Money Management

More people are investing in IRAs, and balances are growing. Learn more about how IRAs are working and whether one might be right for you. [[{“value”:”

When it comes to retirement, you’ll typically hear a lot of bad news. For example, Americans aren’t saving enough. And Social Security’s trust fund is in trouble. And it is indeed true that a good number of people may find themselves without the funds they need to retire comfortably — and that Social Security benefit cuts could be needed in the coming decades without congressional action.

But for once, there is some actual good news. It centers around IRA accounts, and there are a lot of positive data points to rejoice about.

More Americans are saving, and account balances as growing

According to recent research from Fidelity, a growing number of Americans have opened IRA accounts in recent years. In fact, as of the third quarter of 2023, there were 14.6 million IRA accounts — an 11% increase compared with the same time the prior year.

Gen Z has been especially responsible when it comes to opening and investing in IRAs. This age group alone saw a 63% increase in the number of IRA accounts in 2023 compared with the prior year. Not only that, but the overall dollar contributions they made was up by 51% during that same time period.

IRA balances have also been growing for all Americans. The average balance hit $109,600 in the third quarter of 2023. While this was a 4% decrease from the prior quarter, it was an 8% increase from the prior year. It’s also 28% higher than the average account balance was just a decade ago.

All of this suggests more people are opening IRAs, investing in them, and seeing their money grow — which is great news. A big IRA balance can provide essential support during retirement.

Is an IRA right for you?

With so many Americans seeing success in their IRAs, you may be wondering if you should open one if you haven’t already. But the answer depends on your situation.

What if you already have a 401(k)?

If you have access to a workplace 401(k), you should generally be contributing enough to that first to earn your full employer match. An employer match is a contribution your employer makes to your account when you put money into it. For example, your employer might match 50% or 100% of your contributions up to 4% or 6% of your salary.

You’ll want to get this free money whenever possible as your first priority. Once you have met your employer match, though, opening an IRA can be a good idea rather than contributing more to your 401(k).

What if you don’t have a 401(k)?

If you don’t have an employer match or a 401(k) at all, an IRA can be a great tool to save for retirement. See, you can open an IRA with any brokerage firm, so you don’t need an employer to provide one. Depending on whether you open a traditional or a Roth IRA, you can also get a tax break for your contributions in the year you make them (with a traditional IRA) or can take tax-free withdrawals from your account in retirement (with a Roth IRA).

IRAs provide access to more investment choices than 401(k)s do, and some of those choices may be less expensive than what 401(k)s offer. This gives them a big edge over your workplace plan once your match has been earned. And if you’re self-employed, there are even special IRA options for you.

So if you have a little extra money after maxing out your 401(k) match, or if you don’t have a 401(k) at all, then opening an IRA is definitely worth considering. You could join the growing number of Americans finding success with these retirement investment plans.

Where to invest $1,000 right now

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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.Christy Bieber 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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A layoff can be a hard thing to cope with. But read on to see what essential financial move you should make after falling victim to one. [[{“value”:”

The U.S. economy is in a fairly strong place, and the unemployment rate is low. Despite that, unemployment activity has been unsettlingly high to start 2024.

In January, U.S. companies cut more than 82,000 jobs, according to Challenger, Gray & Christmas. That’s a 136% increase from December.

It’s not inconceivable that your job might land on the chopping block at some point this year. And if that were to happen, it could deal a huge blow to your personal finances.

What’s more, perhaps you’re one of the unlucky folks who’s starting 2024 with a job search on your hands due to having been let go. If that’s the case, it might take you some time to find a new job and recover financially. But once that happens, there’s one important thing you should pledge to do.

Build yourself a solid emergency fund

The scary thing about losing a job is that it can happen without warning. Unfortunately, it can also happen even if you’re an employee with a great reputation and work record.

The easiest way to get through a period of unemployment is to have emergency savings to tap. So once you’re back on your feet following a layoff, make every effort to build a solid emergency fund so that the next time you find yourself out of a job, you’ll have cash reserves to cover your bills. Without a fully loaded emergency fund, you might end up deep in credit card debt, which could create a world of financial upheaval.

How much money does your emergency fund need?

As a general rule, your emergency fund should contain enough money to cover a minimum of three months of essential expenses. The logic is that it might take you three months to send out resumes, go on interviews, receive an offer, and get onboarded. So it’s important to have enough money in your savings account to tide yourself over for three months.

But in some cases, it pays to save beyond three months’ worth of bills. You may want to aim for a six-month emergency fund or higher if:

You have dependents and are the sole earner in your householdYou have a very niche job, and replacing it will be difficultYou work in a struggling industry where jobs are harder to come by in generalYou have expenses you can’t easily unload, like a mortgage

That last point is worth digging into a bit, because most people have expenses they’re liable for, whether it’s an apartment lease or a car loan. However, if you’re midway through a lease and you lose your job, your landlord may be willing to let you out of your lease if you explain your situation. From there, you could seek to move in with friends or your parents until you’re gainfully employed.

When you own a home, things are a bit different. You’re in a much more committed housing situation than if you’re renting a home on a 12-month basis. In that case, padding your emergency fund makes sense.

All told, the more money you can set aside for emergencies, the better. But for now, commit to a three-month emergency fund as a starting point and see how well you can do from there. It’s quite possibly the most important financial move you might make — in the context of a layoff and in general.

Where to invest $1,000 right now

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Checking accounts, savings accounts, CDs, and money market accounts can all be opened at banks. Read on to learn how each works. [[{“value”:”

There are four primary types of FDIC-insured bank accounts where you can store money. But there are really important differences between them. Understanding which one is right for you is important to putting your money in the best spot. Here’s what you need to know.

1. Checking accounts

Checking accounts are meant for money you’re going to be using for everyday living. You’ll most likely have your paycheck deposited into one, and you will be able to access the money whenever you want to by writing checks or using a debit card or taking cash out of an ATM. Depending on your bank, you may incur fees if you use an out-of-network ATM.

There are no limits on withdrawals from a checking account — you can take money out as often as needed as long as you have enough cash in the account. But chances are good you’ll earn little or no interest on the money in your checking account. The national average checking account interest rate is .07%.

These accounts are not a good place for your savings, since you can access the money so easily and likely won’t earn any returns on it.

2. Savings accounts

Savings accounts, not surprisingly, are a place for you to save money. You’ll usually move money from checking into savings when you have a specific reason for doing so, like saving for an emergency fund, a vacation, or a big purchase.

Most savings accounts don’t come with ATM access, and some have limits on how many withdrawals you can make per month (the government used to limit you to six, but this regulation isn’t enforced any more). Still, while your bank may restrict the number of times you can take money out, the funds are accessible when you need them with no penalties for withdrawal.

Since these accounts are for saving, you will usually earn interest. In a typical savings account, the rate is still pretty low. The national average is just 0.47% — which is still better than a checking account. There are also many high-yield savings accounts where you can earn much more — upwards of 4.00% in some cases in this high-rate environment we’re in now.

If you’re going to need your money accessible in the coming years but want to earn a good return on it and don’t just want it in your checking account since it’s earmarked for a specific purpose, a savings account is a good option.

3. Certificate of deposit

Certificates of deposit (CDs) are another great option to save, but they’re different from the others. You’ll choose a CD term such as one month or three months or five years, and you’ll have to leave your money invested for that duration to avoid penalties. In exchange, though, you’ll usually earn more interest than a savings account offers. And, the rate of return you’ll get is fixed, unlike with a savings account where the rate you’re paid fluctuates as market rates change.

The national average interest rate on a 24-month CD is 1.86% and on a 60-month CD, it’s 1.41%. It’s definitely possible to find CDs with much better yields, though. So, if you have money you’re saving for a specific goal that you’re going to need in the next five years or less but you definitely won’t need before the end of the CD term you select, this is a great option.

4. Money market accounts

Money market accounts are kind of a hybrid between a savings and checking account. They usually provide higher rates of return than either savings or checking accounts do, with a national average rate of 0.65%. And they typically come with check-writing privileges and debit cards, unlike savings accounts. However, banks typically limit the number of withdrawals you can make per month, much as they do with some savings accounts.

If you have short-term savings goals, want to earn a good return, want easy access to your money, but don’t need to make too many withdrawals, money market accounts are a good option.

Now you know the differences between four bank account types and can decide which is right for your money. For most people, having several of these accounts open makes good sense since they serve different purposes but can all work together as part of your broader financial plan.

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.*

They just revealed what they believe are the 10 best stocks for investors to buy right now…

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*Stock Advisor returns as of February 6, 2024

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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