6 Benefits of a Discover Online Savings Account
Start saving with a convenient, high-yield account that has no fees.*
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Start saving with a convenient, high-yield account that has no fees.*
The post 6 Benefits of a Discover Online Savings Account appeared first on Discover Bank – Banking Topics Blog.
Today, I have a great article to share with you from Kyle Kroeger on how to invest in real estate. He has a goal of reaching $5,000,000 in rental property value, and is sharing his plan today. The prospect of retiring early on real estate is highly intriguing to me. It should be for a […]
The post A 31 Year Old’s Journey to $5,000,000 in Rental Property Value appeared first on Making Sense Of Cents.
I received a great email from Magen L., who says:
I no longer have any retirement savings because I cashed it all out to pay my debt. We also sold our home and moved into an apartment just as the pandemic was hitting. With the sale of our house, the fact that my husband is working overtime, and the stimulus money, we've saved nearly $10,000 and should have more by the end of the year. My primary question is, what should we do with it?
Right now, I have our extra money in a low-interest bank savings [account], and I'm considering moving it to a high-yield savings [account] as our emergency fund. Is that a good idea? For additional money we save, I intend to use it as a down payment on a new house. However, should I be investing in Roth IRAs instead? What is the best option?
Another question comes from Bianca G., who says:
I have zero credit card debt, but I have a car loan and a student loan. I will be receiving a large amount of money sometime next year. If my fiancé and I want to buy a home, is it better to pay off my car first and then my student loan, or should I just pay down a big portion of my student loan?
Thanks Megan and Bianca for your questions. I'll answer them and give you a three-step plan to prioritize your extra money and make your finances more secure. No matter if you're a good saver or you get a cash windfall from a tax refund, an inheritance, or the sale of a home, extra money should never be squandered.
Maybe you're like Magen and have extra cash that could be working harder for you, but you're not sure what to do with it. You may even be paralyzed and do nothing because you have a deep-seated fear of making a big mistake with your cash.
In some cases, having your money sit idle is precisely the right financial move. But it depends on whether or not you've accomplished three fundamental financial goals, which we'll cover.
To know the right way to manage extra cash, you need to step back and take a holistic view of your entire financial life.
To know the right way to manage extra cash, you need to step back and take a holistic view of your entire financial life. Consider what you're doing right and where you're vulnerable.
Try using a three-pronged approach that I call the PIP plan, which stands for:
Let's examine each one to understand how to use the PIP (prepare, invest, and pay off) approach for your situation.
The first fundamental goal you should have is to prepare for the unexpected. As you know, life is full of surprises. Some of them bring happiness, but there's an infinite number of devastating events that could hurt you financially.
In an instant, you could get fired from your job, experience a natural disaster, get a severe illness, or lose a spouse. If 2020 has taught us anything, it's that we have to be as mentally, physically, and financially prepared as possible for what may be around the corner.
While no amount of money can reverse a tragedy, having safety nets can protect your finances. That makes coping with a tragedy easier.
Getting equipped for the unexpected is an ongoing challenge. Your approach should change over time because it depends on your income, debt, number of dependents, and breadwinners in a family.
While no amount of money can reverse a tragedy, having safety nets—such as an emergency fund and various types of insurance—can protect your finances. That makes coping with a tragedy easier.
Everyone should accumulate an emergency fund equal to at least three to six months' worth of their living expenses. For instance, if you spend $3,000 a month on essentials—such as housing, utilities, food, and debt payments—make a goal to keep at least $9,000 in an FDIC-insured bank savings account.
While keeping that much in savings may sound boring, the goal for an emergency fund is safety, not growth. The idea is to have immediate access to your cash when you need it. That's why I don't recommend investing your emergency money unless you have more than a six-month reserve.
The goal for an emergency fund is safety, not growth.
If you don't have enough saved, aim to bridge the gap over a reasonable period. For instance, you could save one half of your target over two years or one third over three years. You can put your goal on autopilot by creating an automatic monthly transfer from your checking into your savings account.
Megan mentioned using high-yield savings, which can be a good option because it pays a bit more interest for large balances. However, the higher rate typically comes with limitations, such as applying only to a threshold balance, so be sure to understand the account terms.
Another critical aspect of preparing for the unexpected is having enough of the right kinds of insurance. Here are some policies you may need:
RELATED: How to Create Foolproof Safety Nets
Once you get as prepared as possible for the unexpected by building an emergency fund and getting the right kinds of insurance, the next goal I mentioned is investing for retirement. That’s the “I” in PIP, right behind prepare for the unexpected.
Investments can go down in value—you should never invest money you can’t live without.
While many people use the terms saving and investing interchangeably, they’re not the same. Let’s clarify the difference between investing and saving so you can think strategically about them:
Saving is for the money you expect to spend within the next few years and don’t want to risk losing it. In other words, you save money that you want to keep 100% safe because you know you’ll need it or because you could need it. While it won’t earn much interest, you’ll be able to tap it in an instant.
Investing is for the money you expect to spend in the future, such as in five or more years. Purchasing an investment means you’re exposing money to some amount of risk to make it grow. Investments can go down in value; therefore, you should never invest money you can’t live without.
In general, I recommend that you invest through a qualified retirement account, such as a workplace plan or an IRA, which come with tax benefits to boost your growth. My recommendation is to contribute no less than 10% to 15% of your pre-tax income for retirement.
Magen mentioned Roth IRAs, and it may be a good option for her to rebuild her retirement savings. For 2020, you can contribute up to $6,000, or $7,000 if you’re over age 50, to a traditional or a Roth IRA. You typically must have income to qualify for an IRA. However, if you’re married and file taxes jointly, a non-working spouse can max out an IRA based on household income.
For workplace retirement plans, such as a 401(k), you can contribute up to $19,500, or $26,000 if you’re over 50 for 2020. Some employers match a certain percent of contributions, which turbocharges your account. That’s why it’s wise to invest enough to max out any free retirement matching at work. If your employer kicks in matching funds, you can exceed the annual contribution limits that I mentioned.
RELATED: A 5-Point Checklist for How to Invest Money Wisely
Once you're working on the first two parts of my PIP plan by preparing for the unexpected and investing for the future, you're in a perfect position also to pay off high-interest debt, the final "P."
Always tackle your high-interest debts before any other debts because they cost you the most. They usually include credit cards, car loans, personal loans, and payday loans with double-digit interest rates. Remember that when you pay off a credit card that charges 18%, that's just like earning 18% on an investment after taxes—pretty impressive!
Remember that when you pay off a credit card that charges 18%, that's just like earning 18% on an investment after taxes—pretty impressive!
Typical low-interest loans include student loans, mortgages, and home equity lines of credit. These types of debt also come with tax breaks for some of the interest you pay, making them cost even less. So, don't even think about paying them down before implementing your PIP plan.
Getting back to Bianca's situation, she didn't mention having emergency savings or regularly investing for retirement. I recommend using her upcoming cash windfall to set these up before paying off a low-rate student loan.
Let's say Bianca sets aside enough for her emergency fund, purchases any missing insurance, and still has cash left over. She could use some or all of it to pay down her auto loan. Since the auto loan probably has a higher interest rate than her student loan and doesn't come with any tax advantages, it's wise to pay it down first.
Once you've put your PIP plan into motion, you can work on other goals, such as saving for a house, vacation, college, or any other dream you have.
Here are five questions to ask yourself when you have a cash windfall or accumulate savings and aren’t sure what to do with it.
Having some emergency money is critical for a healthy financial life because no one can predict the future. You might have a considerable unexpected expense or lose income.
Without emergency money to fall back on, you're living on the edge, financially speaking. So never turn down the opportunity to build a cash reserve before spending money on anything else.
Getting a windfall could be the ticket to getting started with a retirement plan or increasing contributions. It's wise to invest at least 10% to 15% of your gross income for retirement.
Investing in a workplace retirement plan is an excellent way to set aside small amounts of money regularly. You'll build wealth for the future, cut your taxes, and maybe even get some employer matching.
Don't have a job with a retirement plan? Not a problem. If you (or a spouse when you file taxes jointly) have some amount of earned income, you can contribute to a traditional or a Roth IRA. Even if you contribute to a retirement plan at work, you can still max out an IRA in the same year—which is a great way to use a cash windfall.
If you have expensive debt, such as credit cards or payday loans, paying them down is the next best way to spend extra money. Take the opportunity to use a windfall to get rid of high-interest debt and stay out of debt in the future.
After you’ve built up your emergency fund, have money flowing into tax-advantaged retirement accounts, and are whittling down high-interest debt, start thinking about other financial goals. Do you want to buy a house? Go to graduate school? Send your kids to college?
Review your financial situation at least once a year to make sure you’re still on track.
When it comes to managing extra money, always consider the big picture of your financial life and choose strategies that follow my PIP plan in order: prepare for the unexpected, invest for the future, and pay off high-interest debt.
Review your situation at least once a year to make sure you’re still on track. As your life changes, you may need more or less emergency money or insurance coverage.
When your income increases, take the opportunity to bump up your retirement contribution—even increasing it one percent per year can make a huge difference.
And here's another important quick and dirty tip: when you make more money, don't let your cost of living increase as well. If you earn more but maintain or even decrease your expenses, you'll be able to reach your financial goals faster.
Earlier this year I sold my 200th house flip. These are not wholesale deals that I never technically buy or fix up, these are house flips that we buy, renovate and sell. It has been by no means easy to do this many flips and I have had my fair share of problems along the … Read more
In this article: When is the best month to buy a house? Is it a good time to buy a house based on the economy? Personal circumstances that dictate when to buy a house In general, there are three ways to evaluate the best time to buy a home: Best month: In every real estate […]
The post When Is The Best Time to Buy a House? appeared first on Home Buyers Guide.
There are a number of online jobs and companies that pay weekly, or possibly even more frequently. Here are some of our favorites.
The post 33 Online Jobs That Pay Weekly appeared first on Bible Money Matters and was written by Marc. Copyright © Bible Money Matters – please visit biblemoneymatters.com for more great content.
Inflation measures how much an economy rises over time, comparing the average price of a basket of goods from one point in time to another. Understanding inflation is an important element of investing. The Bureau of Labor Statistics CPI Inflation Calculator shows that $5.00 in September 2000 has the purchasing power equal to $7.49 in […]
The post 5 Best Hedges in the Face of Inflation appeared first on Good Financial Cents®.
No matter if you call it, an emergency fund or a cash reserve, the idea is that we all need extra money set aside to stay safe from the unexpected. Not having enough cash on hand to pay for an emergency is why many people get into financial trouble. Having a safety net protects your finances and also gives you peace of mind.
Life happens, and it usually costs money!
But knowing the right amount of emergency cash to keep can be confusing. Today, I'll answer several questions to help you figure out how much your emergency fund should be, the best place to put it, and whether you should invest it.
An emergency fund is a cash account earmarked to pay for the inevitable and unforeseen emergencies in life. Your car won't start. Your computer crashes. Your refrigerator quits. You get sick. You lose your job or business income. Life happens, and it usually costs money!
When you have an unexpected large expense or your income dries up, you need a cash cushion to fall back on to stay healthy and safe. Otherwise, you'll have to make serious sacrifices or rack up debt on a credit card.
I compare an emergency fund to a moat surrounding a fort or castle to protect it from invaders. An emergency fund helps you stay safe from harmful problems that could invade your financial house.
In general, it's best to keep emergency savings in an FDIC-insured bank account.
Since emergencies happen in a split second, you need cash in an account you can tap immediately. In general, it's best to keep emergency savings in an FDIC-insured bank account. Emergencies can't wait for a CD or bond to mature or for you to sell a valuable asset or a home to raise needed cash.
I know that keeping a lot of money in a low or no-interest savings account can seem counterintuitive or feel frustrating. A podcast listener named Tena J. says:
I have a 401(k), and $30,000 in savings not making any interest. I know that I need to put this money somewhere to invest for retirement. What's your advice?
Thanks for your question, Tena. I recommend that you think about your emergency savings and your retirement investments as two separate buckets of money with different purposes.
Even though we tend to use the terms saving and investing interchangeably, they're not the same. The difference has to do with taking a financial risk. You need an emergency savings account that is kept safe and entirely free from risk so it's there when you need it. But the purpose of investing is to put your money at some level of risk in exchange for future growth. Remember that there's always a tradeoff between financial risk and return. Investing money means you could get relatively high returns, but that you could also lose some or all of it.
Even though savings accounts currently pay very little interest, that's the price of keeping money completely safe.
If your emergency money is invested rather than saved, it's subject to volatility, which means the value could plummet when you need it. Having cash in a bank savings or money market deposit account means that it's safe no matter what happens in the markets, but you won't earn much. And that's okay! Even though savings accounts currently pay very little interest, that's the price of keeping money completely safe. Again, remember the purpose of those funds isn't to grow but to be your safety net.
Make sure you always have enough cash on hand to protect yourself from an emergency. I recommend that you maintain a minimum of three to six months' worth of your living expenses in your bank account at all times.
Tena, I like that you're also thinking about retirement but make it a separate goal. It's better to make regular contributions to your 401(k) and max it out when possible than to empty your savings. Tapping a retirement account for a potential emergency isn't always possible, and if you do take an early withdrawal before age 59.5, you must pay taxes plus a 10% penalty.
I recommend that you maintain a minimum of three to six months' worth of your living expenses in your bank account at all times.
To calculate the right amount of emergency savings, tally up your living expenses. They are just the basics—like housing, groceries, medicine, transportation, and existing loan payments—not necessarily a full replacement of your income.
For instance, if you could get by on $3,000 per month if you lost all your income, then always keep a minimum of $9,000 ($3,000 x 3 months) in reserve. But having a six-month reserve or more is even better since finding a job could take that long.
When you have extra money or more than a healthy minimum cash reserve, you might consider investing amounts above that threshold. But it's critical to evaluate the cash reserve you need based on various factors, such as the number of breadwinners in your family, your job stability, marketability, ongoing expenses, and financial goals.
RELATED: 3 Emergency Fund Mistakes to Avoid
Vivian W. asks another question about investing emergency money. She says:
I'm 28 years old and currently save about $20,000 per year. I live with my retired mother, who is 66 and didn't save enough for her retirement. We both have $113,000 in high-yield savings and a CD but want to invest part of it. However, I'm not sure how much cash we should keep in the bank for emergencies. Also, should I be maxing out my Roth IRA every year?
Thanks for your question, Vivian. As I previously mentioned, my recommendation to keep a range of at least three to six months' worth of your living expenses in savings. You could consider investing the excess. Your cash reserve is like having an insurance policy for you and your mother's safety.
Vivian, everyone should be investing for their retirement, in addition to maintaining a healthy emergency fund. A good rule of thumb is to invest at least 10% to 15% of your gross income in a workplace retirement account or IRA. The maximum annual IRA contribution for 2020 and 2021 is $6,000, or $7,000 if you're over age 50. Since you can save $20,000 per year, I would definitely max out your Roth IRA every year.
Another common question is whether you should use emergency savings as a down payment on a home. Ann C. says:
I'm 21 years old and will graduate from college in May with a full-time job that starts in 2022 in a large city where I've never lived. I have enough savings to make a $20,000 down payment on a home. It seems like spending $1,000 or more per month on rent would be a waste and make it harder to save for a home. Do you think I should own or rent?
Ann, thanks for your question and congratulations on your upcoming graduation, relocation, and new job. That's a lot to celebrate!
If spending $20,000 on a home would leave you with no cash, you can't afford to become a homeowner yet. Buying a home is not an emergency. You always need to maintain a healthy cash reserve no matter whether you own or rent.
Buying a home is not an emergency. You always need to maintain a healthy cash reserve no matter whether you own or rent.
Additionally, becoming a homeowner comes with lots of additional expenses on top of your mortgage payment, such as insurance, property taxes, homeowners association fees, furnishings, repairs, and maintenance. Don't get me wrong—I'm a big proponent of being a homeowner and investing in real estate when you can afford it.
Ann, since you've never lived in the city where you're going for your new job, I'd recommend renting for several reasons. One is that you need time to get to know a new city and see where you want to be relative to your office. Renting gives you time to understand what the traffic is like, whether public transportation is an option for commuting, where you like to spend time when you're not working, and the state of the real estate market.
I don't recommend buying a home unless you're sure you will live in it for at least three to five years. If you start your new job and don't like it, you might need to sell a home that you just bought to relocate to another part of town or a new city. That may not be a problem, but it's a bit risky.
I've made several cross-country relocations to big cities and have always rented first to get to know the new landscape and my employer. That gives you plenty of time to figure out the parts of town you like and fit your budget.
Renting gives you more mobility and freedom when you're in an uncertain situation. Also, in many big cities, it's less expensive to rent than buy a comparable property when considering the total costs of ownership. So, take the time to evaluate your options carefully.
RELATED: 8 Steps to Buying a Home You Can Afford
You might wonder if keeping some amount of your cash reserve at home is wise. There's nothing wrong with keeping a small percentage of your emergency money in a safe place at home. It could be helpful in a situation such as a natural disaster when there are widespread power outages.
Typical homeowners or renters insurance doesn't cover cash.
However, be aware that typical homeowners or renters insurance doesn't cover cash. So, if your money gets stolen, lost, or destroyed in a fire or storm, you don't have any recourse.
If you haven't started an emergency fund, accumulating several months' worth of living expenses can seem daunting. Depending on your income and financial situation, it could take years to achieve. That's okay—just get started by taking small steps every month.
Your emergency savings should be a moving target that you reevaluate every year.
If the pandemic has taught us anything, it's that we never know what's around the corner. Your emergency savings should be a moving target that you reevaluate every year.
The first step is to accurately figure your monthly living expenses. As I mentioned, they include housing, utilities, insurance, food, loan payments, transportation, etc. Add up all your current financial needs and obligations for yourself, your family, and third parties that you couldn't or wouldn't want to cut if your income was significantly reduced.
The second step is to estimate how long you could potentially need your emergency money. I recommend saving no less than three months' worth of living expenses. But your unique situation might call for considerably more. Here are some tips to help you determine how much you should set aside:
If you're not a disciplined saver, try automating your emergency savings. Ask your employer to split your paycheck between your regular checking and your emergency savings account. If you get a paper check or are self-employed, set up an automatic monthly or weekly transfer from your checking into your emergency fund.
Ask your employer to split your paycheck between your regular checking and your emergency savings account.
An emergency fund is one of the most critical financial "must-haves." It should be large enough to get you through a crisis, easily accessible, and in cash to ensure its safety and liquidity, no matter what's happening in the financial markets.
So, there's no time to spare in getting started. Once you have a safety net in place, you'll have a fantastic sense of security and peace that no matter what happens in your financial life, you're prepared to tackle it.
Mo and Sarah worked very hard to buy a house. They saved money, they took care of their credit, and they took their time finding the right house. They were young and had their whole lives ahead of them but they did not want to waste their youth either. They also knew that the sooner … Read more
Some small moves can go a long way to changing your money mindsetâand lead you to goal-setting success.
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