Money Management

A regular brokerage account gives you more flexibility with your money. But you’ll lose out on major tax savings for your retirement funds. Read on to learn more. 

It’s important to save money for retirement so you have a nest egg to tap later in life. Having savings could help ensure you’re able to cover your expenses in retirement without financial stress.

It’s typically a good idea to assemble a portfolio of investments for retirement — and ideally go heavy on stocks while retirement is still many years away. That’s because stocks tend to generate strong returns over long periods, and you’ll need those to grow your balance.

You have choices when it comes to choosing a home for your retirement portfolio. You could keep those assets in a regular brokerage account. But you may want to limit yourself to only some of your assets. If you don’t save for retirement at all in an IRA or 401(k), you’ll be giving up a host of tax breaks.

When the IRS throws you a bone

It’s not always easy to find tax breaks that save you money. But in the context of retirement savings, there’s a really easy way to reap tax benefits.

All you need to do is fund a traditional IRA or 401(k) plan, and your contributions will be tax-free. So if you put $5,000 into one of these accounts, the IRS won’t tax you on $5,000 of income.

Traditional IRA and 401(k)s also allow for tax-deferred investment gains. This means you won’t pay capital gains taxes every year as you make money in your portfolio. You’ll only be taxed when you take withdrawals.

Roth IRAs and 401(k)s, meanwhile, don’t give you a tax break on the money you put in. But these accounts give you tax-free gains and withdrawals.

By contrast, you won’t get any of these tax breaks with a regular brokerage account. And that means if you keep all of your long-term savings in a taxable brokerage account, you’re giving up a lot of IRS benefits — benefits that could make it easier to save for retirement in the first place.

Plus, when you have to pay taxes on capital gains every year, that’s money that comes out of your pocket instead of being available for you to invest. So that, too, could work to your detriment over time.

For example, let’s say you’re writing the IRS a $1,000 check every year for 40 years because you owe capital gains taxes on your investments. If, instead of doing that, you were to invest an extra $1,000 a year over 40 years at a 10% return, which is in line with the stock market’s long-term average, you’d grow your $40,000 in investments to about $441,000.

It’s a good idea to fall back on a brokerage account to some degree

Only saving for retirement in a regular brokerage account could mean losing out on many tax benefits. But it’s a good idea to keep some of your nest egg in a taxable brokerage account for one big reason — these accounts are not restrictive.

You can sell investments in a regular brokerage account and take that money out at any time without penalty. By contrast, tapping an IRA or 401(k) prior to age 59 1/2 generally results in a 10% early withdrawal penalty.

As such, you don’t want to keep all of your savings in an IRA or 401(K). If you want to retire at age 54, for example, that may not be an option without a penalty. So having a portion of your savings in a regular brokerage account gives you more flexibility. But the key is to put a portion of your nest egg in a regular brokerage account — not 100%.

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Many Americans have been concerned about an impending recession. Keep reading to learn how much money to keep in your emergency fund. 

Many experts expressed concern that the U.S. would go into a recession in 2023, in part due to the Federal Reserve increasing interest rates to fight inflation. Despite these fears, no recession has materialized yet and concerns are waning as the economy continues to grow at a slow but steady pace.

Still, economic recessions are an inevitable part of life, they will happen eventually, and there remains a chance that one could come soon. If you are worried about how your financial life would withstand a recession, you’ll probably want to put some money into a high-yield savings account to see you through the tough times.

But just how much should you have saved? Here’s what you need to know to help you decide.

Save enough to cover several months of living expenses

One of the biggest risks of a recession is that you will lose your job, not be able to find another one quickly, and end up not being able to cover your bills.

To avoid that, set aside enough money in your bank account to cover several months of living expenses. The exact number of months is going to depend on just how stable your job is and how long it would take you to find a new one.

The good news is, historically, recessions have not lasted for a long time. On average, since 1950, recessions have lasted around 10 months with these downturns spanning between two months and 18 months. So, if you wanted to be pretty conservative, you could opt to save 10 months of living expenses, as that would be enough to get you through the average recession.

Of course, you don’t necessarily need enough savings to cover you during the entire downturn as you might be able to get a new job before the recession ends. As of September 2023, the average length of time unemployed was 9.2 weeks. While periods of unemployment generally last longer in a recession, chances are still good you’d probably find a job in less than 10 months.

If you work in an industry most likely to be impacted by a recession such as retail, the hospitality industry, travel and tourism, real estate, restaurants, or manufacturing and warehousing, then erring on the side of caution by saving enough to cover 10 months of living expenses might be smart.

Otherwise, the standard recommendation of saving three to six months’ worth of expenses is most likely the way to go to strengthen your personal finances.

Don’t go overboard when saving for a recession

The reality is that recessions are a part of life. You’re going to encounter them several times throughout your adult life. But, while it’s good to be prepared for them — or for any surprise expenses — you don’t want to go overboard or panic.

Instead, prepare for them like any other unexpected expense like a medical emergency or a period of unemployment. Having three to six months of living expenses set aside should be enough for most people to get through tough times with their finances unscathed.

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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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Many people subscribe to more than one streaming service. But make sure you’re not making expensive mistakes. Find out how you could be wasting money. 

Streaming services are a typical expense for many households. These subscriptions can provide hours of entertainment at an affordable price point. But make sure you know how many services you’re currently paying for and that you don’t forget to use them. It’s essential to keep track of every membership or subscription you sign up for, or it could impact your wallet.

50% of U.S. households subscribe to four or more streaming services

Streaming platforms have increased in popularity over the years. Seeing movies at a theater can be costly, and for many households, it’s not a frequent expense included in their regular budgets. Streaming services offer a more affordable way to watch unlimited TV shows and movies without draining your checking account.

Many people subscribe to multiple streaming services, so they have more variety. A Leichtman Research Group, Inc. study found that 50% of U.S. households have four or more streaming video services. While having more show and movie choices can be nice, it can be easy to forget about streaming service subscriptions when you use multiple apps.

Here are three costly mistakes you could make when subscribing to multiple streaming services.

1. Some subscriptions could go to waste

If you’re subscribing to several streaming services, keeping track of them all can be a challenge. Life gets busy, and even if you’re a big TV and movie watcher, you may forget to use some of the services you’ve been paying for, which results in wasted money.

Don’t let your subscriptions go to waste. Now is an excellent time to check what services you’re paying for to ensure you’re putting them all to good use. If not, you may want to cancel some services for now to make your next credit card bill less expensive.

2. You may spend more money than you planned

Life is expensive, and every additional expense, no matter how cheap, impacts your personal finances. Streaming apps can be affordable, but the total cost can add up quickly when you subscribe to multiple platforms. Before you know it, your monthly entertainment costs can be more expensive than a cable package.

You may spend more than planned if you subscribe to multiple streaming services. But you can set and follow a budget to avoid this. You can use one of the best budgeting apps to monitor your spending. Developing good budgeting skills can help you avoid credit card debt.

3. You’re not bundling services so you pay more than necessary

If you use multiple streaming services but signed up for all of them a long time ago, you may be forgetting about potential discounts. Some streaming services now offer bundles with discounted pricing. One example is Disney+ and Hulu. The Duo Basic and Duo Premium bundles provide savings of more than 30% over paying for services individually. If you can combine some services in this way, you can save yourself some money on entertainment costs.

Do a financial checkup to avoid wasting money

If you’re using all of your streaming services and can afford the cost you’re paying for them, then you’re in good shape. But if you haven’t reviewed your spending habits recently, you could spend more than you realize or accidentally keep paying for streaming services you’re not using. Take a few moments to do a quick financial checkup and audit the subscriptions you’re paying for. This step could help you keep more money in your pocket.

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Investing in your 30s gives your money a lot of time to grow. Here’s a strategy you can adopt. 

A lot of people struggle to save and invest money in their 20s, and for good reason. When you’re fairly new to the workforce, you may not be in a position to command such a high salary. And the majority of your income may be needed to cover things like your car payments and rent.

By the time your 30s roll around, you’ll hopefully be in a strong position to start investing your money. By then, you may be earning more, and you may have a better handle on your finances overall.

If you start investing in your 30s, you’ll give yourself ample opportunity to grow wealth in time for retirement. But it’s important to adopt the right strategy so your efforts pay off.

Go heavy on stocks

There’s risk involved in owning stocks. The market can be fairly volatile, and you could see the value of your portfolio swing wildly from one week to the next.

That’s not such a big problem when you’re investing over a few decades, though. So if you’re in your 30s, you’re probably able to take on the risk of investing in stocks because you may not be touching that money for three decades, or until whenever it is you retire.

In fact, over the past 50 years, the stock market’s average annual return has been 10%, as measured by the performance of the S&P 500. But that average return accounts for years of strong returns and years of negative returns.

If you start investing $250 a month in a stock-heavy portfolio at age 32, and you do so through age 67, you stand to retire with about $813,000, assuming that 10% average annual return. Make it $350 a month, and you’ll have well over $1 million.

Make sure to maintain a diversified portfolio

Being in your 30s means you’re able to take some risk in your portfolio, and that’s a good thing, since it could lead to stronger returns. But it’s also important to maintain a diverse investment mix at all times.

A good way to start is to invest in an S&P 500 ETF. This will effectively allow you to invest in the 500 largest publicly traded companies in the stock market without having to buy shares of each one individually.

Once you’re able to learn more about choosing stocks, you can move on to buying shares of individual companies if you’d like. But when you do that, keep that diversification principle in mind.

You don’t, for example, want to make it your mission to buy a new tech stock every month. Rather, if you’re buying shares of a tech stock one January, that February, aim to invest in a different industry, like retail or banks.

Also, know that you don’t necessarily need to hold hundreds of different stocks in your portfolio. Doing so, in fact, is not so advisable, because it’s hard to keep track of 224 companies. If you hold some S&P 500 ETFs along with 30 to 40 stocks or so, you should be well-diversified — as long as those stocks represent different corners of the market.

Some people don’t begin to invest until well after their 30s. But if you’re able to get started at that time, you may find that you’re able to amass quite a lot of wealth in time for retirement.

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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.

 Read More