I Asked Financial Planners My 5 Most Embarrassing Money Questions

• I’m a late bloomber when it comes to money, and I’ve been embarrassed to ask some basic questions.
• But I finally got up the nerve to ask financial planners things like, what’s the deal with APY?
• I also asked how 401(k)s actually work, and if it’s too late to start saving for retirement.

When it comes to personal finance, I consider myself a late bloomer. As someone who never took a finance class in school (I was an English major) and didn’t get much education from the people around me, I’ve spent my early 30s trying to learn as much as possible from books and financial experts.

Despite all my research, though, there are still some questions I’ve been embarrassed to ask, mostly because I felt I should have known the answers by now. But I finally decided that, in the interests of reaching my financial goals, it was time. So here are the answers to a few money questions I’m embarrassed I didn’t ask sooner.

1. How does a 401(k) actually work?

At most of the companies I worked for before becoming self-employed, I was hesitant to open up a 401(k) and invest. The biggest reason I didn’t do it was because I didn’t understand how a 401(k) works — and I’m still not quite clear.

I asked financial planner Jay Zigmont to explain it to me: He said that a 401(k) is a specific type of retirement account that your employer can offer. Usually you have two choices: You can save money in a 401(k) either pre-tax (traditional) or post-tax (Roth); sometimes you may have the option to do both.

If you contribute to your 401(k) pre-tax, you get a tax deduction now, but pay income taxes when you take the money out in retirement. If you contribute post-tax, you pay the taxes now but it comes out tax-free in retirement. 

“Remember that a 401(k) is just an account, and you need to actually invest the money in the account after you add it,” said Zigmont. 

2. How much debt is too much?

One of the biggest regrets I have from my 20s is around how much debt I took on because of not-great spending habits. 

Even though I’m more strategic now about how I save my money, I know one day I’ll probably find myself in debt again (whether it’s because of a big purchase or a pop-up emergency I don’t have the cash to fund). This made me wonder how much debt is too much debt. 

Financial planner Kendall Clayborne shared that a good rule of thumb is to generally try to keep the amount of debt payments you have below 36% of your income, however every situation is different. 

“It is important to prioritize good versus bad debt,” said Clayborne. “The idea is that we want to avoid ‘bad’ debt, which is anything with high interest rates.”

This kind of debt can include things such as credit card debt or personal loans. In those cases, it’s best to prioritize paying off that debt as soon as you can. Debt like a mortgage is considered “good” debt, since interest rates are typically fairly low and the debt is financing an asset (i.e. your home).

3. If I haven’t saved for retirement yet, is it too late to start?

For most of my 20s, saving for retirement was at the bottom of my to-do list. It’s only been a few years since I’ve started putting cash into a SEP IRA, and it’s made me wonder if it’s already too late to reach any type of substantial retirement goal.

Financial planner Evon Mendrin said It’s never too late to save for retirement. However, it’s important to start as soon as you can, and that might require spending adjustments today to start saving more for tomorrow.

“Retirement security involves a lot of variables, including savings, amount of assets, income sources like Social Security and pensions, and, importantly, your spending,” said Mendrin.

He said that for those who feel they’re behind on saving for retirement, their goals might just need to be adjusted.

“For example, spending adjustments, part-time work, or delaying the timing of retirement altogether,” said Mendrin. 

4. What is compound interest and how does it work?

When it comes to personal finance, one of the biggest things so many of my friends and family members often tell me is to care about the power of compound interest. While I have a general understanding of what that is, I was curious to dive into how it actually works.

Clayborne broke it down for me: Compound interest is the interest that you earn on your interest. 

For example, if you have $10,000 and it earns 5% interest each year, this turns into $10,500 by the end of the first year and $11,025 by the end of the second year. The extra $25 would be the interest you earned on that additional $500.

“This may not sound like a lot, but over the course of 30 years, your $10,000 would turn into $43,219.42 due to compound interest,” says Clayborne.

5. What’s the deal with APY?

For the past few years, I’ve tried to be smart about the savings accounts and CDs that I put my cash into so the money can grow as much as possible. I often search for the bank that is offering the best annual percentage yield (or APY) but when I sat down to think about that phrase, I found myself confused.

Financial planner Tracy Sherwood explained to me that APY is the annual interest rate your cash is earning and that rate factors into compounding, or the frequency you will earn interest on not only your principal but also the interest that you have earned so far that year.

“You earn a stated interest rate on your deposit or savings account and they specify the frequency they compound the interest, such as daily, monthly, or annually,” said Sherwood. “The more frequently they compound interest, the better.”

One helpful tip Sherwood shared was that when you’re comparing savings accounts, some may offer an incentive or a higher introductory rate for the first six months, but then drop it lower than other banks after that. Be sure to check what that rate is after that offer ends.