Money Management

Forget 12-month CDs; I’m sticking to 48-month terms or longer in the coming months. Read on to see why. [[{“value”:”

To battle rampant inflation, the Federal Reserve was forced to implement a series of interest rate hikes beginning in 2022. That, in turn, drove the cost of borrowing up, putting a huge burden on consumers in need of loans as well as those with credit card balances.

But the Fed’s rate hikes haven’t been all bad news for consumers. Following those hikes, savings account and CD rates rose substantially. Nowadays, you can lock in a pretty attractive APY on a certificate of deposit (CD).

In the coming months, I hope to open a CD or two. But my intent is to stick to terms of 48 months or longer, even though shorter-term CDs are generally paying more right now. Here’s why.

I’m saving for a specific goal that isn’t so far away

First, let’s talk about why I’m choosing to put money into CDs for what I’ll call a four- to five-year period rather than, say, the stock market. Generally speaking, when you’re working on far-off goals, it’s a good idea to invest your money rather than stick to CDs.

Over the past 50 years, the stock market has averaged an annual 10% return. By contrast, with a long-term CD now (which I’ll define as a term of 24 months or longer), you may only be looking at an APY in the 4% range. And when you’re saving for a milestone that’s decades away, it’s better to get a 10% return on your money than less than half that amount.

But the milestone I’m saving for — college — is getting to be frighteningly close. Although my oldest child is still in middle school, college isn’t so far off at this point. My general rule when it comes to investing in stocks is that I stay out of the market when the objective I’m saving for isn’t more than five years away. With a shorter investment window, you have less time to ride out market downturns.

Technically, I’m just beyond that five-year window. But because I have other investments for college, I want to put some money away for my kids’ education in cash to offset some of the risk I’m taking in my portfolio. And since the milestone I’m saving for is somewhat close by, I’m willing to forgo a higher return for what I consider to be a risk-free return in the 4% range.

To be clear, with CDs, deposits of up to $250,000 are protected if your bank is FDIC insured. And that limit rises to $500,000 with a joint account.

I want to lock in a longer-term CD before rates start to fall

Now that I’ve explained why I’m looking at CDs over stocks or other investments, let me talk about why I’m looking at longer-term CDs in the coming months versus shorter-term CDs. These days, you’ll probably get a higher APY on a 12-month CD than on a 48- or 60-month CD, which are some of the terms I’m interested in.

The reason for this is that the Fed is expected to start cutting rates later in 2024. Once that happens, CD rates are likely to fall. And as those rate cuts pick up in 2025 and 2026, which could easily occur, CDs may start to become a less attractive option altogether.

What I want to do is put money into longer-term CDs while rates are still strong like they are today. That way, I’ll have some cash on hand available for college tuition so that if, at that point, my investments in my oldest child’s college account aren’t doing so well, I’ll have options.

Because the CD rates we’re seeing today may not be available again for a long time beyond 2024, you, too, may want to lock in a longer-term CD if that aligns with a specific strategy or goal of yours. If you’re saving for a milestone that’s about five years away like I am, you may decide that you don’t want to take on the risk of the stock market.

But in that case, lock in a 48- or 60-month CD now, or in the next few months, while you can still get 4% or more on your balance. A longer-term CD like that may not appeal to you a year from now if you’re looking at just 2% on your money.

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Are you looking to upgrade your credit card to one that better meets your needs? Learn how to upgrade your credit card so you qualify for a welcome offer. [[{“value”:”

Many of us carry several credit cards in our wallets. There may come a time when one of your credit cards no longer meets your needs, and you may decide to upgrade it to a different one that better aligns with your spending needs and goals.

Before you upgrade to a different credit card, take the proper steps to take advantage of the opportunity to earn bonus rewards if they’re available to you. I’ll share the best way to upgrade your credit card to a better alternative so you can earn more rewards.

Don’t rush to upgrade through your credit card issuer

Most credit card issuers don’t extend a welcome offer to cardholders who upgrade existing cards. That means you won’t be eligible for a welcome offer if you call your credit card company and ask it to upgrade your current card or accept an upgrade offer through your existing credit card account.

Instead, the best approach is to complete a credit card application and apply for the new card you want. Be sure to use an application that mentions the welcome offer. Doing this will allow you to take advantage of the chance to earn bonus rewards.

This strategy is a wise way to maximize your credit card rewards. Earning more rewards can help you reach your redemption goals faster. When applying for a new credit card, keep in mind that you must meet the requirements to earn the welcome offer.

To qualify for a welcome offer, you’ll also likely be required to meet the minimum spending requirements within a set timeline. Make sure you time out when to apply for a new card so you can easily meet the welcome offer spending requirements. Never spend beyond your means to earn a welcome offer. Otherwise, you could rack up costly credit card debt.

You can ask your card issuer if it will extend a welcome offer

While it’s less common, some card issuers may extend a welcome offer to cardholders who upgrade their account to a different card. But you’ll want to ask about this and verify the details before upgrading. If your card issuer doesn’t offer this, applying for a new card is your best bet.

Review application rules and welcome offer restrictions

Before taking this approach, reviewing the credit card issuer’s application rules is wise. Some card issues have application requirements that could make you ineligible for card approval.

One example is Chase’s 5/24 rule. Consumers who have applied for five or more credit cards within the last 24 months could be automatically denied when applying for a Chase credit card.

It’s also worth mentioning that some card issuers have welcome offer restrictions that apply to specific cards. You may be ineligible for a welcome offer if you received a similar offer recently. Look into such rules so you don’t miss out on a valuable welcome offer due to ineligibility.

Get rewarded when you spend with your credit cards

You’re missing out if you’re not yet using rewards credit cards. You’ll earn valuable rewards when you pay for everyday purchases with a credit card like this. Various rewards cards are available, like travel credit cards, cash back credit cards, and dining rewards credit cards.

When choosing a new credit card, pick one that fits your spending habits and aligns with your rewards goals. Check out our list of the best rewards credit cards to learn more.

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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.JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Natasha Gabrielle has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.

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Many people overlook details of their 401(k) plans. Read on to find out how this can result in lost money and opportunity cost. [[{“value”:”

Signing up for a 401(k) plan through your employer can be a great way to build retirement wealth. But they’re not always explained to employees in great detail, and overlooking a few aspects of your 401(k) could cost you lots of money over time.

Here are some common mistakes people make with their 401(k) plans and how to avoid them.

1. Not knowing how much you’re paying in fees

Your fees will include the expense ratio (the fee the fund charges) and any applicable administrative costs the plan administrator charges. Most 401(k) plans charge between 0.5% to 2%, with the average being 1%. A 1% fee would mean you pay $10 in fees for every $1,000 in your portfolio.

You don’t have complete control over all plan fees, like maintenance fees, but you do have control over the expense ratio, which is how much your fund charges people who own it.

If you have the option, look for a fund within your plan that has a low expense ratio. For example, if you want a good investment option with a low fee, choose an exchange-traded fund (ETF). These have an average expense ratio of 0.37%.

2. Not taking advantage of employer match programs

Many employers offer a 401(k) matching program that essentially gives you free money. If you’re not taking advantage of any available matching programs, you’re leaving money on the table.

Let’s assume your employer matches 100% of contributions, up to 3% of your salary. If you earn $75,000 and contribute 3% of your salary to your 401(k) for the year, your 401(k) contribution will be $2,250.

But because your company matches 100% of your contributions up to 3% of your salary, it, too, will put $2,250 into your 401(k) for the year. That means you’ll have a total of $4,500 in contributions in your 401(k) brokerage for the year. Several years of matching contributions will add up quickly.

3. Leaving your job before your account has vested

If your employer matches your contributions, there is usually a period you need to stay at the company before you get to keep the entire match. This is called a vesting period.

For example, if your company has a three-year vesting period and you leave the company before the three years are up, you lose the employer’s contributions. Your contributions, however, are still yours.

If you have a 401(k) at your current employer and are looking for a new job, look at the vesting schedule before deciding to leave. Staying a little longer could mean holding onto thousands of dollars.

4. Not increasing your contribution amount over time

It’s easy to set your 401(k) up and then forget about it, but you should revisit how much you contribute to your plan every time you get a raise.

Most experts recommend saving and investing 15% of your pre-tax income. Increasing your contributions each time you get a raise will ensure you don’t fall behind that goal.

There is a limit to how much you can contribute to your 401(k) each year, and for 2023, it’s $22,500. Most people don’t max out their 401(k) contributions, so don’t stress about reaching that amount; just focus on increasing your contributions each time your pay goes up.

5. Leaving your 401(k) at your old job

When you leave a job, you need to decide what to do with your 401(k). Usually, you can transfer the 401(k) to your new employer, if it offers one, or do a 401(k) rollover.

The benefit of rolling your 401(k) over to an individual retirement account (IRA) with a brokerage firm is that it can give you more control over your investments. Many 401(k)s are limited to target date funds and simplified investment choices, but with an IRA, you can buy and sell individual stocks and other funds.

Whichever option you choose, talk with your former employer about the process. You’ll have to have the funds released and placed into an IRA, 401(k), or other retirement plan within 60 days. Holding onto it longer will result in the money being taxed as income as well as paying an early withdrawal penalty of 10% if you’re younger than 59 1/2.

Don’t sweat the small mistakes

You’re in good company if you’ve made some 401(k) mistakes; I’ve made a few on this list. If you don’t know how much you’re paying in fees or left your 401(k) sitting for too long at your old job, don’t let those mistakes keep you from moving forward.

The best thing you can do is focus on what you want to do better with your investments, like reducing your fee amounts or rolling over your 401(k), and then take the next step toward making that happen.

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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.Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.

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A tax refund could do a world of good for your finances. Read on for tips on the best ways to put it to good use. [[{“value”:”

Getting a tax refund isn’t a given. Some people submit their taxes only to see that they owe money to the IRS rather than the other way around.

But if you are the recipient of a refund this year, you have a prime opportunity to better your financial picture. Here are three of the smartest things you can do with that pile of money.

1. Build or boost your emergency fund

Did you know that most Americans couldn’t cover an unplanned $500 bill by dipping into their savings? So reports SecureSave, which also found that financial stress is hurting workers today.

If you don’t have enough cash in the bank to cover at least three months of essential living expenses, then make sure to put your tax refund directly into savings. It may not constitute a complete emergency fund, but it’s a good start.

Without an emergency fund, you might have to resort to debt when unplanned bills land in your lap. Similarly, if you end up losing your job through no fault of your own, you might have to charge your expenses on a credit card in the absence of having cash in the bank. And that could make an already stressful situation even more harrowing.

Now, chances are, your tax refund won’t be enough to cover a full three months of essential bills — unless it’s really large and your costs are pretty low. So don’t just stick that refund into savings and call it a day. Instead, aim to keep building on your savings until you’re covered for three months of expenses.

2. Pay off lingering credit card debt

Maybe you racked up a balance on your credit card during the holidays. Or maybe your credit card balance predates the holidays and was accumulated in 2022, when inflation ran rampant.

The problem with credit card debt is that the longer it lingers, the more interest you stand to accrue. In fact, let’s say you still owe $2,000 from the holidays, and your credit card has an 18% APY. Even if you manage to pay off that debt in a year, you’re still looking at wasting $200 in interest. Instead of letting that happen, see if your tax refund makes it possible to knock out your credit card balance for good.

3. Contribute to an IRA or 401(k)

There are a couple of reasons why it’s a good idea to use your tax refund to contribute to a retirement plan like an IRA or 401(k) plan. First, traditional IRAs and 401(k)s are funded with pre-tax dollars. If you contribute money to one of these accounts, every dollar you put in up to the annual limit set by the IRS is a dollar of income you won’t pay taxes on.

This year, IRAs max out at $7,000 for savers under age 50 and $8,000 for those 50 and older. With a 401(k), you can contribute up to $23,000 if you’re under 50 or $30,500 if you’re 50 or older.

So let’s say you get a $3,200 tax refund and put it into one of these plans. You could end up exempting that much income from taxes. If you’re in the 22% tax bracket, you get to save $704 on your 2024 tax bill.

Plus, IRAs and 401(k)s let you invest money for your future. Let’s say you contribute a $3,200 refund today, and your portfolio generates an average annual 10% return, which is in line with the stock market’s average. In 35 years, that $3,200 could be worth about $90,000.

Some people might argue that getting a big tax refund isn’t a good thing, since it means the IRS got to hang onto a lot of your money last year when you were entitled to that cash. But if you’re getting a refund, rather than bemoan that fact, put the money to good use. And specifically, focus on protecting yourself from unplanned bills, tackling credit card debt, and funding your nest egg.

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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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CDs typically impose penalties for early withdrawals. But are those penalties ever worth taking? In some cases, yes. Read on to learn more. [[{“value”:”

While the U.S. economy is in pretty good shape these days, that doesn’t mean layoffs didn’t hit the news earlier this year. And the reality is that you never know when layoffs might happen at your place of work, whether due to industry shake-ups, some sort of internal restructuring, or fiscal woes.

Losing your paycheck is not an easy thing to deal with — not when you have bills to pay immediately. So if you’re laid off and have money in a certificate of deposit, or CD, then you may be inclined to cash it out so you can cover your expenses.

But cashing out a CD before its maturity date usually means facing a penalty. So is that penalty worth taking? In some cases, it could be.

READ MORE: What Is a Certificate of Deposit (CD)?

When your early cash-out penalty is the lesser of two evils

The penalty for taking an early CD withdrawal depends on your bank. There are no universal rules when it comes to imposing these penalties, so you’ll need to review the terms of your specific CD to see what sort of financial hit you may be looking at for an early cash-out.

As one example, Capital One imposes a penalty of three months of interest when you cash out a CD early with a term of 12 months or less. So if you have a 12-month, $10,000 CD with a 5% APY, you may be looking at about a $125 penalty for an early withdrawal.

Now, that’s a sum of money you probably don’t want to give up. But think about it this way: What if you have money in the bank outside of your CD, so instead of taking your $10,000 to pay your bills, you instead have to charge $10,000 in expenses on a credit card with an 18% APY?

If it takes you one year to pay off that card balance, you’ll be looking at losing around $1,000 to interest. That’s a much bigger financial hit than a $125 penalty for cashing out a CD before it comes due.

Make sure you’re all set for emergencies before opening a CD

It’s easy to see why you might have to tap a CD to cover your bills after a layoff. But a better bet is to not put yourself in that position.

In fact, you really should not put money into a CD until your emergency fund is complete. And by “complete,” we’re talking about having enough money in the bank to cover three months of essential expenses at a minimum.

Once your savings account balance gets that high, then yes, by all means, feel free to put money into a CD to potentially score a higher and guaranteed APY on it. But always make sure you have enough money in regular savings to cover your bills for a period. That way, you may not have to lose any money to penalties if your job suddenly goes away, or if you encounter any other sort of unplanned expense that requires a large pile of cash.

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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.Maurie Backman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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It costs more to buy a house today, we all know that. But why? Keep reading for a discussion of the factors at play. [[{“value”:”

Buying a home today can be absolutely brutal. If you’re not facing stiff competition from other buyers, you’re facing down a high mortgage payment on even the smallest of homes. I’m sure you’re wondering how things have gotten to this point — and maybe even have some of your own theories. The truth is actually pretty simple, when it comes down to it.

But before I hit you with that bombshell, let’s talk about housing affordability, what influences it, and what people currently believe is making it harder and harder to afford a home.

Drivers of housing affordability

Interestingly enough, the Federal Reserve Bank of Atlanta has been tracking housing affordability for a while. Its public-facing dataset goes all the way back to January 2006, well before the Great Recession.

According to its own measures, the most important drivers of housing affordability are the income of the buyer, the mortgage interest rates at which they’re buying, and the price they give for the house. Makes sense, right? The Atlanta Fed uses these figures to determine a more global measure of housing affordability that it compiles into the Federal Reserve Bank of Atlanta National Home Ownership Affordability Monitor Index (HOAM).

On the HOAM, a market that’s considered affordable has a score of 100 or better, while anything below that is wretched and cursed (my words, not theirs). Since about June 2022, when the HOAM dropped to 71.2, we’ve been firmly in the Wretched and Cursed Zone. Since then, we’ve hit even lower lows, with a record-breaking 66.3 clocked in October 2023. According to that month’s figures, the median monthly payment was 45.3% of the median monthly income. Yeesh.

Compared to June 2015, which had a perfect 100.0 on the HOAM, when the median monthly home payment was just 30% of the median monthly income, that October 2023 figure is pretty bleak.

What’s causing this affordability crisis?

If you look at just the drivers of affordability as defined by the HOAM, it seems as if it’s pretty easy to solve the issue of affordability. Houses need to be cheaper, interest rates lower, and income higher. I mean, yes, in a perfect world, all of that taken together would help, but how do we get there?

People have also been quick to blame sustainable federal mortgages, developers who are building more expensive homes (rather than focusing on affordable ones), institutional investors, and even local planning and zoning regulations that restrict affordable housing supply.

But the truth, as the Urban Institute sees it, is that there simply aren’t enough houses to buy, and the people who want them are willing to pay a lot more than they were a few years ago. And there’s plenty of data to support this.

What does the data say?

According to Redfin data, the median home sales price reached a 10% year-over-year gain in August 2020, at $329,030. This was the same summer when home inventory dropped dramatically from an already bleak three months of housing supply to just one month in that same August. By August 2021, the median home sales price topped $381,000, another 16% of gain. You can probably guess where supply was — yep, still at one month (for reference, six months is considered a balanced market).

Supply wouldn’t cross the two-month barrier until July 2022, at which point, the median U.S. home sales price had reached $415,139. Since that time, prices have stopped increasing dramatically on a national scale, but they do continue to spike in regional markets. Some of this is due to less expensive homes coming onto the market, some is attributable to less competition due to slightly increased home supply.

But because home supply hasn’t yet reached four months since the beginning of the pandemic, there are still issues with bidding wars and a general unwillingness of homeowners to put their houses for sale (even if doing so would increase the supply of homes available for them to buy, too).

How do you buy a home right now?

Now that we’ve established the why, let’s talk about the how. How are you going to find a home in this market? It’s actually easier than you might think.

1. Be ready

Have your financing in order. Get pre-approved with a great mortgage lender before you even start shopping. If you’re using first-time home buyer assistance, get as far into that as you can without a house.

2. Know what you want

Don’t buy just any house to say you’ve done so. Make a list of wants and must-haves so you know your house when you see it. Make sure it’s a house worth fighting for.

3. Give your highest and best offer

In the olden days, we often could volley offers back and forth for a week before buyer and seller came together on a price. You don’t have that luxury today. Listen to your real estate agent; if they say it takes full price to buy that house, they know, as they’re in the trenches every day. Give what it takes or walk away. If you won’t, someone else will — and the seller’s agent knows it. This is still solidly a seller’s market.

Prices are high due to a lack of supply

Prices are where they are because there aren’t enough houses to go around. It’s due to a limited number of people willing to sell their homes, and not some other kind of problem. It’s a very simple supply-and-demand situation. But you can still buy today, if you know what you want and are ready to fight for it.

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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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