Money Management

Learn how to save more with clever psychological strategies. Act now for financial wellness. [[{“value”:”

Navigating the sometimes treacherous waters of personal finance feels a lot like trying to sail without a map for many of us. We’ve all seen the endless stream of expert advice on budgeting smarter, investing wiser, and saving more. Even armed with the best financial plans and tools, what really makes or breaks our success is the stuff happening between our ears — our behaviors, habits, and, you guessed it, our attitudes toward money.

Diving into the psychology behind why we spend the way we do can be a game-changer. It’s like suddenly understanding why you can’t resist adding just one more thing to your online shopping cart or why the idea of saving feels more like a chore than a choice.

Let’s take a closer look at some psychological tricks that are all about keeping more of that hard-earned cash right where it belongs — in your bank account.

1. The 24-hour rule

Impulse buys can be the bane of any budget. They sneak up on you, promising immediate satisfaction, but often lead to buyer’s remorse. Here’s where the 24-hour rule comes into play. Feel a sudden urge to buy something? Pump the brakes and give it a day.

This pause can be incredibly enlightening, offering you the time to ponder over the actual value and necessity of the purchase. More often than not, you’ll find that the item you thought you couldn’t live without yesterday seems less appealing today.

2. The envelope system

If you find yourself consistently overspending in certain areas, the envelope system might just be your savior. Allocate a specific amount of cash for different spending categories and place them in separate envelopes. Once an envelope is empty, that’s your cue to stop spending in that category for the month. This tactile approach to budgeting makes your financial limits tangible and real, curbing the temptation to overspend.

3. The snowball or avalanche methods

The snowball method repayment strategy involves paying off debts from smallest to largest, regardless of interest rate. By tackling a $500 credit card balance before a $2,000 loan, you create momentum and a sense of achievement, encouraging you to continue saving and paying off larger debts.

Conversely, the avalanche method focuses on paying off debts with the highest interest rates first, such as starting with a $1,000 credit card at 20% interest before moving to a $500 card at 15%. This method may save you more in interest payments over time, freeing up more money to save or invest.

4. Rewarding milestones

Who said saving money has to be all work and no play? Certainly not us. Setting savings goals and rewarding yourself for reaching them adds a layer of excitement to the process. Maybe it’s a small treat or a modest night out — whatever you choose, make sure it doesn’t undermine your financial goals. This approach keeps you motivated and makes the journey toward financial security a bit more fun.

5. The use of cash

In the digital age, the act of physically handing over cash has become rare, but its psychological impact is undeniable. Paying with cash makes the transaction feel more real, providing a tangible sense of the money leaving your hands. This physical interaction can make you more mindful of spending, potentially deterring frivolous purchases.

Incorporating these psychological tricks into your financial strategy might require some adjustments, but the payoff is undeniable. By leveraging the complex workings of our minds, we can foster healthier financial habits, paving the way for a more secure and prosperous future. Remember, the goal isn’t just to save money — it’s to cultivate a mindset that values thoughtful, intentional spending.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has positions in and recommends Avalanche. The Motley Fool has a disclosure policy.

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Most auto insurance protections are optional. But take a look at three situations where drivers may have no choice but to purchase extra coverage. [[{“value”:”

Nearly all states require their drivers to have some auto insurance to get behind the wheel. But required coverage is usually limited to liability insurance, which protects other drivers if the policyholder hits them. All drivers are able to add extra protections if they want, but these are usually optional.

RELATED: Cheapest Car Insurance Companies for 2024

However, there are cases where drivers might be required to purchase additional protections to avoid serious financial consequences. Here are three you need to know about.

1. Collision coverage

Collision coverage pays for repairs to the policyholder’s vehicle if they cause an accident or are involved in a single-car accident. It’s not something required by any state law. But lenders and lessors often require it of their drivers to protect their investment.

Even if you’re not required to have it, it’s often worth getting. Should you get into an accident without it, you’ll have to pay for the repairs entirely out of your own pocket. Or if your car is totaled, you’ll be on your own as far as buying a new one.

2. Comprehensive coverage

Comprehensive coverage goes hand in hand with collision coverage. This auto insurance protection pays for damages due to theft, vandalism, bad weather, and animal-vehicle collisions. Again, this applies to the policyholder’s own vehicle. Damages the policyholder causes to other vehicles are covered under liability coverage.

This is another insurance protection that lenders and lessors almost universally require their drivers to carry. It ensures that they still get their money back even if the vehicle is damaged or lost for a reason other than an accident with another vehicle.

3. Uninsured/underinsured motorist coverage

Uninsured/underinsured motorist coverage pays for the policyholder’s medical expenses and vehicle repairs if they’re hit by another driver who is either operating illegally without insurance or whose policy limits aren’t high enough to cover the full cost of the damages. It’s usually optional, but there are some states that require their drivers to carry this.

You don’t need to keep track of whether you’re required to have it or not. When you get an auto insurance quote, the company will automatically include uninsured/underinsured motorist coverage if your state requires it. Legally, insurers cannot sell you less than your state’s minimum coverage requirements.

How to find a good deal on car insurance

Adding extra protections like those discussed above could save you quite a bit of money, but it will also raise premiums. That can be difficult for drivers who are already on a tight budget. The following tips can help:

Shop around. Compare rates from several top auto insurance providers before purchasing a policy. Each company has its own algorithm for evaluating risk, and this can result in wildly different quotes for the same customer.Claim all possible discounts. Getting more discounts isn’t always indicative of a lower premium. But it doesn’t hurt for drivers with special situations, like owning an EV, to seek out insurers that reward them for it.Raise the deductible. Raising the policy’s deductible lowers monthly premiums, but it also means higher out-of-pocket costs in the event of an accident. It’s helpful to budget for this in an emergency fund before going ahead with the deductible increase.

If premiums still aren’t all that affordable even after trying the tips above, you might want to try searching for coverage again in a few months to see if there’s anything cheaper out there. It might not be the most fun way to spend an afternoon, but it certainly beats budgeting for an expensive vehicle repair all on your own.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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Could your high-yield savings account wreck your tax refund? Find out how to avoid bad tax surprises from your savings account. [[{“value”:”

Did you open a high-yield savings account recently? Earning more interest on your savings is good news — except at tax season. You should have received a 1099-INT tax form for your savings account, which banks use to report interest income. The money you earned on your savings is taxable interest.

See what your high-yield savings account could mean for your taxes in 2024 — and how to make some tax-planning moves for the future.

High-yield savings accounts can bring extra tax bills

This challenge is not unique to savings accounts — any kind of interest-earning account could result in taxable interest income. If you’ve opened a CD, if you have a high-yield checking account or money market account, or if you keep cash in your brokerage account, you could have interest income for the past year (or “ordinary dividends” for some types of accounts).

But unlike your paychecks, where you can use W-4 withholdings to have taxes automatically taken out and sent to the government each month, interest income doesn’t have automatic withholdings. This can cause a surprise tax bill when you crunch the numbers for your April 15 tax-filing deadlines.

Who pays the most tax for high-yield savings account interest?

What is the tax rate on high-yield savings account interest? It depends on your tax bracket. Interest income is taxed as “ordinary income” (like income from a job) at your marginal tax rate. So people in higher tax brackets will have to pay a higher tax rate on their savings account interest.

For example, let’s say you’re in the 12% tax bracket (2023 taxable income of less than $44,725 for single filers, or less than $89,450 for married filing jointly). You have a high-yield savings account with a balance of $5,000 that earned 5% APY in 2023, for total interest income of $250.

Someone in the 12% tax bracket would owe about $30 on that interest income. This would reduce your refund by $30 — or you might owe an extra $30. Hopefully that $30 is not an excessive burden; it’s still worth getting the $220 of interest that you earned, right?

But for higher-income taxpayers, savings account interest becomes less of a good deal. If you’re in the 32% tax bracket, and you have $50,000 of savings that earned 5% APY in 2023, that means you have taxable interest income of $2,500. And you’ll owe $800 of tax.

How to avoid tax on savings account interest

I personally don’t mind paying tax on savings account interest, because it’s the price of freedom — savings accounts are flexible, liquid assets that let you withdraw your cash anytime for any reason. But if you’re feeling burdened by a high tax rate on savings account interest, you might consider a few options:

Put more money into your 401(k), traditional IRA, or HSA

Savings accounts accrue taxable interest, but not all accounts do. If you haven’t already, consider maxing out your 401(k). Or put more money into a tax-deductible traditional IRA or health savings account (HSA) if you qualify. Putting more money into tax-deductible accounts could help offset the extra interest income from your savings account, and get you a bigger tax refund.

Put extra cash into a Roth IRA

You could also put extra cash into a Roth IRA. It won’t give you a tax deduction, but your investments can grow tax free, without any 1099-INT statements. Roth IRAs (like 401(k)s, traditional IRAs, and even HSAs) can put your money to work with investments, without causing you to owe more taxes on this year’s return.

Buy more stocks or other investments that earn capital gains

If you don’t qualify for, don’t want to use, or don’t want to max out any other tax-advantaged accounts, you could also consider using a brokerage account to avoid taxable interest income. Instead of keeping cash in a savings account, you can buy stocks, bonds, or ETFs. You won’t owe taxes until you sell the investments (you still pay taxes on dividend income) — and if you wait more than a year to sell, you’ll owe long-term capital gains tax, which often has a lower rate than many tax brackets.

Note of caution: These money moves should only be made for “extra” cash that you want to invest more aggressively for long-term goals. If your high-yield savings account is also your emergency savings fund, you should leave that money in your bank account and just keep paying taxes on it. Don’t put your emergency savings into stocks or other risky assets; don’t lock up your emergency savings in a 401(k) or IRA where it’s hard to withdraw your money.

Bottom line

High-yield savings accounts are a great way to keep your cash safe while also earning a good yield. But these interest-earning accounts can also lead to taxable interest income that could shrink your tax refund. It’s good to be aware of how much interest your savings account earned last year, and how much tax you might owe because of it.

But don’t make any big, risky investment moves with your emergency savings. Some higher-income people might want to reconsider their cash holdings for tax purposes. But unless you have lots of money in the bank, you’re probably better off leaving your savings in a high-yield savings account — some taxes are well worth paying.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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