Money Management

It’s important to be financially prepared for emergencies. Find out why it’s a bad idea to rely on credit cards as your emergency fund. [[{“value”:”

Emergencies can happen at any time. That’s why it’s recommended to have an emergency fund, ideally with enough money to cover three to six months of living expenses. If you go through a job loss or any other costly life event, this gives you time to get back on your feet.

But that’s a lot of money to save. Some people look for alternative options, and a popular choice is using credit cards as an emergency fund. While it may be tempting to do this and avoid saving so much, this is one of the biggest personal finance mistakes you can make.

1. You’ll go into debt for emergency expenses

A key benefit of having an emergency fund is that you can pay for emergency expenses without going into debt. If your car needs a $2,000 repair, you just withdraw it from your savings account. It’s still not fun to part with that money, but it doesn’t become an ongoing issue or a new monthly payment you need to make.

When you put emergencies on your credit card, they stick around longer. You’ll be paying them off over time and paying interest for each month you carry a balance on your card. If you put a $2,000 emergency on your credit card and you can only afford to pay $200 a month toward it, that’s 10 months you’ll be in debt.

It’s even more dangerous if you have multiple financial emergencies, or one extended emergency. In situations like these, you’ll need to go deeper and deeper into debt to keep paying your bills.

Let’s say you lose your job and need to spend $3,000 a month on your credit card to cover your living expenses. It takes an average of about three months to find a new job, according to ZipRecruiter. If it takes you that long, you’d end up with $9,000 in debt.

2. Credit cards have high interest rates

Certain types of debt are more expensive than others. Credit card debt is some of the most expensive. Credit cards have an average interest rate of 21.47%, according to Federal Reserve data. That’s extremely high, and it means using your credit cards for emergency expenses could cost you.

To show just how costly credit card interest can be, let’s go back to that example of taking on $9,000 in debt after a job loss. If your card has a 21% APR, and you pay $300 per month, it will take you 43 months to pay off that balance. During that time, you’ll pay $3,873 in interest.

It may be more convenient in the short term to not bother with an emergency fund. But it could be much more expensive in the long run when you need to get out of credit card debt.

3. Credit cards can’t be used for certain types of expenses

You should be able to use your emergency fund for any type of bill. When your emergency fund is money in a bank account, you can. On the other hand, not all bills can be paid by credit card.

Mortgage lenders normally won’t let you pay by credit card. It’s not always possible to pay rent with a credit card, either — it depends on your landlord. Considering housing is one of the most important bills to pay, not being able to do so in an emergency is a huge problem.

Now, there are workarounds. Plastiq is one of the most popular options. It allows you to pay just about any bill with a credit card, so it can help in a pinch. After you pay Plastiq, it mails a check to make your bill payment for you.

But Plastiq also charges a 2.9% fee for credit card payments. Checks can take up to eight business days to arrive, unless you pay more for expedited service. So it costs you more money, and it’s somewhat inconvenient, since you need to schedule your payment over a week in advance.

Being financially prepared for emergencies

Credit cards can be useful, but they’re not right for your emergency fund. If you don’t have at least three months of emergency savings, make that a goal.

Figure out an amount you can afford to set aside every month, and transfer that to a savings account specifically for emergencies. An emergency fund is an important part of your financial security, and having one will give you the peace of mind that you’re ready for anything.

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Want to save more money in 2024? Every payday, pay yourself first. Find out how automation can help you stay on track so you reach your savings goals. [[{“value”:”

Many people struggle with saving money, even if it’s one of their financial goals. If you’re finding it challenging to prioritize saving, you’re not alone. One way to ensure you stay on top of your goals is by paying yourself first. By doing this, you’ll be making savings a top priority.

How do you do this? Every payday, transfer a portion of your paycheck to your savings account. Over time, this money move can transform your savings account balance. To succeed, you’ll want to get into the habit of doing this.

If you sometimes forget to transfer money into your savings account, I have a recommended technique to eliminate forgetfulness. Find out what move to make to ensure you always pay yourself first, even when life gets busy.

Put your savings on autopilot

Here are two common reasons why people don’t save as much money as they would like:

They spend their extra cash before it gets saved.They don’t remember to transfer money to their savings accounts.

If either of these scenarios resonates with you, I recommend one strategy that can make a big difference — automate your savings. Instead of relying on your memory to make manual contributions to your savings account, put your savings on autopilot.

You can set up automatic transfers through your bank’s mobile app or website. It’s easy and free to do. Once you enable automation, money will be automatically transferred from your checking account to your savings account on a set schedule.

Remember how we talked about the importance of paying yourself first earlier? I suggest choosing a contribution schedule that aligns with your pay schedule. If you get paid biweekly, set up your automatic transfers so that money is transferred biweekly on payday. This way, you pay yourself before you spend the money elsewhere.

Automation can be a game changer if you’ve struggled to stay true to your savings goals. You’ll eliminate forgetfulness and save time. While you’re going about your everyday life, your savings account will grow behind the scenes. It’s a win-win move for you and your money.

Altering your spending habits can help

Some people neglect to save because they overspend. While it requires effort, it’s possible to develop new spending habits so you waste less money and end up with more to stash in your high-yield savings account.

One way to make positive changes is to start budgeting. Setting and following spending limits can help you stop overspending. One of the best budgeting apps may help if you struggle with budgeting. Digital tools like this can help you stay motivated and help you learn new habits, as well as identify spending areas where you can painlessly cut back.

Don’t put off saving

Even if you have no savings, it’s not too late to start putting money aside. If you’re delaying saving because you can only contribute a small amount to your savings account, remember that any money saved is a win. Don’t avoid saving because you think your actions won’t make a difference. For additional money management tips, check out our free personal finance resources.

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According to experts, this may be the best year to buy a car since 2019. Here’s why one writer says they won’t be among the new owners. [[{“value”:”

Despite experts calling for 2024 to be a great year to buy a new vehicle, I’m not interested. It’s not just because the average price of a new car is $48,759, and it’s not just because I’d like to give electric vehicle (EV) manufacturers a year (or five) to work the kinks out. I really just don’t see it as a good financial move right now. Here’s why.

I have no desire to pay more for auto insurance

The expenses involved in owning a vehicle go far beyond the monthly loan payment. Drivers also have to cover the cost of gas, routine maintenance, occasional repairs, and auto insurance.

Although we recently changed insurers to save more than $1,600 annually on bundled homeowners and auto coverage, I know that buying a newer model car means getting hit with a higher insurance premium. The more a vehicle is worth, the more it costs to repair. And it’s the price of expensive repairs that gets passed along to the consumer by way of higher insurance premiums.

Between November 2022 and November 2023, car insurance costs outpaced inflation, increasing by 19%. Honestly, I’m just not okay with adjusting our monthly budget to pay more to an auto insurer.

I want to pay down debt

Now that the inflation rate is nearing the Federal Reserve’s target of 2%, it’s about time for the Fed to lower the federal funds rate (the interest rate at which banks loan money to other banks). While the federal funds rate is not directly connected to the interest rates we pay as consumers, where one goes, the other typically follows. In other words, once the Fed lowers the federal funds rate, we can expect interest rates across the board to follow.

We took out a mortgage in mid-2022 that left a bit of a sour taste in my mouth, but because I believe that we “marry the house, date the rate,” I knew that we could refinance when rates dropped. It makes no sense to take on new debt when what I really want to do is refinance existing debt.

I’m still cautious about overpaying

One of the best things about being a finance writer is research. Yesterday, I was looking into which auto manufacturers currently offer promotional interest rates of 3% or less. At first, it seemed like a great way for someone (who actually needs a new car) to finance their ride. However, just for fun, I did the math. If someone with excellent credit were to buy a $48,000 vehicle and snag a 1.99% interest rate, their monthly payment for 60 months would be $841, and they would pay $2,470 in interest.

The thought of having over $800 less each month to save for retirement strikes me as ludicrous — especially since our current vehicles run fine.

Yesterday, as I cleaned my desk off for the evening, it suddenly struck me that I’d grown up. There was a time when I ignored the critical part of my brain, the part that reminded me of the difference between wants and needs. There was a time when I would make a financial decision, reasoning that I could “figure it out later.”

Today, before I make a money decision, I stop long enough to think it through. And now that I’ve considered the idea of a new car in 2024, the answer is a resounding no.

If you’re considering buying a new car in 2024, these questions can help you decide if now is the right time:

How much will the cost of insurance increase if I buy a new car?Does my monthly budget have the wiggle room, or will it be a struggle to make payments?Do I have money put away for emergencies?Would I rather wait until interest rates drop, or do I plan to refinance the vehicle when rates are lower?

Answer these questions to make the right call for you and your finances.

Where to invest $1,000 right now

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There’s one account that offers a world of benefits to long-term savers. Read on to learn more about it. [[{“value”:”

You may have different goals or objectives you’re currently trying to save for. And if any of those goals fall into the short-term category, then your best bet is to keep your cash in the bank, whether it’s a savings account or a CD. You don’t want to invest money you might need in a few years, because if the market performs poorly or experiences turbulence, you may not have enough time to ride out a downturn.

On the other hand, if you’re saving for retirement, it’s a good idea to invest your money to grow it into a larger sum over time. And you might as well choose an account that offers some nice tax benefits.

In that regard, you have choices. But it definitely pays to consider a Roth IRA.

Benefits galore

With a Roth IRA, you won’t get a tax break on the money you contribute to your account. But you do get the benefit of tax-free gains in your account and tax-free withdrawals.

By contrast, with a traditional IRA, your money goes in tax free. However, withdrawals are taxed in retirement, and gains from your investments are taxed eventually (at the time you take your withdrawals).

Now, you’ve probably gone through periods in life when money has been tight. Many retirees feel that way all the time because, well, they’re retired and aren’t earning a paycheck. So having access to tax-free income is a great thing at a time like that.

Another thing you should know is that Roth retirement plans do not force you to take required minimum distributions (RMDs). To be fair, RMDs aren’t a problem for many seniors, because they’re already taking steady withdrawals from their retirement plans to cover their living expenses.

But let’s say you decide to go back to work on a part-time basis as a retiree because you’re bored, or because you want the financial security of earning a paycheck. You may find that between your wages and Social Security, you don’t need to tap your retirement savings every year. With a traditional IRA, sorry, you have no choice.

But Roth IRAs don’t impose RMDs, so you get the option to leave your balance alone as you see fit. That’s important for two reasons.

First, if you don’t take money out of your retirement plan, it can stay invested and continue to grow in a tax-advantaged manner. Also, if you want to leave an inheritance to your children or grandchildren, not having to tap your IRA makes that easier.

Consider a Roth IRA in 2024

While you have plenty of options when it comes to choosing a retirement plan, there’s a lot to gain by putting your money into a Roth IRA. This year, Roth IRA contributions max out at $7,000 for savers under age 50 and $8,000 for those age 50 and over. If you’re able to hit that max this year, you may be surprised — in a good way — at how much good it does for your finances.

Over the past 50 years, the stock market’s average annual return has been 10%. If you put $7,000 into a Roth IRA this year, in 40 years, it’ll be worth about $317,000 if your portfolio delivers that same 10% yearly return. And remember, that’s just one year’s contribution.

Of course, if you can’t max out your Roth IRA this year, that’s understandable and perfectly fine. But if you can save something, whatever amount you contribute has the potential to grow into a lot of money over time. And the best part? Whatever you gain in your account, the IRS won’t get a dime of it.

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Choosing the right term for your CD will dictate how beneficial it really is. Take a look at how you can decide. [[{“value”:”

Other than finding a good rate, the most important thing to consider when opening a new CD (certificate of deposit) is the maturity length. Do you want a short-term CD — typically a 6-month CD or a 12-month CD — or a long-term CD (three to five years)?

Both types have their ups and downs, so it really comes down to your own banking goals. In general, though, short-term CDs are probably best for most folks in most cases. Here’s a look at why.

Pros of short-term CDs

There are two big reasons to go with a short-term CD.

1. Higher rates

The first, and arguably most important, reason to go with a short-term CD is the APY (annual percentage yield). The very best CD rates tend to be from short-term CDs.

For example, you can easily find a ton of 6-month and 12-month CDs with rates in the 5% range. However, you’re going to have a hard time finding a 3-, 4-, or 5-year CD with a rate above 4.5%.

Now, for context, if you can get close to the above rates, you’re doing pretty well no matter which way you go. The national average is 1.49% for 6-month CDs and 1.40% for 5-year CDs. That said, 5% is still better than 4.5% when it comes to making money.

2. Lower chance of penalty fees

The other big positive of a short-term CD is that your money isn’t locked in for years. You see, CDs have very severe early withdrawal penalties that can equal up to half of your interest income.

If you think there’s any chance you may need your money within the next few years, avoid a long-term CD. Even if you find a magical 3-year CD with a sky-high APY, chances are it won’t be as profitable overall if you’re stuck paying penalty fees because you need your money in year two.

In some cases, even a 6-month CD may be too long to tie up your money, such as with your emergency fund. In this case, stick with a high-yield savings account. You won’t lose access to your money, and the rates right now are actually very comparable to even top CDs.

Cons of short-term CDs

The main downside to a short-term CD is that your rate will expire when your CD matures. If the market rate has decreased, the new rate could be lower than your previous rate.

For example, say you currently have a 12-month CD at 5%. If the Fed drops its rates during that year, most banks will likely follow suit. So when your CD matures, it will roll over into a new 12-month CD and will likely have a rate below 5%.

The primary reason to get a long-term CD: Rate lock

Your rate is locked in for the full life of your CD, so the most compelling reason to get a long-term CD is to lock in your interest rate for up to five years (60-month CDs are as long-term as you can get).

In other words, if you think interest rates are going to drop, then locking in the current high rates with a long-term CD could actually be a smart financial move. And considering that the Fed is forecasted to cut rates a few times in 2024, this wouldn’t be a completely outlandish assumption to make.

But this does bring us back around to the fact that long-term CDs lock in your money as well as your rate. The early withdrawal penalties will likely make the higher rate moot if you need your money before the CD matures.

TL;DR: Shorter terms are better for most folks

To sum it up, short-term CDs are generally better because they tend to offer higher interest rates and your money isn’t tied up for years and years. Long-term CDs can be good if you really want to lock in the current rate, but you have to be absolutely certain you won’t need that money before the CD matures so you won’t get hit with early withdrawal penalty fees.

Where to invest $1,000 right now

When our analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has nearly tripled the market.*

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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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