Top Ten Money Questions People Always Ask

by Hank Coleman

I’m constantly being asked money questions by readers, coworkers, friends, and family members. I do ask for your money questions over and over again after all. In fact, if you email me one of your money questions and I pick yours to be featured in our Reader’s Questions Series, I’ll send you a free copy of Dave Ramsey’s book, The Total Money Makeover.

I thought that it would be cool to highlight the ten questions that I hear the most often. Here are the quick answers to these top money questions that people have a burning desire to learn and understand

1. Should I pay off my highest interest debt or debt with the smallest balance first? – I can understand both feelings and arguments for each of these debt reduction tactics. Use a debt snowball to pay off your debt.I’m a huge fan of Dave Ramsey and The Total Money Makeover where he recommends paying off your debts using the debt snowball method eliminating your debts with the smallest balances first and then progressing to the ones with the largest balances. This gives you some psychological affirmation to continue with the hard task at hand.

2. Which is better term life insurance or whole life insurance? – In almost every case, term life insurance is a better option for people than a whole life insurance policy or a cash value insurance policy that builds money in a cash account for the insured to use. There are very few reasons that you would have a permanent need for insurance. Insurance is a protection against the sudden loss of a person’s income to protect those in the family who depend on that income. After your children have graduated from college and left the house and after you have paid off your mortgage, there is very little need for life insurance. Term life insurance provides a very low cost insurance policy for the specific amount of time that you need coverage.

3. Should I pay off all my debts first before I start investing? – This is one place where I diverge from Dave Ramsey’s teachings. I personally think that you should start investing in a Roth IRA as soon as you can regardless if you have debt or not. Waiting will only delay the power of compounding interest. Paying off debt is very important and should be at the top over everyone’s personal finance to do list, but I personally have a hard time stopping investing completely to throw all available income at debt reduction. I like to continue investing even if it is just a little bit while paying off debts.

4. Where should I invest my emergency fund? – A lot of people ask me about investing their emergency fund in order to earn a few extra percentage points on their rate of return. An emergency fund is not for investing, plain and simple. Emergency funds should not be invested but rather should stay liquid and readily available in case you actually need the money during a true emergency. I recommend high yielding online savings accounts like the ones offered by ING Direct and PerkStreet FinancialSM or even using money market funds to hold your emergency fund.

5. Is it too late to invest in gold? – I personally think that if you have not been in on the rapid of gold as of late, then you probably have missed the boat so to speak. It may be too late to invest much in gold and precious metals now that they have enjoyed an incredible rise over the past few years. I hate buying any investments near their all-time highs. Also, I caution people in investing too much of their total portfolio in these types of investments when their retirement portfolios should be geared towards index funds and other vanilla type investments. Investments in things like gold, precious metals, peer to peer lending loans like those available through Lending Club, and other non-traditional investments should only make up a small percentage of your total portfolio such as 10% or so.

6. How should I save for my children’s college? – 529 College Savings Plans provide parents with an excellent tool to invest for their children’s college educations. 529 College Savings Plans allow parents to invest with after tax dollars and then later withdraw the earnings and principle for qualified educational expenses tax free. The investment can also be transferred to other beneficiaries such as a little brother or sister in the event an older sibling earns a scholarship, for example.

7. Which should I invest in first: a 401k or a Roth IRA? – The real question when you weigh the benefits of a Roth IRA over a 401k is all about taxes. Do you think that your tax rate is going to go up in the future? Do you think that the federal government will raise our taxes in the future? If you answered yes to either of these questions, then a Roth IRA is a superior investment option over the 401k retirement plan (assuming that your employer doesn’t match contributions). If you get matching contributions from your employer, then that should always be the first place that you invest. This is a 100% rate of return on your money in that case. Otherwise, you should maximize your Roth IRA and your spouse’s Roth IRA with retirement investments after that. Paying your taxes now at a lower rate and withdrawing future earnings tax free during retirement will result in a lower total tax bill assuming that your tax rate will increase in the future which we all hope for because it means that will be earning more in the future!

8. What should I invest in after I max out my Roth IRA? – Dave Ramsey recommends in his book, The Total Money Makeover, to invest 15% of your income for retirement. After you maximize yours and your spouse’s Roth IRAs and contribute enough in your 401k retirement plan to capture your employer’s match, then you have many options for investments after that. I love adding funds to my 401k plan because it takes advantage of automatic investing by taking money out of my paycheck every month without any need for my intervention, my plan invests in low cost index funds, and I get the benefits of dollar cost averaging. If your plan does not have any good investment options, you may want to consider index investing through a company such as Betterment. Check out my complete review of Betterment to see all the great funds the service invests in.

9. How much cash should I be holding in my portfolio? – Recently, a study from MFS Investment Management found that too many young investors hold too much cash in their portfolios for their age. Young investors in Generations X and Y are shying away from the stock market thanks to its recent turmoil but doing so at a great devastation to their future retirement and investment earnings. There is no reason for someone in their 20s or 30s with several decades until they reach retirement age to hold more than 10% of their entire portfolio in cash and cash equivalent investments like online savings accounts, money market funds, and certificates of deposit.

10. Do I really need umbrella insurance even if I do not have many assets? – There are more and more lawsuits that are filed in America every year. And, we all know that far too many of them are absolutely frivolous. How do you protect yourself from the damaging effects that losing a lawsuit and having a judgment placed against you? Umbrella insurance provides you additional liability insurance coverage above what you have on your home and car insurance. Many people mistakenly think that they do not need umbrella insurance because they do not have much in the way of assets to lose if they were to lose a lawsuit. But, the one asset that is often overlooked is often also your largest one…your future income. You need to protect your future income from attack, and umbrella insurance is one of the best and most affordable ways to do that.

Did I miss any money questions that you are just dying for me to answer? Is there a better one that you think should be in the top ten? Shoot me an email Hank [at] MoneyQandA.com. I’d love to hear from you.

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About Hank Coleman

Hank Coleman is the founder of Money Q&A, an Iraq combat veteran, a Dr. Pepper addict, and a self-proclaimed investing junkie. He has written extensively for many nationally known financial websites and publications. Hank holds a Master’s Degree in Finance and is currently pursuing his Certified Financial Planner credentials. Email him directly at Hank[at]MoneyQandA.com.


Hank Coleman has written 524 articles on Money Q&A. Learn more about Money Q&A on Twitter @MoneyQandA and @HankColeman.


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{ 11 comments… read them below or add one }

Eric J. Nisall - DollarVersity

A LOT of personal finance is very subjective in nature. An in-depth analysis of not only the money, but the psychology of the individual need to be considered. But, there are some things that should be solid and apply to everyone which I think the emergency fund falls right into. I couldn’t agree more that these funds need to be totally liquid and immediately accessible. I believe that each segment of finances should be strictly for a purpose–retirement accounts only for retirement, short-, medium-, and long-term saving for just those purposes and EF’s only for emergencies. Glad to see someone else thinks the same way as well.
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Hank

Thanks, Eric for the comment. I understand your point about personal finances being subjective. I think that the proportion of it leans a little more towards a very smaller protion than A LOT of PF. A lot of it is not subjective.
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YFS

Hank great tips! As Eric said personal finance is subjective. I also believe it is behavioral. All of these questions could have been answered with an “it depends”. Hank, how do you feel about using life insurance as an vehicle for building generational wealth or providing liquidity for estate taxes?
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Hank

YFS, you make a great point about behavioral. That has a lot to do with it, and how we react also makes us think that personal finance is more subjective than it is.

I’m not a big fan of building generational wealth. I guess it stems from that fact that we grew up without it. I’m not a big fan of setting my children up so they do not have to work much or get things handed to them. So, I shy away from that…maybe a little too far the other way. Life insurance to help pay estate taxes for high net worth individuals is a good tool especially if it keeps you from having to fire sale a business or other high value property for example.
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Shaun @ Smart Family Finance

I’m always asking question number 6 and yes, of course a 529 plan. My problem is how much to save and how much to save in a 529 plan. I don’t want to over do it on the 529 and get penalized for over saving for college (if there is such a thing).
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Hank

Shaun, thanks for the comment. I’m with you. I struggle with exactly how much to invest in 529s each year as well. I typically fall into the Dave Ramsey advice which pegs the number at $2,000 per kid per year. That’s the number I shoot for.
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jim

Old guy here – put 2 kids thru college (in state, great public universities) 1 just graduated last May, the other graduated 9 years ago. We had a total of $100,000 in each account before they started. Guess what? They both used every dime of it and we even cash flowed somethings (extra curricular, but educational nonetheless). I don’t see how you’re going to do it cheaper than that any time in the future. Just a word to the wise.

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Erik

Hi Hank, glad I found your site! Great post on the top ten questions – I find that one of the biggest issues people have is trying to decide which debt to pay off first in a debt reduction snowball strategy – the smallest debt to get rid of it, or the debt with the highest interest? I waver almost daily myself so it’s good to read other people’s opinions… and interesting you have also made the question number one on your list!
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Marissa - 2ndSkiesForex

Personally, I would hesitate to invest on college plans. What if your child doesn’t want to go college after all? Anything can happen in the future that you cannot control. Is there any option to just withdraw the money saved in case it couldn’t be used for college?
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martha

This could also be renamed questions you didn’t even know you should ask! This is great some of the questions are things I have been trying to figure for years and the others well now I know I should look into them!
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TheElevationGroup

Very interesting points, but I strongly believe in the power of having a good level of FINANCIAL EDUCATION, otherwise other will decide for you or tell you what to do with your money
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