Money Management

Foreclosure could destroy your credit, not to mention leave you without a home. But should you withdraw from retirement savings to avoid it? 

Many people buy homes with every intention of repaying their mortgages. But sometimes, things happen.

If you lose your job or get hit with a string of unplanned bills, you might land in a situation where you struggle to keep up with your housing payments. And if you miss too many payments, you could land in foreclosure.

The problem with foreclosure is twofold. First, if a lender forecloses on your home, it means you no longer have a home to live in.

A foreclosure could also cause major damage to your credit score. And since a foreclosure will stay on your credit report for seven years, it means you might struggle for a long time to do everything from getting approved for a credit card to securing a rental.

Now, if you truly have no funds to use to pay your mortgage, foreclosure may be inevitable. But what if you have a modest balance in your IRA — enough money to get current on your housing payments and tide yourself over until your financial situation improves?

You may be tempted to tap your IRA to avoid foreclosure. But should you?

You’ll risk a massive penalty

IRAs offer tax breaks because the IRS wants to encourage workers to save for retirement. So if you put money into a traditional IRA, the IRS won’t tax you on those contributions.

In exchange, the IRS wants that money to stay where it is until you reach retirement age. If you take a withdrawal before age 59 1/2, you’ll risk a 10% penalty on the sum you remove. A $25,000 withdrawal, for example, will result in a $2,500 penalty.

Plus, IRA withdrawals are taxed, so you’ll lose a chunk of what you remove to the IRS regardless. This isn’t a penalty — the same taxes would apply in retirement. But it’s a negative consequence nonetheless.

You’ll risk falling short on funds in retirement

The more money you remove from your IRA ahead of retirement, the greater your risk of not having enough money to live on during retirement. Remember, too, that when you raid your IRA, you don’t just lose out on the principal sum you remove. You also lose out on potential growth.

If your IRA is invested at an average annual 10% return, which is in line with the stock market’s long-term average, then removing $25,000 to avoid foreclosure won’t just mean ending up $25,000 short in retirement. Rather, it will mean having almost $170,000 less if retirement is 20 years away.

Alternatives to raiding your IRA

Taking funds from an IRA ahead of retirement could have really unfortunate consequences. So can foreclosure. It’s hard to say whether you should raid your IRA to avoid foreclosure or not.

But what is certain is that it pays to take some steps before reaching that point. One step is to contact your lender and discuss a short sale.

In a short sale, your lender accepts a certain price for your home and writes off the remainder of your mortgage balance. If your home is only worth $250,000 and you owe $320,000 on your mortgage, your lender would write off the $70,000 difference.

A short sale, too, will remain on your credit report for seven years. But a short sale isn’t considered to be as unfavorable as a foreclosure, so the damage may not be as severe.

You can also try to look at ways to monetize your home so you can stay in it. Renting out portions of your living space might work to drum up the cash you need, so if you have a finished basement or garage, that’s worth considering. You can even rent out a parking space in your driveway if there’s demand for it.

You may decide to raid your IRA to avoid foreclosure and stay in your home. If you feel that your current financial situation is temporary and likely to improve, then the hit to your IRA may be worth it — even with the penalty involved. That way, you can stay put and avoid years of credit score damage.

But think carefully before tapping an IRA ahead of retirement. Doing so could put you in an even worse situation than a mid-life foreclosure.

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It’s not too late to get your holiday shopping done early. Be sure to maximize your savings as you shop online by finding tools that can help you save big. 

Now that October is almost over, you may be thinking about getting your holiday shopping done. By starting your holiday shopping early, you’ll have more time to compare sales to find the best deals. As you shop, don’t forget to use online tools that can maximize your savings. Below, I’ll outline some tools that can help you keep more money in your bank account as you shop.

1. Coupon code apps and websites

Who doesn’t love a discount? You can take advantage of special sales and clearance opportunities when shopping online. But you could save more money using coupons and promo codes. Many of your favorite retailers have active coupon codes you can use to get additional discounts during the checkout process.

Review our list of the best coupon apps and browser extensions to learn more so you can maximize your savings.

2. Price comparison websites and browser extensions

Another way you can save money as you check off your holiday shopping list is by using online price comparison tools. One such tool is Google Shopping. You can search by product and compare prices from various retailers. In addition to showing you prices, Google provides estimated taxes and shipping details to help you compare the total cost.

Another tool to consider using is Capital One Shopping. Tools like this can ensure you don’t spend more than necessary.

3. Cash back apps

Cash back apps are another valuable tool for online shoppers. When shopping with a participating retailer, you can earn cash back rewards. You won’t get an immediate discount on your shopping bill, but once you accumulate enough rewards, you can cash out your earnings to a bank account, or a payments app like PayPal.

Some popular cash back apps, like Rakuten, offer higher reward rates during the busy holiday season, so don’t miss out on extra rewards.

How to save on shipping costs

As you shop online, don’t forget to review shipping costs. This additional expense impacts your personal finances. Many online retailers offer free shipping if you meet order minimums. Depending on the retailer, this spending threshold is often between $35 to $50. Consider buying multiple items from one retailer to qualify for free shipping.

Another way to save on shipping costs is to shop with retailers that offer in-store pickup. If a store is near your home, this is an easy way to avoid shipping fees. Alternatively, some retailers have paid membership programs that offer free shipping perks, like Amazon Prime. In addition to free shipping benefits, there are many little-known perks to Prime memberships.

Don’t miss out on credit card rewards

Many online shoppers use credit cards to pay for their purchases. Before you check out, consider what payment method could offer you the most rewards. By using rewards credit cards, you can earn points, miles, or cash back when you spend money with your cards. If you prefer cash rewards, check out our list of the best cash back credit cards.

When using credit cards, only charge what you can afford. It’s best to pay your entire credit card balance off each month. If you carry a balance on your card, you’ll pay credit card interest fees, which can be expensive. You don’t want to risk racking up credit card debt. But the good news is you can avoid overspending beyond your means by setting and following a shopping budget.

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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.Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Natasha Gabrielle has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, and PayPal. The Motley Fool recommends the following options: short December 2023 $67.50 puts on PayPal. The Motley Fool has a disclosure policy.

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You have your choice of bank accounts to help your money grow with interest. Learn whether a savings account or a CD should currently be higher on your list. 

Right now is an excellent time to have money in the bank. Why’s that, you ask? Well, the Federal Reserve’s repeated interest rate hikes have increased the rate banks pay to lend to each other, and as a result, those banks have steadily increased APYs on deposit accounts for consumers. This includes savings accounts and certificates of deposit (also known as CDs).

If you’ve got some money saved up and are looking for a new home for it right now, this article is for you. Let’s discuss the situations CDs and savings accounts are best for, and learn how to pick the right one for you and your money.

CD: A future purchase on a set timeline or income over time

If you are reasonably sure you won’t need to add any more money to your current balance and now you’re ready to just let it sit and grow with interest, a CD is a good option for you. For example, let’s say you’ve saved up for a dream vacation, but your trip isn’t until next year. If you open a 6- or 12-month CD account, you’ll keep your money safe and earn a solid rate of interest on it, too.

The one catch is that you won’t be able to withdraw or add any money during the CD’s term, lest you incur a penalty equal to a few months’ worth of earned interest (or more — it depends on your CD issuer’s rules). So if you’re still actively saving, or don’t quite know when you’ll need your money, a CD might not be a good fit (consider a savings account instead — more on the below).

However, if you’ve got a chunk of money and different goals, you could try building a CD ladder. This is when you divide up your money and open CD accounts of differing lengths, ensuring you’re frequently having money (plus interest earned) become available. Plus, you’ll be able to take advantage of increasing CD rates over time. Check out the best CD rates to find the best accounts for your CD ladder.

Savings account: Emergency fund or other savings without a timeline

What if you’re still actively saving money and don’t want to lock your money up for a set period? This is where a savings account shines. It gives you flexibility, and these days, the APYs on the best high-yield savings accounts are very generous — you could earn upward of 4% or even 5% on your saved cash.

Note that I’ve specified “high yield” for your new savings account. What’s the difference? Well, a traditional savings account doesn’t come with rates that beat inflation (currently at 3.7%, according to the latest Consumer Price Index Summary report). Per the FDIC, the current average APY on a savings account is a measly 0.46%. That’s a far cry from the 4% or 5% you could command with a high-yield savings account! But this average includes savings accounts offered by big traditional banks — which often pay in the neighborhood of 0.01%. So rather than putting your cash into one of these, look to online banks for a well-paying account.

A savings account is an especially good place for your all-important emergency fund. This is the money you have saved for unplanned expenses, which are always lurking around every corner (think a tire blowout, a surprise trip to urgent care, or a new hot water heater). Since you always need to have this money available, and having to pay a penalty to access it would be a blow on top of whatever emergency expense you have, avoid CDs for your emergency fund or any money you could need with little to no notice.

Two great choices for your money

No matter which account you land on, both CDs and savings accounts are a solid place to keep your cash. Just ensure you’re choosing an FDIC-insured bank, as up to $250,000 of your money will be protected in the event of bank failure. Take advantage of the higher APYs being offered and watch your money grow.

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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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Remodeling and moving can both allow you to get a better home. Keep reading to find out what to consider when you’re making the choice. 

If your current home is not working well for you, you have two primary options. One option is to remodel and the other is to move.

In some cases, moving is the better choice, but in others you should remodel. To help you decide what makes sense for you, ask yourself these key questions.

What is your mortgage rate compared to the current rate?

One of the single most important factors to consider is whether you would end up having to pay a much higher mortgage rate if you move now.

Mortgage loan rates repeatedly hit record lows during the pandemic, but anyone who bought a house in the last decade — up until late summer of 2022 — probably has a mortgage rate under 5.00%. Now, unfortunately, rates are hovering around 7.00% to 8.00%.

Giving up a low-interest mortgage on your current home to get a much more expensive loan now may not make sense. So if you have a very low rate on your loan, chances are good that remodeling would make sense rather than getting in touch with a mortgage lender to buy another home now when both home prices and rates are high.

Will you be over-improving the home for the neighborhood?

Before you remodel, you need to consider whether doing so would cause your home to be too high-value for where you live.

See, most people don’t want a house that is significantly more expensive than the homes around them. Neighborhoods at certain price points typically cater to people within that price range — not those who could afford a much costlier home.

If you have over-improved, you’ll have the “best” house in your neighborhood but it will be worth more than most buyers want to pay for homes in the area. In this case, you’ll likely end up losing a lot of money on the upgrades you made when you do decide to sell in the future.

If you can’t make your home the way you want it without making it an outlier where you live, moving could be the better bet.

Are you comfortable managing a remodel?

Remodeling a property is a lot of work. You’ll need to find contractors, make sure they do the work properly, figure out a way to finance the construction costs, and deal with problems that arise. You’ll need to make sure the contractor gets the proper permits. And you’ll need to make a zillion tiny decisions and hope that your project comes out matching your vision in the end.

Not everyone has the time and ability to do that — or the willingness to live in a construction zone while the project is being done. If you dread the idea of spending every weekend visiting design centers to try to figure out what your remodel should look like, moving may be a better bet.

How much would remodeling cost you versus moving?

Finally, you’ll need to compare the costs of remodeling to the costs of moving to see which would result in a bigger hit to your savings account. If you could get the home you want for $50,000 more by buying a new property, but turning your current house into your dream home would cost $100,000, then moving is a better idea for your finances.

Ultimately, you need to consider all of these issues to decide which course of action is best. It’s a big decision, so take the time to think about it and run the numbers before moving forward with either choice.

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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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Automatic 401(k) contributions increase retirement savings rates, but you can still automate retirement investing even if you don’t have a 401(k). See how. 

Workplace 401(k) plans can be used to save for retirement. These accounts provide tax advantages, as people who contribute don’t pay taxes on the money they invest in the year they put the funds into their account. Employers also sometimes match contributions.

There’s another good reason why 401(k)s help people end up with enough money in retirement: Many plans auto-enroll workers, which means people are signed up by default and would have to opt out if they didn’t want to contribute.

Studies have shown auto-enrollment actually comes close to doubling the number of people who participate in plans, so it makes a huge difference. That’s because most people tend to stick with the status quo or path of least resistance.

But what if you don’t have a 401(k) at work? Can you still set up automatic retirement savings for, say, an IRA account? Absolutely. Here’s how to do it.

1. Determine how much you want to invest for the future

The first step you’ll need to take if you want to automate your retirement investing is to determine the amount you actually want to save each month. To do that, you’ll need to figure out your retirement goal and then break that big goal down into smaller ones.

A good rule of thumb is that you’ll need 10 times your final salary to retire. So assume you’ll get a 2% raise each year from now through your chosen retirement age, estimate your final salary, and multiply that number by 10. This will give you the amount you need to have invested.

The calculators on Investor.gov can help you determine how much to pull out of your bank account and put into your brokerage account to hit that target.

2. Open a tax-advantaged retirement plan with a brokerage firm

Once you know how much to invest, you’ll need to open a tax-advantaged retirement account at a brokerage firm. Most people can open one of two types:

A traditional IRA: This comes with a tax break in the year you invest in your account. You’ll pay taxes as a retiree on withdrawals.A Roth IRA: This doesn’t provide an upfront tax break but money can be withdrawn tax-free. This is a better option for those who expect to be taxed at a higher rate in retirement.

Almost any brokerage account or financial institution will allow you to open either type of account online. Just check to confirm the broker doesn’t charge any fees and offers tools and investments you want, such as ETF screeners, low-fee ETFs, or no-load mutual funds. Then fill out an application and provide your personal details and bank information to get your account open.

3. Use your brokerage or bank account to set up your automatic contributions

Finally, either your checking account or your brokerage account should offer the option to set up automatic contributions to your brokerage firm. You can usually find this option under the transfer or bill payment section of your bank account or under the deposit section of your brokerage account. Your bank or brokerage firm should also be able to walk you through this process if you can’t figure it out. Call customer service if you need help.

By taking these three steps, you can set yourself on the path to retirement success without much further effort on your part.

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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.Christy Bieber 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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