customer — in everything, always. It’s the mission of my column — all Your Money readers are above average!

TIM: Ah, something to aspire to: an unprofitable customer.

Thank you so much for doing this chat, Ron. Can we end with the one most important piece of advice you think everyone like me should know as we become real adult people?

RON: Think hard about a couple of things when you’re contemplating any expense: Is this a want or a need? Which wants will make me happiest? (Hint: The answer generally involves doing things more than having things.) And how much is enough? (That last one is one of the most cosmic questions of this or any age — how much happiness, love, sex, work satisfaction, exercise, food, religion and, of course, money.)

TIM: And now you’ve sent me into both a financial AND existential crisis. Thanks again!

RON: My pleasure. I often respond to reader questions in the comments of my columns. Please check them out at nytimes.com/lieber

H/T NYTimes