FIVE MONEY MUSTS

These plans, sometimes called “workplace plans,” are different from individual retirement plans, such as Traditional IRAs. Offered by an employer, these are plans that eligible employees can use to save for retirement by contributing money directly from their paycheck into their account, where the money can be invested based on the options offered in the plan. Pre-tax contributions can be excluded from your gross income (For example, if you earn $40,000 and you contribute $5,000, the IRS only considers your income to be $35,000 when your taxes are computed). You generally don’t pay taxes on pre-tax contributions to the plan, or earnings on those contributions, until you make a withdrawal. This allows the money to grow free from taxes. As you saw in the game, in some cases an employer may “match” a portion of your contributions (in this case 3% or 7%). Some plans may allow you to make Roth or after-tax contributions as well. Just keep in mind that there are rules around maximum amounts that can be contributed to retirement plans, including 401(k)s. Once you stop working, or unless the workplace plan has a special provision, you’re generally required to begin making withdrawals from your plan beginning the year you turn 73.

This is money that your employer may contribute to your account in their workplace retirement plan, such as a 401(k). While there are many different ways this can be calculated, in general the employer may “match” up to a certain portion of the money that you save. For example, one of the jobs in the game offered a 7% match. If you chose to set aside 7% of Taylor’s paycheck into the 401(k) in the game, Taylor’s employer would contribute a dollar-for-dollar “match” of that amount. If you set aside more, the company would only match the first 7%. If you set aside less than 7% (say 5%), the company would only match 5%. Remember, every employer plan has different provisions — it’s best to talk to human resources to make sure you fully understand what your employer offers.

A type of retirement plan that may be offered by employers such as public schools, churches, or certain tax-exempt organizations. While these are somewhat similar to 401(k) plans, there are also some unique features and rules that apply to these plans.

This refers to purchases you make using a credit card, in which the credit card company “credits” you for what you spend. In the game the card you and Taylor are offered gives 5% cash back with all purchases. You probably noticed that you got back $5 in cash for every $100 in purchases you made with the card during the game (assuming you decided to get the card). While some companies will actually send a check for this amount, others may use it to reduce the amount of your monthly bill. When evaluating a cash back award, remember not all purchases are treated the same. Sometimes you only earn the full cash back with certain types of purchases. Read the fine print!

This is the money for purchases you make using your credit card in any given month. For example, let’s say during the game you use Taylor’s card to charge $200 worth of stuff. The credit card balance is $200. Now let’s say that when it was time to pay the piper you decide to make a $120 payment. In that case, you’d be carrying an $80 credit card balance over to the next month. This is an important concept that could save you (or cost you) a lot of money. While the credit card you chose for Taylor carried an 18% interest rate, card companies generally don’t start charging until after your bill is due (cash advances are an exception to this). So while Taylor won’t pay interest on that $200 in those purchases you made during the game, Taylor will be charged interest on the $80 of that balance you don’t pay off.

This is the rate of interest that a credit card company will charge you for any unpaid balances each month. If you use your credit card to get a cash advance, some companies will charge interest from the day that cash advance is received. Note that credit card interest rates are higher than most consumer interest rates, such as car loans or mortgages. The card in the game comes with a rate of 18%, which is pretty high compared to other types of loans. You should also be aware that while some credit card companies may offer a low “introductory” interest rate, that rate may rise over time

Your credit history is basically your track record of paying back loans over time. Your credit card bill, your mortgage, your student loans, a car loan — any kind of outstanding loan you have is considered. That means that every payment you make becomes part of your credit history. Making payments late or skipping them altogether is going to negatively impact your history. Here’s another thing about credit history — not having one can cost you. Lenders who see that you’ve never taken out and paid back a loan of any type see you as a larger credit risk than someone who has a track record of taking out and repaying loans.

This refers to the amount in purchases your credit card company will allow you to make in any given month. However, if you’re carrying a balance (meaning you didn’t pay your entire bill from some prior month) your credit limit is reduced by that balance. For instance, in the game the credit card you and Taylor are offered has a $2,500 credit limit. But if you carry an unpaid balance of $200 when it’s time to pay the bill, the following month you can only make $2,300 in purchases. While you’re technically allowed to spend up to your full credit limit, most credit experts suggest that you only spend about 30% in any given month in order not to harm your credit rating. If you spend more than $750 using Taylor’s credit card, you’ll see what happens.

During the game we talk a lot about Taylor’s credit score and why you should be concerned about it. A credit score is basically an evaluation of your creditworthiness. In other words, it’s a rating used by companies that lend money to help determine how good a risk you are to repay any loans. A higher score means that banks and credit card companies think it’s more likely you’ll repay your debts. Did you know that every person with a Social Security number has a credit score? There are lots of things that can negatively impact your credit score; here are a few*:

This is money you set aside for unexpected events — a job loss, an illness, or in the case of Taylor, a flat tire. You might also hear this referred to as a rainy day fund. Since you may need this money at any time (after all, no one can predict an emergency), many financial professionals suggest keeping the money for your emergency fund in relatively lower-risk types of investments, such as a bank savings account. How much should you set aside in an emergency fund? Most people will tell you to shoot for about 3-6 months of living expenses, just to be on the safe side. After all, as you learned in the game, you never know.

These are things you spend money on that you can’t live without, like housing, utilities, and food. Different people are going to have different views of what’s essential. For instance, if you have debts, you may want to consider your payments as essential. Some people consider health insurance essential. Same with a phone and a car. Hey, you might even consider movies essential. The point is different people are going to have different definition of “essentials.” But when you create a budget, try to dedicate about 60% of your after-tax income to your essential expenses.

Health insurance is a type of coverage that can help pay for health-related expenses, such as medications, doctor visits, or surgical procedures. Like most other types of insurance, you pay a premium and are reimbursed for some or all your expenses, depending on the type of policy. While some people purchase health insurance coverage in the private market, many people are offered health insurance through their employers. In the game, some of the jobs available to Taylor paid for all or part of health insurance, but one doesn’t pay for any of it.

Every loan, whether it’s a student loan, a car loan, or even a credit card balance (which is basically a loan you take out each month from the credit card issuer), has two components — principal (the amount you borrowed) and the interest (the amount the lender charges you for the right to borrow money from them). The principal is something you must repay by the end of the term of the loan. So a five-year car loan must be repaid in full at the end of five years, usually in monthly installments. With each payment you’re not only repaying the principal you’re also making a smaller interest payment. The higher the interest rate, the higher the payment.

This is the amount an investment has grown over time. When looking at investment returns, it’s important to note the time period being shown. Investment returns can be shown for a wide range of time periods, including monthly, quarterly, annually, over multiple years, and over the life of the investment. Here’s another important thing to remember — investment returns are not guaranteed. Any investment that has the potential to increase in value also typically has the potential to lose value. And even more importantly, just because an investment has provided a certain level of return in the past is no guarantee that it will do so in the future.

When you receive your credit card statement letting you know how you much you’ve charged over the past month (plus any balance you’ve carried over from prior months), you’ll see a “minimum payment amount.” This is the smallest amount you’re allowed to pay to ensure the credit card company doesn’t consider your account delinquent. But don’t be fooled — making the minimum payment will still result in interest charges on the amount you don’t pay. So while making the minimum credit card payment only won’t hurt your credit score, it could take a bite out of your finances in other ways. While there is no minimum payment required in the game, you’ll see this show up on your credit card bill in the real world.

This is money that’s deducted from your paycheck. Here’s how it works: All employees are required to fill out and sign a W-4 form, on which they declare the amount of withholding (note that while there’s a minimum amount that has to be declared, an employee can include more in withholdings than is required by the IRS). The IRS, in turn, provides the income tax calculation based on those declarations and federal income taxes are deducted based on that formula. State taxes (and local income taxes where applicable) are determined in much the same way, with individual states’ tax boards providing a formula for taxes to be withheld. Note that in addition to the taxes described above, your paycheck will also be subject to Social Security and Medicare taxes.

This is another kind of individual retirement account, similar to a Traditional IRA. While you didn’t encounter this in the game, many people use this to save for retirement. Like a Traditional IRA you set the money into an account yourself, where it can be invested. The big difference has to do with the tax benefits. With a Roth IRA, you contribute money that has already been taxed (that’s one reason Roth contributions are often called after-tax contributions). However, unlike a Traditional IRA, you’re not allowed to deduct the amount of your contribution from your gross income. But any growth or earnings from the investments in the account—and money you take out in retirement—is free from federal taxes (and usually state and local taxes too), provided certain requirements are met. There are a couple of other differences from a Traditional IRA. The first is, you can withdraw your contributions at any time for any reason (but hey, that’s not going to help your retirement plan much). The other big difference is that unlike a Traditional IRA you’re generally not required to withdraw money from the account in the year you turn 73.

This is money that you set aside for something you think you might need within the next five years or so. So if you’re saving for a car, the down payment on a house, or even setting aside money for an emergency fund (because you never know when an emergency might pop up) that would be classified as short-term savings. This is all part of the 60/30/10 rule, which suggests that about 10% of what you earn after taxes should be dedicated to short-term and emergency savings.

This is money that you owe based on loans you may have taken out in order to fund your education. When thinking about these loans, it’s important to remember that not all loans are the same. Very often loans from private sources, such as banks, come with a higher interest rate than loans from the government. For the purposes of the game, we assume the interest rate on Taylor’s loans is 5% annually. While you didn’t have to think about this for Taylor when repaying your loans, it’s a good idea to pay off your higher-interest loans first, which could save you money over time. Also, you may have a number of options when it comes to paying off your loans — you can pay back equal amounts each month, structure your repayment schedule so that you’re making smaller payments early on (when you’re probably earning less money), or tie your payments to your salary. Different types of loans have different options available, so it’s important to educate yourself.

Like any loan you take out, student loans charge interest. That means that in addition to repaying the full amount of the loan, you have to pay a little (or in some cases a lot) for the right to take out the loan in the first place (that’s how lenders make money). For the purposes of the game, we assume the interest rate on Taylor’s student loans is 5%. However, depending on the type of student loan you take out, interest rates may vary widely. For instance, loans from private institutions, like banks, tend to have much higher interest rates than loans from government agencies.

This is an account in which you set aside money for retirement (IRA stands for Individual Retirement Account). Unlike the 401(k) or workplace plan that you encountered in the game, with an individual retirement account, you set aside money into an account yourself, where it can be invested. With a Traditional IRA, taxes on the money you set aside may be paid when you withdraw money in retirement (assuming you’re 59½ or older), in which case the money can grow free from federal taxes until you withdraw it. When you make withdrawals, you pay taxes on the original amount you had put into the account, plus any growth. Another thing to remember is that you have to start taking money out of a Traditional IRA beginning the year you turn 73.