What is a 401(k)?

A 401(k) is a retirement savings plan, which commonly accrues interest over the years. Taxes are paid only when you take the money out of the account (which kind of explains why everyone is huffing and puffing over tax increases).

Some employers will match whatever you put into your 401(k), so that means….free money. If you leave your employer, you still get to keep the money. But if you take the money out earlier than when you retire, you'll be hit with taxes and a 10% penalty.

Still confused? Watch John Oliver break down the do's and don't's of 401(k) accounts in this hilarious video below:

What Is Social Security?

We hear politicians mention social security over and over again. And a lot of older people worry if social security will be drained by the time they retire. But what exactly does this all mean?

Social Security covers a lot of people in America, actually. It provides funding to retired and disabled workers, as well as to the families of deceased workers. Basically it does what the title implies. Think of it as one big safety net for the some of the nation's most vulnerable citizens.

According to a Time 2016 report, Social Security Trust is on track to run out by 2036, at which point only 75% of what it doles out will be from payroll taxes (you know, the part of the reason why your check is always slightly lower than what you expect it to be).

The projected depletion is why there are numerous calls to raise the retirement age.

How much should I be paying for rent?

The rule of thumb is that you should be spending no more than 30% of your income on rent. Therefore if you make $4,000 a month, your rent should be no more than $1,200.

Did my parents have it easier growing up?

Short answer, yes. If your parents were embarking on their careers before the 80s, inflation was lower, unions were stronger, and the job market was overall stronger. You can read more about the shift towards emphasizing owning bonds, increasing demand in the housing market, and encouraging consumers to take out as much credit as possible, here.

How Many credit cards are too many credit cards?

There is no magic number! What is most important is that you are paying all of your credit card bills regularly and managing your debt. So don't reverse logic yourself into thinking more credit cards is being more of an adult. Not biting off more than you can chew is what adulting is really all about.

What is the cheapest way to go out?

Drink at home beforehand (but no drinking and driving!), but also bring a set amount of hard cash with you out for the night. It's easy to keep swiping that card throughout the night. With a set amount of cash in hand, you're forced to pace yourself and know when it's a sign to call it a night.

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The Federal Reserve sets the guardrails for the federal funds rate, and through that helps control the money supply for the nation.

When you take out a loan for a car, charge something to your credit card, or get a personal line of credit, there is going to be an interest rate that applies to your loan.

A lot of different factors go into what you will be charged, including your own personal credit score. But even those with flawless credit still see a minimum charge that they can't get around. That all goes back to the Federal Funds Rate.

One thing consumers rarely realize is that all of our banks are lending money to each other every night. Banks are legally required to maintain a certain percentage of their deposits in non-interest-bearing accounts at the Federal Reserve to ensure they have enough money to cover any withdrawals that may unexpectedly come up. However, deposits can fluctuate and it's very common for some banks to exceed the requirement on certain days while some fall short. In cases like this, banks actually lend each other money to ensure they meet the minimum balance. It's a bit hard to imagine these multibillion-dollar financial institutions needing to borrow money to tide them over for a bit, but it happens every single night at the Federal Reserve. It's also a nice deal for those with balances above the reserve balance requirement to earn a bit of money with cash that would normally just be sitting there.

The Federal Reserve The Federal Reserve


The exact interest rate the banks will charge each other is a matter of negotiation between them, but the Federal Open Market Committee (FOMC) (the arm of the Federal Reserve that sets monetary policy) meets eight times a year to set a target rate. They evaluate a multitude of economic indicators including unemployment, inflation, and consumer confidence to decide the best rate to keep the country in business. The weighted average of all interest rates across these interbank loans is the effective federal funds rate.

This rate has a huge impact on the economy overall as well as your personal finances. The federal funds rate is essentially the cheapest money available to a bank and that feeds into all of the other loans they make. Banks will add a slight upcharge to the rate set by the Fed to determine what is the lowest interest that they will announce for their most creditworthy customers, also known as the prime rate. If you have a variable interest rate loan (very common with credit cards and some student loans), it's likely that the interest rate you pay is a set percentage on top of that prime rate that your lender is paying. That's why in times of low interest rates (it was set at 0% during the Great Recession), a lot of borrowers should go for fixed interest rate loans that won't increase. However, if the federal funds rate was relatively high (it went up to 20% in the early 1980's), a variable interest rate loan may be a better decision as you would be charged less interest should the rate drop without the need to refinance.

The federal funds rate also has a major impact on your investment portfolio. The stock market reacts very strongly to any changes in interest rates from the Federal Reserve, as a lower rate makes it cheaper for companies to borrow and reinvest while a higher rate may restrict capital and slow short-term growth. If you have a significant portion of your investments in equities, a small change in the federal funds rate can have a large impact on your net worth.

Getty Images/Maria Stavreva

Whether you're leaving a job involuntarily, departing for something new, or just want to prepare for the unknown, it is smart to understand all your options regarding your 401k.

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