Tackle the money boogeymen – investing, debt, wills, taxes and budgeting -- one easy step at a time.
Ever wonder why we think it’s fun to scare ourselves with creepy movies and haunted houses? Some experts believe it gives us a sense of control. And of course there’s the relief when the fright is over and we know we’re safe.
Money is a scary subject for a lot of us, but it helps to know that you don’t have to tackle your fears all at once. You can take them on in bite-sized chunks.
Step 1: Take a quiz
If investing scares you, it may be hard to know where to start. But even if you’re too nervous to do anything else, you can try this easy first step: Take a quiz to assess your fears, such as Vanguard’s Investor Questionnaire or the quiz at LearnVest. Your bank may also have one online. These simple quizzes walk you through a few scenarios involving money to discover your risk tolerance.
Knowing your risk tolerance — how much risk you can live with comfortably — is key to learning your best investment style. Use it to decide your asset allocation — spreading your risk among different types of financial instruments.
Just to know: You’re not the only nervous investor. About half the people who have 401(k)’s say they’re confused. Confidence comes from educating yourself about investing. (See: “Beginning Stock Investor? Here’s All You Need to Know.”)
Step 2: Know good debt from bad
Yes, there’s a difference between types of debt. Understanding the difference gives you confidence to know when it’s smart to go ahead and borrow money.
- Good debt: Good debt eventually pays you back. Use it to purchase things that appreciate in value. A home mortgage can be good debt, for example. A fixed-rate mortgage lets you manage your housing expense and hopefully reap a profit by selling for more than you paid if you decide to move. Student loans to pay for a college education can be good debt if you can earn more with a degree than without it. Nevertheless, it’s a bad idea to take on vast amounts of college debt or buy a home that is unlikely to appreciate in value.
- Bad debt: Bad debt is the kind you take on because you’re spending more than you earn. Living beyond your means, in other words. “High interest consumer debt is the worst type of debt,” says the Consumer Financial Protection Bureau.
Borrowing to buy a car is one type of bad debt. The car starts losing value as you drive it off the lot and you’ll sell it for less than you paid for it. Financing a vacation with a credit card instead of saving and budgeting for it is another example.
Step 3: Get a will
Everyone needs a will. Even you. The good news: Making a will isn’t as scary, difficult or expensive as you might think.
Here are two ways to get started:
- Call your local bar association. See the American Bar Association’s state-by-state map for a local contact and ask about free or low-cost help where you live. Also, some local bar associations have lawyer referral programs that offer a consultation of a half hour to an hour with an attorney at no cost or a minimal fee. You can explain your situation, ask the attorney’s advice and learn the price for getting your will written up.
- Do it yourself. There are many software options that allow you to create a will yourself. I used an older version of Quicken’s WillMaker Plus software to write a simple will and found it a snap. You could also check your library for “Nolo’s Simple Will Book.”
Do you need a trust, in addition to a will? A trust gives you more control over how your estate will be distributed. It helps minimize taxes and time and expense spent on probate. This is a question best answered in a discussion with a trust attorney. Learn more here.
Definitely get a trust if your estate is worth more than the basic federal estate tax exclusion — $5.43 million in 2015. You might need one anyway, though.
Also, don’t forget to check Nolo’s list of states that impose estate taxes.
Step 4: Rein in your tax bill
Find tax breaks and deductions available to you in this article.
If you need advice or help filing your return, act now. Don’t wait for the springtime tax rush, when accountants are super busy. Ask trusted friends and family members for recommendations for a CPA. Interview two or three candidates to see whom you feel comfortable with.
Find certified public accountants in your area through the American Institute of CPAs. Also, check with your state’s licensing agency to verify that the CPA you choose has an active license.
Step 5: Track your expenses
Budgeting is scarier than zombies for a lot of people. But budgeting fears are inflated. It helps to know that you don’t have to become a budgeting convert overnight. Start out slowly by simply watching where your money is going. There are several ways to do this.
You could try a free online budgeting tool like PowerWallet. These programs import your bank and credit card transactions and show you where your money is being spent. These tracking tools can be employed to great effect alongside tips that help you keep your spending behavior in check.
Others prefer to record purchases on a spreadsheet. It’s more hands-on. Give yourself an hour at the end of each month to record purchases from your receipts, checkbook and credit cards.
The bottom line: Get your feet wet to see what works best for you. There’s no one way. Trial, error and your own experience eventually will guide you to a system you like and can stick with.
How have you overcome your financial fears? Share with us in comments below or on our Facebook page.