When you’re leaving your job and possibly starting a new one, it’s easy to get wrapped up in the changes taking place in your life and forget about your 401(k). However, if you don’t follow the IRS’s 401(k) rollover rules, you may incur large penalties and lose a significant chunk of the hard-earned money you’ve set aside in your retirement fund.
Penalties Are Big
If you withdraw your money from your old employer’s retirement fund or move it into another non-qualified investment vehicle, such as a regular savings account, you may incur penalties, and the amount of money you receive may be far less than the balance of your retirement fund. First, your previous employer will withhold 20% for federal income taxes; additional funds may be withheld for state income taxes. Second, if you’re under 59½ years old, you’ll probably see an additional penalty applied. Consult your tax advisor.
As an example, if you have worked for 10 years and have $50,000 in your current 401(k) account, you could receive only $35,000 if are under 59½ years old and you elect to take a cash withdrawal rather than rolling over the funds into a qualified plan. Also, the money you receive could potentially bump you up into a higher income tax bracket, increasing the overall amount you are required to pay in income taxes.
Complying With 401(k) Rollover Rules
These rules are in place partly to motivate taxpayers to save for retirement. It is important to think seriously about taking money out of your retirement account before you reach 59½ years of age. When you leave your job, you have a number of options to manage your 401(k) savings without incurring a penalty. These options include:
Leave your 401(k) with your old employer. This can be an easy short-term option. Your old employer is obligated to continue managing the money and provide communications just as they have in the past. You can change your mind later and move the money to your new employer or a different eligible account. However, don’t assume you can always follow this path.
Make a 401(k) rollover to a plan with your new employer. You have 60 days to complete this transaction before penalties kick in. Contact your new employer’s benefits office when you’re hired so you can set up the rollover transaction on both ends without a last-minute rush.
Invest in a non-employer retirement account, generally an IRA. You have many choices here: Roth or traditional, IRA savings or IRA CD. These options may be worth researching if you’re leaving a job and don’t yet know where you’ll eventually end up. This should be done within 60 days to avoid penalties.
At the end of the year you’ll receive a 1099-R statement saying that you’ve had a retirement fund distribution. When you reconcile your taxes be sure to show the appropriate destination for your money as a 401(k) rollover so the IRS doesn’t erroneously apply penalties. Check with a tax advisor if you have specific questions and to be sure you are aware of any changes in IRS rules.
Katherine Pomerantz, owner of The Bookkeeping Artist, an accounting and financial strategy firm for small businesses and entrepreneurs, knows how easy it is to get stuck in a financial rut. While putting your finances on autopilot is a great way to relieve the pressure of managing bills, paying off debt and saving for the future, it’s possible to automate your finances so much that you miss out on new opportunities to make your money work harder for you. Pomerantz says plenty of her clients use a savings account, for example, but she likes to help them look for ways to “double down on growing their income.”
Could you also benefit from taking a fresh look at your finances? Maybe you’ve been putting money in the same types of bank accounts for years, but haven’t checked how much you’re earning. Or maybe you’ve increased your earning potential (congrats!) but haven’t adjusted your approach to saving accordingly. Your savings diligence is admirable, but it might be time to take stock of your financial strategy to see if there are other types of bank accounts you could use to maximize your money.
Ask yourself: Where is my money? Where should I keep my money? And, where should I keep my savings? As you review your answers to these questions, and think about moving your hard-earned dollars to different types of bank accounts, here are a few options to consider:
If: You use a checking account Then: Consider a rewards checking account
Most people use a checking account because it’s an easy place to store money, pay bills and make small purchases. If a checking account (and debit card) is part of your regular financial routine, you may want to find an account that rewards you for using the account. Whether a bank pays interest on your balance or provides cash back on your debit card purchases, the benefit of a rewards checking account is that it lets you earn a little extra on the transactions you’re already making on a daily basis.
But choose carefully. Some types of bank accounts tie their rewards to high minimum balances, charge a monthly fee or limit rewards to transactions that require a signature. Be sure you know the requirements and, when asking yourself where should I keep my money, also ask yourself whether you can meet any requirements on a regular basis. Discover Cashback Debit allows you to earn 1% cash back on up to $3,000 in qualifying debit card purchases each month and has no monthly fees or monthly balance requirements.1
If: You use a traditional savings account Then: Consider an online savings account
A savings account is a good place for your emergency fund because the money can be easily accessed when you need it.2 Interest rates, however, can be meager. Once you’ve saved enough to cover your immediate emergency fund needs, it’s time to ask yourself: Where should I keep my savings?
While interest rates are changing rapidly, online savings accounts may help you earn a better return. They’re similar to the accounts offered by traditional brick-and-mortar banks, but because online banks have lower overhead, they often offer higher rates. You may also be able to find accounts, like the Discover Online Savings Account, that have no monthly fees for maintenance or balance requirements. This means your savings can grow more quickly.
Burke Does, uses an online savings account because of the higher interest rate.
“I like that mine is at a separate bank from where I do my traditional banking,” Burke says, “because it makes it a little bit less tempting to use the money when it’s not actually an emergency.”
If: You have a money market account Then: Consider a certificate of deposit (CD)
When comparing types of bank accounts, consumers may choose to save with a money market account if they find one with a competitive interest rate and enjoy the flexibility of withdrawing money when needed. Money market accounts can also be enticing when they offer check writing and debit card access.2 If you’re just parking your money in a money market account and don’t actually need to make withdrawals, you may be able to earn more with a CD.
With a CD, you agree to leave your money in the bank for a set term. Typically, the longer the deposit period, the higher the interest rate. Chelsea Brennan, an investment professional and blogger at Mama Fish Saves, says the benefit of saving for shorter-term goals with a CD is that your money is more likely to remain committed to its purpose. Alternatively, when you can dip into the funds easily, as with a money market account (and some other types of bank accounts), “this only makes it harder to reach your ultimate goal,” she says.
A simple way to reach your goals.
Watch your savings grow with a CD.
Lock in Your Rate
Certificate of Deposit
Discover Bank, Member FDIC
If the answer to where should I keep my savings leads you to open a certificate of deposit, note that you’ll be charged an early withdrawal penalty if you take out your money before the CD maturity date. You may want to avoid putting your money in a CD if there’s a chance you’ll need it to cover an emergency before it matures.
If: You use a 401(k) Then: Consider an Individual Retirement Account (IRA)
An employer-sponsored retirement plan is an excellent workplace perk, especially if your employer provides a matching contribution. If you want to ramp up your retirement savings, you could consider contributing money to both a 401(k) and an IRA.
Opening a Roth IRA can be a way to diversify your retirement savings and create a tax-free stream of income for later in life, since distributions are tax-free in retirement. However, as you consider where should I keep my savings, it’s important to know that contributions to a Roth IRA are limited by income, regardless of whether you participate in other retirement plans. Contributions to a traditional IRA are tax-deferred now, but taxable in retirement.
Pomerantz, the owner of The Bookkeeping Artist, works with a married couple who is using an IRA to save for a home down payment. Normally, withdrawing money from an IRA before the age of 59½ means paying a 10 percent additional tax penalty, according to the IRS. But there is an exception if the money is being used to buy or build your first home.
Pomerantz says her clients already have retirement savings in employer-sponsored accounts. They were trying to save for a down payment for their first home, but kept dipping into their savings account for other purchases.
“They wanted to open an entirely separate account that they couldn’t withdraw from whenever they wanted,” Pomerantz says. “That’s when they thought of opening an IRA. Their savings grew exponentially,” she says.
If you’re considering opening an IRA for your retirement plan, keep in mind that you have more options to choose from besides Roth vs. traditional. For example, Discover IRA Accounts offer two distinct, but complementary accounts.
A Discover IRA CD generally offers higher rates at fixed terms, making it a good choice for a long-term retirement plan. A Discover IRA Savings Account, on the other hand, provides a retirement savings option that allows for flexible contributions and withdrawals. An IRA Savings Account, with no minimum balance requirement, is a great place to stash your retirement savings if you are just getting started and looking for an account that will work with any budget. Keep in mind that you may have an IRS early withdrawal penalty if you withdraw your finds prior to age 59½. Consider consulting a tax advisor to discuss your specific situation.
As you consider how to manage IRAs, note that an IRA savings account can also be a place to stash funds from a maturing IRA CD if you’re not ready to lock in another term.
Where should I keep my money?
If it’s been a while since you asked yourself where should I keep my money, it might be time to mix it up. Whether you want to keep your money accessible, or save it and let it grow, there are several types of bank accounts that can help you reach your financial goals. Whichever mix of accounts you choose, make sure to regularly check in and assess that your financial setup is aligned with your short- and long-term goals.
1 ATM transactions, the purchase of money orders or other cash equivalents, cash over portions of point-of-sale transactions, Peer-to-Peer (P2P) payments (such as Apple Pay Cash), and loan payments or account funding made with your debit card are not eligible for cash back rewards. In addition, purchases made using third-party payment accounts (services such as Venmo® and PayPal™, who also provide P2P payments) may not be eligible for cash back rewards. Apple, the Apple logo and Apple Pay are trademarks of Apple Inc., registered in the U.S. and other countries. Venmo and PayPal are registered trademarks of PayPal, Inc.
2 Savings and Money Market Accounts may have limitations on the number of transactions out of the account. Check account agreements for more information.
“No way, son. I worked hard for that money. I’m not about to gamble it away in the stock market.”
That was my dad, a child of the Great Depression and someone who, understandably, was reluctant to do anything with his money that didn’t involve either an insured CD or a T-bill backed by Uncle Sam.
Sound familiar? Maybe you know someone like him. Maybe it’s even you.
Humorist Will Rogers famously said, “I am more concerned with the return of my money than the return on my money.” Good logic, especially as one ages and becomes unable to rebuild a nest egg. But for anyone still working, sticking your neck out — even by a little — can make the difference between living large and barely scraping by when those golden years roll around.
Invest $400 a month for 40 years and earn 2% annually, and you’ll end up with around $300,000. Jack that rate of return to 10%, and you’ll have more than $2 million.
Think those extra dollars will make a difference in how, when and where you retire?
Of course, the only possible way to earn 10% on your savings is to take some risk by investing in things that might not work out.
While these types of earnings comparisons may be compelling, they’re probably old news to those unwilling to consider investing in real estate, stocks or other risk assets. So here’s another approach: a list of rules designed to help anyone minimize the fear of doing just about anything.
From investing in stocks to skydiving to asking someone out on a date, fear is not your friend. Here are seven universal principles that will help you keep it to a minimum.
1. Understand what you’re doing
If you’re going to invest in stocks, invest your time before investing a dime. Talk to people you know who have more experience. Learn what makes markets, and stocks, move up and down. Studying history will help you understand and predict the future.
So will understanding the rules of the game. And one rule of this game is that stocks will go down as well as up.
There’s an inverse relationship between knowledge and fear. The more you have of the former, the less you’ll have of the latter.
2. Understand why you’re doing it
With conviction comes courage.
When it comes to investing, you’ll be most effective when you accept that investing in the shares of great American companies has historically been a very smart thing to do, especially over long periods of time. And investing when others are running for the hills has proven smarter still.
You know the stock market is riskier than insured bank accounts, so it follows that if it didn’t return more than insured bank accounts over time, it wouldn’t exist. Thus, I’m convinced a part of my savings belongs in stocks, not despite the risks involved, but because of the risk involved.
The Standard & Poor’s 500 index, a stock market index designed to mirror the returns of 500 big U.S. companies, has averaged an annual return of about 10% since its inception in 1928.
3. Don’t overdo it
If you want to scare yourself to death:
Invest money you’ll soon need.
Invest more than makes you comfortable.
Or put your money in silly, speculative stocks that are more like gambling than investing.
Staring at the ceiling at night? This is why.
When it comes to investing in risk assets, you must never invest money you’ll need within five years, and never invest everything you have. One rule of thumb I’ve been advocating for decades is to subtract your age from 100, then put the difference as a percentage of your money in stocks. So if you’re 20, you can invest up to 80% in stocks. If you’re 80, 20%. If you’re nervous, invest less. It’s just a rule of thumb.
4. Plan for pain
It would be great if your stock portfolio, your house and every other asset you have went up in value each and every month. Unfortunately, that’s not the way it goes. But if you can accept that the potential upside of bull markets outweighs the potential downside of bear markets, it’s easier to stick with the program when times get tough.
I have a significant proportion of my net worth in stocks, so I know how it feels when things go south. But the decades I’ve spent as an investor taught me to expect the bad with the good. When stocks have been rising for long periods of time and become overvalued — and are thus likely to go down (like now) — I don’t adjust my portfolio, I adjust my expectations. Expecting a decline means that, when it comes, I’ll be prepared instead of panicked.
5. Listen to your voice, not everyone else’s
When it comes to investments, romantic relationships and lots of other decisions in life, develop your own voice and listen to it. If you like short people, date them. If you like stocks, buy them. If you want to live in Ecuador, move there.
People trying to steer you in one direction or another often aren’t as smart as you think they are, don’t know you as well as they think they do and may have personal agendas that don’t align with yours.
6. Consider the risk of not taking a risk
For the first few decades I invested in stocks, I mostly stood on the sidelines when times were bad, too afraid to make a move. Finally, however, experience taught me that when times are bad and everyone’s afraid, it isn’t the time to freeze. Instead, it’s the time to act.
When both the real estate and stock market tanked in the recent Great Recession, I invested a chunk of my savings in quality stocks and also bought a rental house.
Those two decisions, while scary at the time, have substantially increased my net worth today.
While there’s always a risk of losing money by investing in stocks, real estate or anything else that fluctuates in value, there’s also a risk in not doing so. As pointed out above, you’re unlikely to retire rich, or even adequately funded, if you earn an average income and are willing only to invest in guaranteed rates of return.
You can’t get a hit from the dugout.
7. Think long term
If you’re trying to invest short term, you might as well head to Vegas, where you can at least drink for free.
When I bought General Electric, JPMorgan, ConocoPhillips and other signature stocks back in 2009, I didn’t expect them to go up right away. But because these are some of the biggest companies on the planet, I knew they wouldn’t go bankrupt and assumed that sometime before I died they’d come back. In fact, had the market continued to tank and these stocks continued to fall, I was fully prepared to buy more.
If you combine quality with patience, it will almost certainly pay off sooner or later. I have no idea whether the market will go up, down or sideways tomorrow. It’s the flip of a coin. But I’d give 90% odds it will be higher 10 or 20 years from now.
The longer your time horizon, the higher the probability you’ll be successful.
About me
I founded Money Talks News in 1991. I’ve earned a CPA and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. If you like what you read here, sign up for our free newsletter.
Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.
There are certainly plenty of reasons to avoid credit cards. However, there are an equal amount of reasons to get one. Either way, if you can’t get one or don’t want one, there are still several ways to build credit without one.
How to Build Credit Without a Credit Card
Here are 7 ways to build credit without a credit card, plus one way that is technically a credit card, but doesn’t require you to have credit to get it.
1. CD Loans
Even if you have poor credit, passbook or CD loans are relatively easy to secure. To get a CD loan, you can use either whatever savings you have accrued or a CD account. Whoever grants the loan uses those funds as security should you fail to pay them back.
Obviously, this isn’t going to be an easy route to take for most average Americans, who have little to zero savings. That said, if you have the ability to get a CD loan, you can build credit with it over time.
2. Personal Loans
A personal loan is what is often referred to as unsecured debt. Unsecured, in this case, means that your loan is not backed by any collateral (usually a home or car). Because the loan is unsecured, lenders will often charge higher interest rates to borrowers.
Borrowers with no or low credit scores usually have to get a co-signer, otherwise, their interest rates are higher than most other borrowers.
Personal loans can be used for just about anything, but should obviously be used to help propel you further along the road of financial independence — meaning invest the money wisely.
Don’t simply get the loan just to build your credit! Make sure it has a legitimate purpose and isn’t simply satisfying an “I want this” scenario.
3. Rent Payments
Most landlords don’t report on-time payments. In fact, the only time rent-related credit data is collected is if your debt is sent to a collections agency. When this happens, the only way rent normally affects your credit is in a negative way.
If you’re not sure whether your landlord or property manager reports your payments, simply ask. If they don’t, ask them to consider doing it. If they decline, though, there are still options.
Currently, all there are several companies that report your rent payments to credit bureaus. RentTrack is a relatively new company that aims to help consumers build credit without having to take on more debt.
How it works:
Sign up, answer a few basic questions, and verify that you are, indeed, you.
RentTrack processes your payment using either your bank, debit, or credit card to schedule your rent payment.
RentTrack pays your landlord for you by either mailing a check or making a direct deposit. All payments are guaranteed to arrive on time with a confirmation logged in to their server when your landlord receives payment (that you can access and verify should you have a shifty landlord).
According to RentTrack, tenants using this service raise their credit score on average by 29 points in two months, and a whopping 132 points after two years. Considering that credit scores only go up to 850 points, this is quite a lot!
4. Federal Student Loans
Any payment you make on a student loan is reported to all three credit bureaus. If you’ve gone to school and are now in the working world, make sure you make all of your payments on time. Those payments are reported!
Any loans that you receive to go to college that are made on time will help you build credit.
The great thing about federal student loans is that you don’t have to have a good credit score to receive them. In fact, you don’t even have to have one. These loans are based on need, not merit.
5. Credit Builder Loan
Offered by credit unions and banks, credit builder loans are great loans for people who have little to no credit history. You borrow a small amount (say $1,000) and make payments on that amount for one to two years.
Your payments are deposited into an interest-bearing CD or savings account, so you’ll get back a little more than you put in. However, note that you won’t have access to the funds until you’ve paid them in full.
The only purpose of this loan is to build credit. Think of it like getting a federal refund check after you’ve done your taxes.
It shows up on your credit report as a loan, so every monthly payment you make takes down the remaining balance, and is reported to the credit bureaus as an on-time payment.
The flip side to this is that it can hurt your credit if you don’t make those payments! Make sure you can make the payments before you sign up.
6. Authorized User
If you have a friend, family member, or loved one who is a responsible credit card user, becoming an authorized user on his or her account could positively impact your credit.
Make sure he or she makes every payment on time and has a low to zero balance. By doing this, every monthly payment this person makes shows up as a positive payment on your report, too.
You’ll also diversify your types of credit and gain access to the length of credit history associated with this account. It doesn’t matter when you enter the scene. You gain access to the entire history associated with the account.
It can’t be emphasized enough that the person you use for this being financially responsible. If they, for whatever reason, start missing payments, your credit score will be lowered and hurt, too.
And for those of you muttering, “I thought this was going to be about building credit without a credit card,” know that we’re not telling you to use the credit card.
You simply need to become an authorized user on it to make this hack work. If you have someone that is willing to add you to their account, this is perhaps the best way to build credit.
7. Peer-to-Peer Loan
Another type of loan, peer-to-peer loans usually do report on-time payments (or late payments) to the credit bureaus.
Interest rates can be high, but they come with a higher limit than a credit builder loan so you get a little more flexibility there.
8. Secured Credit Card
This one’s technically a credit card, but not in the traditional sense. Secured credit cards are very much like credit builder loans, but the difference is that you get access to the funds immediately.
A secured credit card is no risk to the credit card issuer because, in order to use it, you must first deposit money. However much money you deposit is equal to your card’s credit limit; so the more money deposited, the more credit you have available.
This money is then set aside and used by the lender should you not make payments. In essence, you are borrowing money from yourself.
Whenever you use your secured card, you have a balance the same as you would on a credit card. Pay off the balance in full every month, and you will build credit the same as you would with an unsecured credit card.
If you’ve never had credit, you may also want to check out our article ‘How to Build Credit from Scratch‘.
How is a credit score is established?
Before you can begin to build your credit, it first takes an awareness of what is actually used to determine your credit score.
If you’re a seasoned vet when it comes to credit scores, it’s probably safe for you to move on to the next part. However, if you’re new to the credit scene and just beginning to wrap your brain around these things, keep reading.
The Five Credit Score Influencers
There are five categories that contribute to your credit score. They are:
Payment History (35%)
Amounts Owed (30%)
Length of Credit History (15%)
New Credit (10%)
Types of Credit Used (10%)
Each is unique and will impact your credit in different ways; likewise, they are all connected. When one falters, others falter; when one is lifted, others are lifted. It’s a financial food chain, so to speak.
Payment History
Your payment history reflects how often you have paid your bills on time. If you’ve ever gone bankrupt or missed a payment due-date by more than 30 days, for example, your credit scores will be lowered.
This is why paying your bills on time is so important because this category is the biggest contributor to whether you have good or bad credit.
Amounts Owed
This category reflects your overall credit utilization. Your credit utilization ratio is a percentage of how much credit you have available to you vs. how much you owe on all of your accounts. Car loans, student loans, and credit card debt (if you have it), are all added together and are combined with available credit. In short, it’s what you owe versus what you still have available.
Length of Credit History
How long have your credit accounts been open or active? The longer the better for this one. Close an account that you have had for a long time, and you will negatively impact this category when it eventually drops off your credit report.
New Credit
How new are your most recent accounts? How many credit inquiries have you had and when was the last time you had one? Too active and too quiet are both red flags.
Types of Credit Used
Credit cards, retail accounts, mortgages, and installment loans all mix together to account for 10% of your credit score. How much is too many or too little depends on the rest of your credit report?
Generally speaking, you want a long credit history to have a good credit score, so if you don’t have any credit cards or credit card debt, your history is limited and you’re considered more of a risk than a person who does and who makes on-time payments.
Creditors need to have something that they can gauge financial behavior, which leads us to the next section.
When you have bad credit, or even no credit at all, it can be difficult to build credit. This is true especially if you have no accounts that are reporting to the credit bureaus.
That’s where Self (formerly Self Lender) comes in.
Self is a type of credit-builder loan that does not require a cash deposit right at the start. If you want to build credit while saving money little by little over time, then Self might be right for you.
Self’s Loan Process
What exactly happens when you take out a loan with Self?
Once your application is approved, the loan funds are deposited into a certificate of deposit (CD). It’s FDIC-insured, so you know the money is safe. Then, you start to repay the loan before you have access to the funds. You can select from a few different plans, lasting either 12 or 24 months.
Monthly payments vary between $25 and $150, allowing you to choose how aggressive you want to be. The payments do include interest, so the amount you pay over the loan term will be more than the amount you receive at the end. You do, however, earn a small amount from interest on the CD account, although it won’t amount to much.
The true benefit of Self is that they report your payments to all three major credit bureaus. That means you really need to make sure you make those payments on time. Once you do, you’re likely to start seeing improvements in your credit score, as long as you’re taking care of your credit in other aspects of your financial life as well.
Also, you can pay off your loan early with Self, but then you won’t receive the prolonged payment history on your three credit reports.
Get started with Self on Self’s secure website
How to Apply
Self is available in all 50 states and you’ll just need to meet a few basic requirements in order to qualify. Here are the specific requisites:
Bank account, debit card, or prepaid card
Email address and phone number
Social security number
Permanent U.S. residency with a physical U.S. residence
Minimum of 18 years old
If you meet those standards, then applying should be easy. However, while Self doesn’t perform a hard pull on your credit, they will run a ChexSystems report. You can’t have a negative item within the last 180 days for things like unpaid fees or bad checks.
Once you’re ready to apply for a Self loan, the entire process can take fewer than five minutes from start to finish. If you’re approved, you’ll start making payments one month from the day your credit builder account is opened.
You can elect to either pay manually each month or set up autopay so that you don’t forget and risk making a late payment. After all, the goal is not to add a burden to your life, but instead, utilize credit in a positive way.
Loan Fees
There are four different tiers of credit builder loans from Self, and each one costs you a different amount. Your choices include:
A $25 monthly payment over 24 months; receive $525 at the end
A $48 monthly payment over 12 months; receive $545 at the end
A $89 monthly payment over 12 months; receive $1,000 at the end
A $150 monthly payment over 12 months; receive $1,700 at the end
Self says they’re still collecting data on whether or not a larger self-builder loan helps to build credit faster. Your best bet is to pick a plan that you can comfortably afford in order to guarantee a successful repayment plan.
What other fees can you expect to pay with Self?
First, you’ll pay a one-time, upfront administrative fee that ranges between $9 and $15, depending on your loan amount. When it comes time to start making your monthly payments, you’ll also pay a debit card fee if you choose that form of payment. It’ll cost you $0.30 plus 2.99% each time. You’re better off linking your bank account to Self to avoid having those fees add up over time.
Self also charges a late fee if you’re more than 15 days late making a payment. The amount is 5% of your monthly payment. For the $25 option, that comes to $1.25 and for the $150 option, your fee would be $7.50.
Self can report your late payment to the credit bureaus after 30 days, and if you stop repaying your loan altogether, it’ll be considered a default. Both scenarios can cause harm to your credit score and limit your future financing options.
Finally, while you can prepay your Self loan with no fee, you will lose interest if you take out your CD funds early. Specifically, you’ll have to forego 90 days of interest, though that only adds up to pennies.
When to Use a Self Loan
A Self loan can not only help you rebuild your credit score, it can also help give you the discipline to create a savings account. The benefits really depend on your needs. Are you simply trying to build your credit score? There may be other things you can do (we’ll talk about those in a minute).
Do you want an account that reports on-time payments but doesn’t require upfront cash? Then Self may be a good fit.
Finally, do you have trouble sticking to a budget and want a more solid structure to get yourself to save? You could definitely get this through Self — as long as you’re willing to take on the risk that comes with any type of loan.
Get started with Self on Self’s secure website
Other Alternatives
When thinking about whether or not Self is right for you, it’s also wise to consider your other options.
Getting a Secured Credit Card
The first is a secured credit card. You can even use it in conjunction with a credit builder loan to build a more diverse credit history. The downside to secured credit cards is that you need an upfront security deposit as collateral. When you use your credit card, you then make payments, which also include interest if you don’t pay on time.
However, if you have some upfront cash (usually starting around $500) that you don’t need as an emergency fund, you can use a secured credit card to make a small purchase each month. Pay off the balance in full to avoid interest and you still get those payments reported to the credit bureau.
Using a Co-signer
If you want access to a traditional unsecured credit card with better rates and terms, you could potentially use a co-signer. This lets you use their credit score and credit history to help enhance your application.
The problem, however, is that any negative marks you receive through late payments or even defaulting will affect your co-signer’s credit as well. You need to have a strong relationship with that person and make sure you both fully understand the pros and cons.
Building credit, either from past troubles or from scratch, can definitely be accomplished with a strong strategy. Consider your own personal needs to decide whether a credit builder loan from Self is right from you. If you want to build your payment history without a lot of upfront cash, it could be ideal.
It’s been about eight months since my last mortgage match-up, so let’s give it a whirl again.
Today, the focus will be on taking out a mortgage versus simply using cash when purchasing a home.
Of course, it’s not that simple for the majority of the population to throw a few hundred thousand dollars (or more) down on a property. So for many, this won’t even be an option.
But it’s worth visiting regardless to see how even the very rich often opt for a home loan when they’ve got plenty of cash to spare.
Buying a Home with Cash Has Its Benefits
Cash buyers are more attractive to home sellers
The home buying process can be a lot faster without a mortgage
Don’t need to abide by any mortgage lender’s rules
No property restrictions or inspections to worry about
Don’t have to pay interest to the bank for several decades
First let’s talk about buying a home with cash. This is almost certainly the favored approach of real estate investors and perhaps the mega-rich, though billionaires like Mark Zuckerberg still take out mortgages.
And investing gurus like Warren Buffett think the low mortgage rates are a great deal…
But for a large swath of the population, this either/or question doesn’t even get any consideration because most of us can’t afford to buy a home (or even a small condo) with cash.
Still, there are some advantages to buying a home with cash as opposed to taking out a mortgage.
The most obvious is that you don’t pay any interest when you buy with cash. That’s right, no mortgage, no interest payments.
Additionally, you don’t have to make any payments to principal either, seeing that you own your home free and clear right off the bat.
However, that doesn’t mean you won’t have recurring costs. You’ll still need to pay homeowner’s insurance (unless you’re really brave), along with property taxes and possibly HOA dues depending upon where the property is located.
The insurance thing becomes optional when you own your property outright. Not so if you have a mortgage because you don’t really own your home. Your lender does, until that loan is actually paid off in full.
Another plus to paying with cash is the negotiating power you gain when making an offer. If you’re going up against some other would-be buyers that need to finance the purchase, you’ll have the upper hand in pretty much every situation.
Sure, you could get outbid by another buyer willing to offer more for the home, but your cash offer should be king if all else is equal. And it may still be king even if you offer less than the competition.
Once your offer gets accepted, you won’t have to worry about dealing with a bank or mortgage lender. That means it doesn’t matter if your credit score is in bad shape, or if you don’t have the necessary income to qualify for a mortgage. Or if you’re a foreign national who might otherwise have difficulty getting a loan.
There is still a process to purchasing the home, but you can cut out the middleman, otherwise known as the lender. And that means you won’t have to pay lender fees, including a costly loan origination fee, or lender’s title insurance, underwriting fees, and so on.
But you might not want to skimp on the appraisal, even though it’s not a requirement. It’ll buy you some time to determine if the house is in good shape and worth what you agreed to pay.
That lack of a mortgage also means you’ll be able to move in sooner, or rent out the property sooner. Speaking of renting it out, you won’t have to worry about occupancy issues, or a higher mortgage rate because it’s an investment property.
Taking Out a Mortgage, Even If You Don’t Have To
A lot of very rich people take out mortgage loans
Not because they have to, but because they know home loans are cheap
Instead of tying up all their money in a single property
They put their hard-earned cash to work in other investments that can yield better returns
On the other hand, there’s the traditional approach to buying a home, with the help of a mortgage.
This is kind of the default option more out of necessity than preference. As I alluded to earlier, most of us can’t afford to buy real estate with cash. We need a mortgage to get the deal done.
In fact, many Americans need a sizable mortgage to get the job done, with practically zero-down FHA loans a popular choice for a large number of prospective home buyers.
So like it or not, a mortgage is often just a fact of life.
The number one downside to a mortgage is all that interest. On a $200,000 loan set at 4.5%, the total amount of interest due over 30 years is close to $165,000. Y
eah, you pay nearly double what you agreed to pay for the home. Sounds pretty rough, doesn’t it?
But like I said, this is the price of not having a substantial amount of money to put down. Along with that, you also have to pay a bunch of lender fees, which can certainly add up.
If you put down a very small amount, you’ll also be subject to paying mortgage insurance premiums, possibly for life if you go with an FHA loan and never refinance.
Oh, and you don’t just get a mortgage. You need to qualify for a mortgage, and not everyone qualifies for countless reasons. Having the lender pry into your personal and financial life may also be extremely annoying and frustrating, but if you need hundreds of thousands of dollars, they’ve earned that right.
The good news is that you write off that mortgage interest as long as you itemize deductions and they exceed the standard deduction. So some of that interest can result in a lower tax bill each April, which lessens the blow pretty significantly.
Additionally, mortgage rates are dirt cheap compared to just about every other type of loan out there. Yes, you pay a lot of interest, but it’s only because the loan amounts are so large.
That means there’s a decent chance you can invest the money that would be locked up in your home (if you paid cash) at a better return elsewhere.
Having a mortgage on your home also means you’ve got more liquidity and less at risk, assuming something goes wrong.
Imagine something devastating happens to your home that isn’t covered by insurance. Would you rather have 20% invested, or 100%?
Also consider the recent housing bust – a lot of homeowners were able to walk away from their homes relatively unscathed because they didn’t have much invested.
Those who purchased all-cash could cut their losses, but they couldn’t walk away without losing a lot of money. There’s also that old saying about putting all your eggs in one basket.
If you don’t have money in other places, it certainly shouldn’t all be tied up in your home.
[Mortgage affordability calculator]
Can You Get the Best of Both Worlds?
Most home buyers put down a small amount of cash and take out a mortgage
The sweet spot might be a 20% down payment
This allows you to avoid costly mortgage insurance and obtain a low mortgage rate
You can invest your excess funds elsewhere or prepay the mortgage if that’s your goal
Absolutely. Most people buy homes with cash and a mortgage, not just either or. In other words, when you put 20% down on a house, you’re paying a decent chunk of cash and financing the rest.
As a result, you avoid the requirement for mortgage insurance, you get a lower rate of interest, and you have an equity investment.
Putting down 20% or more should also put you in a pretty good position when it comes to a bidding war, though an all-cash buyer willing to make a good offer will always have the upper hand.
Additionally, you can always pay your mortgage off earlier than planned seeing that most mortgages don’t have prepayment penalties anymore.
Sure, you will subject yourself to the closing costs associated with a mortgage, along with the qualifying process, but you don’t have to pay off your mortgage over 30 years.
If you decide your money isn’t earning as much as you’d like, you can move more of it towards the mortgage balance.
Got plans to retire in 10 or 15 years? Start prepaying the mortgage faster so you’ll be free and clear by the time you’re on a fixed income. Or go with a 15-year fixed mortgage instead.
Remember, it doesn’t have to be an either/or discussion. You can make adjustments based on your financial standing as time goes on. With cash, you can also pull equity via a cash out refinance. So both options provide flexibility.
Advantages to Buying a Home with Cash
No need to qualify for a mortgage
No need to shop for a mortgage
No mortgage payments (good if you lose your job or are close to retirement)
No interest due
No lender fees
Homeowner’s insurance isn’t required
You don’t need to pay for an appraisal
More negotiating power when making an offer
Lower purchase price possible
Faster closing process
Could be a better return for your money than a low-yielding CD or bond
Set it and forget it investing (don’t have to manage your investments)
Can tap home equity if and when needed
Can always sell or take out a mortgage
Less hassle overall (one less thing to manage)
Sense of security because it’s your home!
Disadvantages to Buying a Home with Cash
Most of us don’t have the money required to buy a home with cash
Mortgage rates are a cheap source of financing
Real estate is an illiquid asset (not easy or free to sell)
The property could lose substantial value
You could lose a lot of money if your home is destroyed and not covered by insurance
You miss out on the mortgage interest deduction
Your return on investment might be poor relative to other options
Poor diversification if a lot of your money is in one single property
House rich and cash poor if savings get depleted
Advantages to Buying a Home with a Mortgage
Mortgage rates are very low
Mortgage interest is tax deductible
Inflation should make future monthly payments “cheaper”
You only need to bring in a small down payment
More cash on hand for anything else
Getting a mortgage isn’t really that difficult
A mortgage can actually improve your credit score
You can prepay your mortgage whenever you want in most cases
You can invest your money elsewhere for a better return
Your money is more liquid
Forced savings each month
Less risk if something happens to your home or if values drop
Disadvantages to Buying a Home with a Mortgage
Tons of mortgage interest must be paid
30 years of monthly payments (maybe less, but still a long time!)
You need to shop for a mortgage
You need to get approved for a mortgage
You could get declined
More (lender) costs associated with a mortgage
Closing process more work and more time
You may buy more house than you should (get in over your head)
Harder to sell the property if little or no equity
You can lose your home if you fall behind on payments
When you are retired or near retirement, it is generally a good idea to have a percentage of your savings in investment vehicles that are lower in risk. However, it can be difficult to find low-risk, high-return investments — especially now with certificate of deposit (CD) and savings account rates at less than 1 percent.
Not too long ago, retirees could earn sufficient interest in low-risk savings vehicles that could keep money protected while allowing adequate growth. But today’s extremely low rates make that nearly impossible. And rates are not expected to rise any time soon. In fact, the Federal Reserve has promised to keep rates low through 2023 to support economic recovery.
At any rate, there is more to consider than just returns.
There Is More Than Just Low Risk and High Return to Consider
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The rate of return or interest rate is what most people are concerned about when considering a low-risk, high-return investment. However, there are other factors that may make different investment options more or less attractive. Before we talk about specific investment options, let’s look at six things to consider in addition to the rate of return.
Liquidity and Your Time Horizon
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How soon do you need access to the money? Do you need the money to be liquid — available at any time?
Fees
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With any investment, it is critically important to factor in the fees. Fees can eat up your returns and are often hidden.
Minimum Investment/Balance
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Some investment vehicles have a minimum amount you need to invest. Certain account types also may come with a maximum investment.
The Inflation Rate
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If your return on your money is not greater than the rate of inflation, then you are not actually earning real returns. Inflation is a sneaky factor to consider with regard to your rate of return. You should always think in terms of your “real” rate of return, which is your return minus the inflation rate.
Is Investment Designed for Income or Growth, and Is That What You Need?
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Sometimes you will want to make a low-risk, high-return investment that is designed to pay you an income. Other times, you simply want your money to appreciate for withdrawal at a later date.
Your Overall Asset Allocation and Specific Needs
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Many people around retirement age are fearful of keeping too much money in the stock market. But, the stock market is one of the best ways to grow your money for the long term and should be included in your portfolio — though preferably in the form of funds.
There are various rules of thumb for determining your best asset allocation between high-risk, high-return and low-risk, low-return investments and everything in between.
However, the most personalized way to determine your optimal asset allocation is to create detailed spending projections to determine how much money you will need and when and for what kinds of expenses. You will want the money that you absolutely need to spend in the near term in low-risk vehicles (with the highest returns possible) and money that you will want in the future can be invested with higher risk, potentially capturing higher returns. The NewRetirement Planner is designed to help you figure this out.
14 Low-Risk and High-Return Investments
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So, where should you keep money that you want to protect from risk while earning adequate returns? I have got some bad news: There is really no such thing. You can’t have your cake and eat it too.
However, keep reading for some options for lower-ish risk, higher-ish return investment options.
1. Keep Money in the Bank
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According to the FDIC, the national average interest rate on savings accounts currently stands at 0.05% annual percentage yield (APY) (compare that to the average stock market return over the last 100 years of 10%). The 0.05% APY applies to both average and jumbo deposits (balances over $100,000).
That being said, there is a lot of competition in the marketplace for cash savings, and you can find higher rates. But, this is overall not a low-risk, high-return investment. Consider it more of a low-risk and low-return opportunity.
How low? Well, if you had $50,000 in an account earning a 0.05% APY, then you would only earn $125.13 over a five-year period.
2. In High-Yield Savings Accounts (HYSAs)
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A high-yield savings account (HYSA) is a type of savings account that pays significantly higher interest — 20 to 25 times the national average. Many of the best rates on HYSAs can be found from online banks.
If you were to earn a “good” rate of return on an HYSA, then you might earn 0.50% APY. This is significantly more than the 0.05% APY you might earn from a traditional bank. So, your $50,000 would earn $1,265.49 in five years ($1,000 more than in a traditional bank).
3. In Money Market Accounts
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A money market account is a savings account that can also function as a checking account and typically comes with a debit card with unlimited transactions.
Money market accounts typically offer higher returns than what a bank offers on a typical checking account. A pro and a con is that the money is very available for withdrawal — good if you want the asset to be liquid, bad if you are trying to save the money. It may be too tempting not to touch it.
A typical APY on a money market account is 0.30% to 0.50%.
4. In Cash Management Accounts
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A cash management account is another variation of other savings accounts and is typically offered by brokerage firms and robo-advisers.
Current APYs on cash management accounts are around 0.50%.
5. With a Credit Union
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According to MyCreditUnion.gov, “Credit unions are not-for-profit organizations that exist to serve their members. Like banks, credit unions accept deposits, make loans and provide a wide array of other financial services. But as member-owned and cooperative institutions, credit unions provide a safe place to save and borrow at reasonable rates.”
Credit unions typically provide higher interest rates on cash accounts than banks. You will also typically pay lower fees for ATMs and other services.
However, always read the fine print. Many of the offers from bank/credit unions that have attractive rates either cap the balance that is available for the rate and/or require you to create a checking account and actually use their product for a certain number of transactions per month. And the caps can be really low ($3,000–$5,000).
6. In a Certificate of Deposit (CD)
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A certificate of deposit (CD) is a financial product that restricts your access to your money for a specified period of time. For that restriction, you are rewarded with a better return than with traditional savings accounts.
Current rates are around 1.05% APY for a five-year term, and there is typically a minimum investment required.
7. Move Money Around Based on Incentives and Perks
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You probably have a friend who changes credit card accounts frequently to take advantage of all the perks that are offered with various cards. This is often referred to as “churning.”
Well, if you’re willing to move your money around and keep track of all requirements, cash bonuses for opening, interest rates and duration, you can do something similar with cash accounts. For example, Capital One had an offer recently where you could receive $400 for opening a new checking account and have two automated deposits of at least $1,000 in 60 days.
Please note that NewRetirement has no affiliation with Capital One and the above example may no longer be available.
If you do a few of these a year, it is worth more than any high-yield savings account returns, but with many hoops to jump through.
8. In U.S. Savings Bonds
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A bond represents a loan an investor makes. When you invest in a bond, you are guaranteed a specified return and your principle will be paid back on a predetermined date. Your returns are paid as interest and are not based on profits.
The vast majority of bonds that are bought and sold are done so through the secondary market, meaning between an investor to another investor, and not from the original borrower to an investor.
Government bonds typically offer slightly better interest rates than a savings account, without a lot of additional risk. U.S. Treasury bonds are backed by the federal government, meaning that you are most certainly assured you will get your money back. If you don’t, then the dollar probably doesn’t exist at that point, and we have much bigger problems to deal with.
Your returns are determined by how long you hold the bond. Current returns are around 0.03% for a one-month duration and 2% for a duration of 30 years, but these numbers can vary significantly.
As a comparison, since 1926, large stocks have returned an average of 10% per year while long-term government bonds have returned between 5% and 6%, according to investment researcher Morningstar.
The face value of a bond also changes as interest rates change. As interest rates go up, your bond would be worth less on the secondary market, as you have a lower interest rate than is otherwise available. If interest rates go lower (and in our case, negative, such as in Germany), your bond would be worth more.
Some state-government bonds also are tax-sheltered in the state that they are issued in, which might make them interesting to those of us in high income-tax brackets.
9. In Corporate Bonds
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A corporate bond is a bond issued by a company rather than a federal, state or local government. They are considered to be a relatively safe investment, though far riskier than government-backed bonds.
Corporate bonds are reviewed for creditworthiness by rating agencies like Standard & Poor’s and Moody’s. Bond ratings are used to inform you about the stability of the bond in question, and the ratings help determine the interest rates that are paid.
Bonds with lower ratings, such as junk bonds and below-investment-grade bonds may have higher returns, but carry with them a much higher risk of default. Some bonds can even be called, meaning the borrower can elect to pay off the bond early. This occurs when the borrower can borrow funds from a different source at a lower interest rate. Always read the fine print.
10. Invest in a Fund
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An investment fund is a portfolio of assets — usually stocks and/or bonds. Instead of investing in or lending to one company, you are investing in a group of companies, which spreads your risk.
There are many types of funds. and some may be better than others as a low-risk, high-return investment. Let’s take a closer look at five options:
Index Funds
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An index fund is a concept that was invented by John Bogle, founder of Vanguard, as part of his thesis at Princeton. If you think successful long-term investing is about picking just the right stocks, think again. Bogle’s genius was not in knowing which stock to buy, but rather in knowing that some stocks will gain and some will lose but the overall market will gain over the long term.
An index fund is an investment made in an entire market, not individual sectors or companies. As Bogle famously said, “Don’t look for the needle in the haystack. Just buy the haystack.”
Index funds are also cap-weighted. This means that companies are held in proportion to their valuation. Large companies, such as Apple, are heavily weighted, while smaller companies are less so.
Stable Value Funds
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Stable value funds are a portfolio of bonds that are insured to protect the investor against a decline in yield or a loss of capital. They are a common low-risk investment option inside of many 401(k) plans (there is very limited availability outside of 401(k)s).
Stable value funds are a portfolio of bonds that are insured to provide the investor with a reasonable guarantee of return (though they are not insured by the FDIC) of principal. And, as the name says, they return a stable rate of interest.
The interest rate is typically a few percentage points above money market funds. However, beware of fees.
Target Date Funds
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A target-date fund (also known as a life cycle fund or age-based fund, or even abbreviated as a TDF) is an investment fund that automatically changes your investment portfolio from high-risk, high-reward to low-risk, low-reward options as you near your target date — the date when you want the money to be available to you for withdrawal.
The target date is usually identified in the name of the fund. So, if you want access to the money in or near 2045, you would pick a fund with 2045 in its name.
There are various pros and cons associated with target-date funds. You will definitely want to assess the fees on the investment. And, know that your money can be at risk and that you can’t take it out before the target date.
What if you think a certain TDF is too conservative? Then use a TDF with a date further down the line than when you want the money. This way, you will have a higher percentage of stocks for longer.
How about if a TDF is too aggressive for your taste? Do the opposite: choose a TDF with a date nearer than when you expect to use the money.
Real Estate Investment Trusts (REITs)
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A real estate investment trust (REIT) is a fund of properties — typically income-producing assets like apartment buildings and hotels.
Tax-Exempt Mutual Funds
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A tax-exempt mutual fund is a fund composed of investments that generate tax-free interest. These funds are offered by some investment firms.
To benefit from a tax-exempt mutual fund, you will need to invest outside of any tax-advantaged account and be in a higher tax bracket.
11. Look at Ladders
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Investopedia defines laddering as “Buying multiple financial products of the same type — such as bonds or CDs — each with different maturity dates. By spreading their investment across several maturities, investors hope to reduce their interest rate and reinvestment risk.”
Learn more about bond ladders.
12. Consider Annuities
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An annuity is an insurance product that guarantees income. They are popular with retirees who want to be assured that they will get a certain amount of income over a specified period of time.
In fact, according to a Towers Watson Retirement Survey, having predictable retirement income (presumably adequate income to cover all of your expenses) can help you feel happier. Conversely, the researchers discovered that retirees who must withdraw money from investments to pay for retirement expenses had the highest financial anxiety.
There are a lot of variations to consider when purchasing an annuity, but the following are a few popular options for retirees looking for income.
Fixed-Term Annuities
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When you buy an annuity, you are exchanging a lump sum of money for an agreed-upon income stream to be paid over an agreed-up term.
The income stream can be variable — the amount you get varies each month along with interest rates or investment returns. Or, the income stream can be fixed — the amount you get remains the same no matter what is going on with the financial markets.
Fixed annuities are appealing to retirees because they transform your savings into predictable income.
You also specify the term of an annuity, payments can last for a specified number of years, or your lifetime — no matter how long that turns out to be.
Guaranteed Lifetime Annuities
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A guaranteed lifetime annuity is a specific type of fixed-term annuity and is ideal for retirement. When you purchase this type of annuity, you are getting a guaranteed paycheck for as long as you live — no matter how long that turns out to be.
Multi-Year Guaranteed Annuities (MYGA)
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A multi-year guaranteed annuity (MYGA). It is similar to an n-year Certificate of Deposit except that it is issued by an insurance company, instead of by the FDIC. It has a fixed interest rate (such as 3%) and you would have to hold it for “n” years (where “n” equals five years, for example). After five years, you get your investment plus the interest over that period of time. You can surrender it sooner but then there is an early withdrawal penalty.
They are not FDIC insured but do have some protection from your state’s insurance guaranty program (if the company should fail). Today, a five-year MYGA is going for about 3%. These products often have a minimum to invest (such as $10,000) and can be “surrendered” after that time period with that full rate of return.
13. Be Wary, but Just Go With Stocks (Lower-Risk Stocks, Anyway)
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Low-interest rates can force investors into riskier securities. While there are absolutely zero guarantees with stocks and you could potentially lose all of your money with even the most conservative stock investment, there are stocks that are less risky than others.
If you think you can tolerate a stock investment for a low-risk (well … at best it is probably a medium risk) high-return investment, consider the following two possibilities:
Preferred Stock
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There are two types of stock — common and preferred. Preferred stock trades like common stock, but act somewhat like bonds. Preferred shareholders have a higher claim on dividends than common stockholders, and, in the event of liquidation, have a preferred claim on assets over common stockholders — but less than bondholders.
Dividend-Paying Common Stock
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In general, companies paying dividends tend to be higher quality with stronger balance sheets and less risk. And, even though they have less volatility, they outperform non-dividend-paying stock over time as well.
They can return an average yield of 3% plus capital appreciation.
14. Paying Off Your Mortgage
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Paying off your mortgage and eliminating all debt can be a pretty good low-risk, high-return investment.
For example, if you have a mortgage at 3%, you could effectively earn 3% interest on the value of the mortgage balance because it is no longer subject to interest.
Plus, it will improve your cash flow.
When it comes to getting advice from Certified Financial Planners (CFPs), it’s usually not in their best interests to recommend you pay down your mortgage. Why?
Most CFPs are paid on a percentage of assets managed (AUM). The more assets they manage, the more they take home. Diverting funds from your portfolio to pay down your mortgage inherently means that your CFP will earn less money. This is why looking for an adviser paid on an hourly basis keeps you and your adviser aligned.
Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.
Just out of college or just starting your career, now’s the time to start saving for retirement.
You’re just out of college or you’re in the early years of your career. How do you begin to pursue your financial goals at a time when you may have limited income and a variety of expenses to cope with? It may not be as difficult as it sounds if you take advantage of Discover’s flexible, high-interest accounts and a few time-tested strategies.
Buy and Hold for the Long Term — Some of your largest financial goals — retirement, for example — are decades away. With that kind of time horizon, you may not need to worry too much about day-to-day fluctuations in the value of your investments. You can potentially afford to ride short-term volatility out and stay focused on the long-term performance of your investments. Keep in mind, if you try to “time” the market, or make decisions based on short-term developments, you could guess wrong and miss out on market upturns. Discover’s Individual Retirement Account CDs offer guaranteed returns as well as flexible terms ranging from 3 months to 10 years. And when your term is up, it’s easy to renew.
It’s also a good idea to set aside money on a regular basis in a savings account, so you can pay unexpected expenses without having to dip into your retirement accounts. With a Discover Online Savings Account, that’s easy to do.
Take Advantage of Compounding — Even if you invest a relatively small amount on a regular basis, you may still be able to pursue large goals over time thanks to the power of compounding. Compounding is when previous earnings from an account remain in the account and in turn earn more money for you. The earlier you start saving, the more your money may compound.
Procrastination has been called the thief of time. Don’t let it rob you of a more secure financial future — start investing and saving as early and often as you can.
Discover
Regardless of your time horizon, risk tolerance, or savings goal, you can always find the right savings vehicle for your needs at Discover. Discover offers an Online Savings Account to help you with your short-term savings goals, a full range of CDs and IRA CDs with terms from 3 months to 10 years as well as Money Market Accounts that may be ideal for rounding out your overall savings strategy. Open a Discover account online in minutes or call our 24-hour U.S-based Customer Service at 1-800-347-7000.
The article and information provided herein are for informational purposes only and are not intended as a substitute for professional advice.
Learn how spending with your checking account can be the secret to building savings.
You might think of saving and spending as complete opposites. Money either comes into or out of your account. But when managed the right way, one can end up being the yin to the other’s yang. To get your saving and spending habits to complement each other, you only have to look as far as your checking account.
Richard D. Quinn, founder of personal finance blog Quinnscommentary, says the majority of Americans think they don’t have enough money to save—even when they do. “Virtually everyone can find money to save, and it’s not necessary to go through complicated budget calculations,” he says.
You can avoid the tricky number crunching and find ways to save money with your checking account by evaluating how you spend and taking advantage of features that can help you grow your savings.
What are the best ways to save while using a checking account? Try these tips to save money with your checking account to build a cash cushion:
1. Pick the right checking account
Checking accounts aren’t created equal. If you’re looking for ways to save money with your checking account and are a frequent debit card user, consider picking an account that rewards you for your purchases.
Discover Cashback Debit, for example, allows you to earn 1% cash back on up to $3,000 in qualifying debit card purchases each month.1 Maxing out your cashback earnings monthly could yield $360 in rewards annually. Deposit that cash into a high-yield savings account, and you’ve accelerated your savings just through smart spending.
If you’re all about rewards, one of the biggest tips to save money with your checking account is knowing the guidelines before you open your account.
“You need to understand your rewards program,” says Dave Rathmanner, vice president of content for LendEDU. “You need to know what the rewards are for, whether there are limits on the amount of rewards you can earn and how those rewards are earned.”
2. Sweep rewards to savings
When determining how to save money with a checking account, spend time upfront planning how—and when—you’ll use your rewards. Letting your cashback linger in your checking account could tempt you to spend or splurge, even if saving is your true goal.
“Think of your ability to earn cash back solely as a way to generate savings,” says Dan Wesley, founder of CreditLoan.com, a consumer finance education site and personal loan matching service. “Don’t allow yourself to spend your cashback.”
Easier said than done? Not if you set up an automatic transfer of your rewards from checking to savings as a way to save money with your checking account. Knowing how often cash rewards are credited to your account can help you put your savings on autopilot.
finances are combined with your significant other’s, encourage your partner to open a rewards checking account of his or her own. It can be an easy way to rack up more rewards—and more savings.
For added rewards earning power, you could consider using a cashback rewards credit card to cover purchases once you hit your checking account rewards earning limit for the month. Just remember, if you’re using credit to earn cash back, charge only what you can afford to pay off in full to avoid paying interest.
4. Match reward spending to your budget
Earning cash back on debit card purchases can jump-start your savings, but you still have to be mindful of what you’re spending if you want to learn how to save money with a checking account.
“You need to consider whether what you have to do to earn rewards will be financially worth it in the long run,” Rathmanner says. “There’s no point in spending an extra $100 at the grocery store to earn cash back if you aren’t actually going to use everything you’re buying.”
5. Pay yourself the way you pay your bills
One of the secrets of how to save money with a checking account is to create a budget for how you’ll spend your income each month. While your budget should include room for your regular expenses—rent, bills, food and transportation—it should also include a line item for the cash you want to save. Otherwise, you may find the months come and go with everything in your checking account spent.
“If you pay it like a bill, saving becomes much easier,” Wesley says. “And if you don’t spend as much as you budgeted for, avoid splurging with the extra cash and just save it instead.”
6. Automate your savings
Quinn says the key to saving is sticking to it and avoiding excuses for not saving. That’s why automating your finances is one of the best ways to save money with your checking account, he adds. With automation, you don’t have to remember to move money over to savings, nor will you be tempted by untouched funds that are sitting around in your checking account.
Start automating your finances by linking your checking account to your savings account and scheduling a recurring transfer each payday.
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You can also set up automatic transfers from checking to other types of savings vehicles, like an Individual Retirement Account (IRA), certificate of deposit (CD) or 529 college savings plan.
7. Start a savings challenge
Budgeting and automating are straightforward ways to save money with your checking account, but you could also boost your savings by challenging yourself with a little creativity. Mentally round up debit card transactions to the next ten-dollar increment, for example, and roll the difference into savings. If you spend $42.38 with your debit card on groceries, round up to $50.00 and put the other $7.62 into savings.
To do this, log in to online or mobile banking to check debit transactions daily or weekly, and add up the ‘rounded’ amount to be transferred to savings. You could also find an app to help you manage your money that rounds up your debit transactions and automatically moves money into savings for you.
Another tip to save money with your checking account is to treat savings as a reward for sticking to your budget. If eating out is your personal budgeting Achilles heel, for instance, put the money you’d normally spend on takeout or dinner with friends into savings each time you’re able to resist the temptation to spend on meals out. Seeing your savings account balance grow can be an excellent motivator to stick with the savings habit (welcome to the life of a frugal foodie!).
Maintain your savings momentum
Figuring out how to save money with a checking account is the first step toward growing your savings. The second is making sure that you’re saving consistently. Setting some savings goals can give you a reason to stay the course.
When setting goals, remember to be specific about what you’re saving for, whether it’s a vacation, a new car or some rainy day cash for your emergency fund. Choose goals that are realistic, and give yourself a time frame for reaching them. Putting these tips to save money with your checking account into practice regularly could bring a big financial payoff over time.
1 ATM transactions, the purchase of money orders or other cash equivalents, cash over portions of point-of-sale transactions, Peer-to-Peer (P2P) payments (such as Apple Pay Cash), and loan payments or account funding made with your debit card are not eligible for cash back rewards. In addition, purchases made using third-party payment accounts (services such as Venmo® and PayPal™, who also provide P2P payments) may not be eligible for cash back rewards. Apple, the Apple logo and Apple Pay are trademarks of Apple Inc., registered in the U.S. and other countries. Venmo and PayPal are registered trademarks of PayPal, Inc.
The right location and a finely-tuned budget are key to making a destination wedding work.
Does your dream wedding involve a beachfront ceremony at sunset even though you live in the city, or exchanging vows surrounded by the lush beauty of a tropical rainforest miles and miles away from home? If so, a destination wedding somewhere outside of your hometown might be right up your alley.
Sound pricey? It certainly can be. According to The Knot, a wedding website, the average price tag of a domestic destination wedding, including the couple’s travel costs, is $28,372. While international destination weddings tend to cost more per guest, they do often include a smaller guest list, with the average wedding spend at $27,227.
Before breaking into a cold sweat at the thought of destination wedding bliss, know that The Knot has reported the total spend for local weddings as high as $32,641 in recent years.
While it’s possible to save money on a wedding hosted locally, it’s also feasible to plan a destination wedding on a budget. These cost-saving tips for destination weddings can get you started:
1. Know what you’re willing to spend
One of the key budget-saving tips for planning a destination wedding is knowing where to draw the line on cost. Without a firm dollar amount in mind, it can be easy to overspend.
Tiffany Zorotrian, an agent with Chantel Ray Real Estate in Virginia Beach, Virginia, found herself planning a destination wedding on short notice. She and her fiancé originally planned on an outdoor wedding in April but had to move up the date because of a military deployment. Virginia’s winter weather wasn’t accommodating to an outdoor event, so they opted for a destination wedding in Key West, Florida, instead. Their budget was $10,000.
When trying to plan a destination wedding on a budget, they had to decide which costs they were willing to assume.
“One thing you need to consider is whether or not you’re going to support travel costs for close family members who want to be there, but may not have the financial means to make the trip themselves,” Zorotrian says. “We did that, but to accommodate those costs, we needed to save money in other areas.” They negotiated deals for their hotel stay for themselves and five family members and brought in their own food and beverages for the wedding festivities.
The average spend on a domestic destination wedding, including the couple’s travel costs, is $28,372.
Jo Ann Woodward, co-owner of Schwartz & Woodward, a Houston-based wedding planning firm, says couples must consider the extra costs associated with a destination wedding that you may not encounter with a wedding in your hometown. That includes the couple’s airfare and accommodations for all guests, local transportation since most guests won’t have their own cars and excursions (some couples will host their guests on special outings like fishing trips, scuba diving, hiking or guided walking tours). Woodward says if guests are covering their own travel costs, couples should consider if they’re willing pay for other activities.
2. Keep it small
If you’re trying to plan a destination wedding on a budget, a shorter guest list may be the answer.
“Couples need to decide who they really want to attend,” Woodward says. She suggests inviting only those people without whom you couldn’t imagine sharing one of the most important moments of your life.
Zorotrian took a different approach. Instead of skimping on the guest list, she invited all of their friends and family so there’d be no hurt feelings. But, she planned her wedding budget on the assumption that only the people who were really committed to being there would come.
When you’re trying to follow cost-saving tips for destination weddings, including everyone on the guest list is a gamble. Should everyone you’ve invited decide to attend, that can inflate your spending. If you’re concerned that the wedding may end up being oversized, it’s better to err on the side of caution and plan for a smaller wedding from the beginning.
“If you invite someone, anticipate and budget that they will attend so there are no financial surprises,” says Candice Coppola, owner and creative director of Jubilee Events, a Cheshire, Connecticut-based wedding planning firm.
The bet did, however, work out for Zorotrian and her husband. They were able to come in just under their $10,000 budget. In the end, their wedding was a tiny, intimate affair, unlike the larger outdoor event they’d originally anticipated in their hometown. But, they were happy with the final result and the money they were able to save.
3. Choose your destination carefully
Where—and when—you plan to have the big day can impact costs in a big way. Coppola says timing matters if you want to plan a destination wedding on a budget.
“Every year, prices increase,” she says, which is why one of her cost-saving tips for destination weddings is to book one to two years in advance to get the current year’s rates.
Scheduling outside the location’s peak season and going low-key on accommodations are other budget-saving tips for planning a destination wedding.
Coppola says that during a destination’s tourist or high season, hotel rates can increase by 25 to 50 percent. She says you can create more room in your budget and save money by scheduling a wedding for the destination’s shoulder or off-peak season instead. Shoulder season is the period between peak and off-peak season.
In general, this time of year offers fewer crowds, but weather could be problematic. In the Caribbean, for example, the off-peak season is typically mid-April to mid-December, which coincides with the North American hurricane season. Sites like Expedia and Lonely Planet can be resources for finding information and recommendations on which off-peak season destinations offer the most favorable weather conditions for a wedding.
If you’ve got a smaller guest list, some cost-saving tips for destination weddings include renting a large vacation home instead of booking hotel rooms for each of your guests. Woodward suggests reading the fine print before choosing a vacation rental, as some vacation homes may come with extra fees for each guest over a certain limit.
Something else to consider when seeking out budget-saving tips for planning a destination wedding: how far your money will stretch if you’re outside the U.S.
“In some regions, like the Caribbean, U.S. dollars are preferred and can get you farther than local currency,” Coppola says. Depending on where you travel, items may simply be less expensive than in America, so you’ll have more purchasing power. In Costa Rica, for example, consumer prices were about 23 percent lower than in the U.S. as of March 2018, according to Numbeo, a website that compares cost of living data.
It’s also worth considering the exchange rate if you’re not using U.S. currency and looking for budget-saving tips for planning a destination wedding. A preferable rate allows you to spend less for the same things abroad than you would at home. Remember also to factor currency exchange fees into your budget.
“Each destination has its own feel and flavor. You have to decide what’s most important for you and your guests to experience, since creating memories for a lifetime is the goal.”
4. Choose the best way to pay
As you research cost-saving tips for destination weddings, don’t overlook your payment method. One potential way to save is by opening a rewards credit card in advance of the wedding that allows you to earn points or miles on purchases. When it’s time to book travel, you could use those miles to cover some or all of the cost of your flights or hotel stays. Some travel cards may offer additional money-saving perks, such as complimentary companion tickets or checked luggage, which can reduce costs. Alternately, cashback rewards could be applied as a statement credit against wedding purchases you’ve already made.
Why should credit cards have all the fun?
Now you can earn cash back with your debit card.
If you want to avoid racking up debt when spending on your destination wedding, consider the benefits of a rewards checking account, which can help you earn cash back on everyday expenses, including those for your wedding. With Discover Cashback Debit you can earn 1% cash back on up to $3,000 in debit card purchases each month.1
Preparing in advance and saving up for the big day can also make it easier to plan a destination wedding on a budget. Consider depositing funds for your wedding into an online savings account with a competitive interest rate. This way, you can be earning money on your savings until you’re ready to pay for wedding expenses.
Check your mindset to plan a destination wedding on a budget
These cost-saving tips for destination weddings address the financial side of planning a getaway, but you also need to consider the emotional side.
“Each destination has its own feel and flavor,” Woodward says. “You have to decide what’s most important for you and your guests to experience, since creating memories for a lifetime is the goal.”
As you plan your dream destination wedding, set your expectations early and remember to be flexible. Working on a budget may mean having to cut back on certain expenses, such as flowers or wedding favors, but it’s essential to stay focused on the bigger picture, which is making your special day as enjoyable as possible.
1 ATM transactions, the purchase of money orders or other cash equivalents, cash over portions of point-of-sale transactions, Peer-to-Peer (P2P) payments (such as Apple Pay Cash), and loan payments or account funding made with your debit card are not eligible for cash back rewards. In addition, purchases made using third-party payment accounts (services such as Venmo® and PayPal™, who also provide P2P payments) may not be eligible for cash back rewards. Apple, the Apple logo and Apple Pay are trademarks of Apple Inc., registered in the U.S. and other countries.
If you’ve got a smaller guest list, some cost-saving tips for destination weddings include renting a large vacation home instead of booking hotel rooms for each of your guests. Woodward suggests reading the fine print before choosing a vacation rental, as some vacation homes may come with extra fees for each guest over a certain limit.
