Money Management

Total home equity in America is huge right now. If you own a home, read on to see what that could mean for you. 

The fact that home values have soared in recent years is a bad thing for today’s buyers. But it puts existing homeowners in a stronger financial position.

U.S. homeowners are now sitting on almost $30 trillion in home equity collectively, according to the St. Louis Federal Reserve. That amounts to roughly $200,000 per homeowner in tappable equity — meaning, the amount of equity you can borrow against in order to still maintain 20% equity in your home.

If you’re sitting on a pile of home equity, you may be tempted to tap it via a home equity loan or line of credit (HELOC). But before you go that route, consider the pros and cons.

Why it could pay to tap your home equity

Some people tap their home equity to do things like renovate their home. You can also borrow against your home for a purpose having nothing to do with your home, like taking a vacation. But it’s generally best to reserve a home equity loan or HELOC for situations where you’re borrowing money to greatly improve your life — such as finishing a basement to add living space to your property or paying for a course that can help you grow your career and boost your income over time.

The upside of tapping home equity is that it can be fairly easy to qualify to borrow, provided your credit is in reasonable shape. The reason? Home equity loans and HELOCs are secured by the homes being borrowed against. If you fall behind on your payments, your lender can eventually force the sale of your home to get repaid. That minimizes your lender’s risk — even though it adds to yours.

The problem with tapping your home equity — today and in general

Generally speaking, borrowing against your home equity means putting yourself at risk of losing your home. This won’t happen if you make your payments on time as you’re supposed to. But who’s to say that you’ll be able to do that? What if you lose your job or something else happens that makes it so you don’t have a paycheck for a while?

If you’re going to borrow against your home equity, make sure you understand the risks involved. And don’t take on payments that are a stretch to begin with.

You may want to consider a personal loan as an alternative to a home equity loan or HELOC. Personal loans are unsecured, so they’re not tied to a specific asset. Falling behind on one is still a bad thing, as it could ruin your credit. But you’re taking a different risk there — one that doesn’t necessarily involve losing the roof over your head.

Of course, following the Federal Reserve’s recent string of interest rate hikes, borrowing money in any form is pretty expensive these days. So for that reason alone, you may want to hold off on tapping your home equity and wait for interest rates to come down.

But if you decide to move forward with a home equity loan or HELOC, shop around with different lenders to see which has the most competitive rates. And read the terms of your borrowing agreement very carefully so you know exactly what you’re signing up for.

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It’s not great to be roughly 20 years into a career with no savings. But read on to see why all isn’t lost. 

It’s important to enter retirement with savings so you’re able to pay your bills without worry once you stop working. But saving for retirement is something you should aim to do over time. And the longer you put it off, the harder it might be to build up a large enough nest egg to meet your future needs.

The average 40-something has $77,400 socked away for retirement, according to data from Northwestern Mutual. But what if your current IRA or 401(k) balance is $0?

That’s not an optimal situation to be in. But it doesn’t mean you’re doomed to a miserable, cash-strapped retirement, either.

There’s still time to catch up on retirement savings

If you’re 40 years old, it could mean that you’ve been working full-time for almost 20 years, assuming you attended college. And if not, it means you’ve potentially been working even longer than that.

In an ideal world, you’d have some retirement savings by now. But life, as we know, isn’t always ideal. Perhaps you struggled in a low-paying job for many years, or you had expenses like medical bills that monopolized much of your income.

Either way, it’s actually pretty darn easy to get to 40 years old without any money in retirement savings. But before you panic, do realize that you actually have more working years ahead of you than you do behind you, assuming you’re looking to retire in your mid- to late-60s, which is a pretty common time frame. So if you commit to funding your retirement savings starting now, you should have ample opportunity to catch up.

Investing is part of the equation

If you were to start pumping hundreds of dollars a month into a retirement plan now and continue that over the next 25 years or so, then you’d probably end up with quite a lot of savings. But let’s be real.

If your current IRA or 401(k) balance is $0, it means you’re not in the habit of parting with that much money for savings purposes on a monthly basis. So it’s not so feasible to go from saving nothing per month to saving, say, $500 per month unless you’re really willing and able to make drastic lifestyle changes.

But the good news is that you can save a smaller amount of money each month and have it go a long way — that is, if you’re willing to invest your retirement savings in the stock market.

Over the past 50 years, the stock market has rewarded investors with an average annual 10% return, as measured by the S&P 500. If you’re willing to go heavy on stocks, you might generate a similar return for your savings.

Meanwhile, let’s say you manage to part with $150 a month over the next 25 years. (To do that, you will have to make some spending changes, but you won’t necessarily have to uproot your life completely.) At an annual return of 10%, you’re looking at a nest egg worth $177,000. That’s more than what the average 60-something has saved for retirement today — $112,500 — as per Northwestern Mutual.

And if you’re worried about taking on the risk of investing in stocks, do remember that the 10% annual return we just talked about accounts for numerous years when the market utterly slumped. When you’re investing for a two- or five-year goal, stocks aren’t really your best bet — there’s just too much risk involved because you don’t have a lot of time to ride out a downturn. But when you’re talking about a 25-year goal, it’s a very different story.

Getting to 40 without retirement savings isn’t the best spot to land in. But you can’t change the past. So rather than make yourself feel bad for being in that situation, give yourself grace and make a game plan to play catch-up.

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IRAs offer tax breaks for retirement savers, but they’re also pretty restrictive. Read on to learn more. 

Setting money aside for retirement could help ensure you’re able to live comfortably once your career comes to an end and you stop collecting a paycheck. And it pays to look at an individual retirement account (IRA) for your retirement savings.

Traditional IRAs allow you to make contributions on a tax-free basis. This year, IRAs max out at $6,500 for workers under age 50 and $7,500 for those 50 and older. So if you’re 40 and you max out your IRA, the IRS won’t tax you on $6,500 of income. And if you fall into the 24% tax bracket, that means you’ll be reducing your IRS burden by $1,560. That’s a pretty good deal.

Plus, investment gains in an IRA are tax-deferred, so you’re not taxed on them until you take withdrawals. With a taxable brokerage account, you pay taxes on gains the year you take those gains.

But while a traditional IRA is generally a good account to take advantage of, there’s one hiccup you might face. Because you get a tax break on your contributions, the IRS wants you to leave your money in that account until age 59½ at a minimum.

If you take a withdrawal at an earlier age, you’ll face a 10% penalty for removing your money too soon (though there are limited exceptions to this rule). And so if you think there’s a good chance you’ll end up retiring before age 59½, you may want to keep some of your long-term savings in a taxable brokerage account.

It pays to give yourself options

Although a taxable brokerage account won’t give you the same benefits as an IRA, there’s a big upside: You can remove your money whenever you want. Want to sell some stocks to take a vacation? Go for it. Want help buying a new car? You won’t face any penalties for tapping your investments.

Similarly, if you decide you want to retire in your early 50s, you can withdraw from your brokerage account without having to stress about penalties. That money is yours. The only thing you’ll have to worry about are taxes on capital gains. But when you take withdrawals from an IRA, you pay those, too.

(To be clear, if you’re treating your brokerage account as a long-term savings account for retirement, it’s best not to take withdrawals for vacations or car-buying purposes. These examples merely illustrate that you can do so without penalty.)

Use both accounts to your advantage

There should eventually be a point when you’ll be able to take IRA withdrawals penalty-free. So it pays to keep some of your retirement savings in one of these accounts. But if you know that early retirement is on your radar, then it makes sense to consider splitting your contributions between an IRA and a regular brokerage account.

Let’s say you want to retire at age 55 and have $300,000 in a brokerage account and $300,000 in an IRA at that point. What you can do is raid your brokerage account for the first several years, and then start tapping your IRA once you’re eligible to do so without penalty. But that way, you at least get penalty-free access to some of your investments at an earlier age.

IRAs are a really great savings tool for retirement. But keeping all of your savings in one is a move you might regret. And if you’re tempted to do so for the tax breaks, remind yourself that contributing to an IRA means committing to keeping your money there until 59½ — or otherwise facing penalties on the savings you worked hard to build.

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Interest rate hikes have been tough on consumers. Is another one about to hit? 

Inflation has been a nagging problem for U.S. consumers for the past couple of years. And the Federal Reserve is determined to do something about it.

The job of the Fed is to oversee monetary policy in the U.S., and its goal is to create and maintain a stable economy. The central bank feels that rampant inflation is not at all conducive to that. That’s why the Fed opted to raise interest rates 11 times over the past year and a half.

When the Fed raises interest rates, it tends to drive the cost of borrowing upward. When that happens, consumers tend to start spending less. And a pullback in consumer spending is exactly what’s needed to bring inflation down.

The Fed is set to meet again on Sept. 19 and 20. And at that meeting, it will have a very tough decision to make: raise interest rates for a 12th time since March 2022, or let things be. The decision the central bank makes could impact your personal finances, so you’ll want to stay tuned to see what happens.

Why another rate hike may be in store

The Fed has come a long way in cooling inflation. In July, the Consumer Price Index, which measures changes in the cost of goods and services, was up just 3.2% on an annual basis. That’s not so far off from the 2% annual inflation rate the Fed likes to target for the long term.

On the other hand, 3.2% inflation is not 2%. So the Fed may decide that another interest rate hike is in order to get closer to its goal.

How will another interest rate hike affect you?

The extent to which you’ll be impacted by interest rate hikes will depend on whether you have plans to borrow money in the coming months.

If you intend to buy a car, you may get stuck with a higher interest rate on an auto loan if the Fed raises interest rates again. Similarly, if you’re thinking of signing a personal loan, your costs could be higher there. And if you owe money on a credit card or HELOC balance with variable interest, another rate hike from the Fed could drive your monthly payments upward. That’s something to brace for.

On the other hand, if you’re someone with money in savings, another rate hike could work to your benefit in the form of a higher interest rate on your cash reserves. CD rates could rise as well.

In fact, that’s why interest rate hikes are such an effective means of fighting inflation. When the Fed needs consumers to stop spending, enticing them to keep more money in the bank with higher interest rates on savings is a good way to go about that.

All told, we don’t know exactly what’s going to come of the Fed’s late September meeting. The central bank might leave interest rates alone, but a small rate hike isn’t out of the question. Pay attention to what happens so you know what to expect in terms of borrowing money, juggling your existing debt, and putting cash into the bank.

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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 positions in Target. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.

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A $20,000 savings balance might seem huge. Read on to see why it has the potential to fall short. 

It’s important to have money in savings for unexpected bills and financial emergencies. You never know when you might need to spend money on a home repair, or when you might lose your job through no fault of your own. Having a solid emergency fund could make it so you don’t instantly need to reach for a credit card — and rack up a costly balance — when life doesn’t go your way.

As a general rule, it’s a good idea to have enough money in an emergency fund to cover three full months of essential bills. If you’re able to save beyond that point, even better. But seeing as how 63% of Americans don’t have enough money in savings to cover an unplanned $500 expense, according to a recent SecureSave survey, even hitting the three-month mark may be a stretch for a lot of people.

Meanwhile, you might have a fairly large savings balance to the tune of $20,000. That’s definitely a lot of money. And in some cases, that might constitute a really robust emergency fund. But in some situations, a $20,000 emergency fund might also leave you short.

Why $20,000 in savings may not be enough

Considering that so many people don’t even have $500 in savings, you may be wondering how it can be that a $20,000 emergency fund isn’t adequate. The answer is that it may be more than adequate for you. But it’s not necessarily adequate for everyone.

When calculating what you need to have in emergency savings, it’s important to add up your personal expenses. And if you happen to spend a lot of money on living costs, it’s possible that a $20,000 savings balance wouldn’t suffice in sustaining you for three months without a paycheck.

Let’s say your essential spending reads as follows:

$3,000 a month on housing, including your mortgage payment, property taxes, and insurance$1,000 on car payments and auto insurance$800 on groceries$200 on medication$600 on utilities$200 on cellphone service$1,200 a month on childcare

All told, you’re spending $7,000 a month on essentials. A $20,000 emergency fund might cover close to three months of bills, but you might come up a little short.

On the other hand, let’s imagine your personal spending on essentials amounts to half of that amount each month, or $3,500. In that case, you’re in excellent shape with a $20,000 emergency fund.

It’s all about you

One mistake people tend to make when saving for emergencies is landing on a random number and assuming it’ll work for them. It’s easy to see why you’d think a $20,000 emergency fund would be more than adequate. But if your expenses are higher than average, that may not cut it.

So spend a few minutes adding up your essential bills to see what your personal spending amounts to monthly. And then multiply that by three to get your minimum emergency savings target. It’s really that simple.

Of course, you may find that you have nowhere close to three months’ worth of bills in savings, and that’s not necessarily something to panic over, either. Building that safety net can take a lot of time.

But if you see that you have work to do, make a plan. Set up an automatic transfer to send an extra $100 a month into your savings from this point forward, or an extra $50 or $20 if that’s what you can swing. The key is to know what to aim for and do your best to get there.

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