Money Management

Savings accounts are paying record-high interest rates, making them an attractive option. Find out why stock market investments may still make sense. 

The continued warnings about an impending recession have made a lot of investors nervous. So much so that some Americans question whether they’d be better keeping their money in cash rather than investing it in the stock market. Particularly since some top high-yield savings accounts are paying APYs of around 5%.

But deciding how much to keep in cash and what to invest has more to do with your own financial situation than what the economy is doing or what rates savings accounts are paying.

Investing vs. saving

The difference between investing and saving is at the heart of the cash versus stocks debate. Both are important foundations for financial stability, but they play different roles in our financial tool kits.

Saving: The idea is to keep your savings — essentially cash — in a relatively safe place, such as a savings account or a certificate of deposit. Safety is the name of the game here. Savings are for your emergency fund or money you’re saving for something specific, like a new TV or vacation.Investing: Investing is about buying assets, such as stocks, that you believe will perform well in the long term. You might invest money you plan to use in your retirement, or for other long-term goals. Investments carry more risk than savings and there may be years when your assets fall in value. However, historically over time, assets held in a brokerage account have outperformed cash left in savings.

As Ryan King from Making Money Simple explained when we asked about his cash versus stocks strategy, “I keep an emergency fund and any sinking funds in cash, a sinking fund being a pot of money that I am saving for a specific goal. For example, for a house deposit or for a holiday. Any other money I invest.”

How investing can build wealth

Consistently investing even a small amount of money regularly is a tried and tested way to build wealth over time. The S&P 500 — often used as a benchmark for stock investments — averaged an annual return of 9.9% between 1992 and 2021. Even if you adjust for inflation, it generated returns of 7.3% over 30 years.

It’s easy to get lost in all this talk of percentages. Instead, let’s look at how $5,000 might perform over a 30-year period if it earned a 9% versus a 5% annual return. These are very rough calculations, but they show the degree to which stocks will beat cash over time — even using the current record-high savings rates. Inflation also fluctuates a lot, but we’ll go with around 3% per year.

Here’s how investing $5,000 and saving it might pan out over 30 years:

Don’t let recession warnings stop you from investing

“OK, but what if we enter a recession?” I hear you cry. If we do hit economic difficulties and the stock market falls, wouldn’t it be better to have your money sitting safely in a savings account rather than wobbling around in potentially turbulent stock markets?

There’s no one-size-fits-all answer. If you’re nearing retirement, you may well want to move a good chunk of your money to safer shores. But more widely, we don’t know if a recession will arrive, nor what shape it will take. It is almost impossible to predict what will happen to the stock market in the near term. If you’re a long-term investor, if you have cash to invest, it’s often best to get on with it.

For example, 2022 was not a good year for the stock market. As we went into 2023, many analysts and investment professionals were pessimistic about the year ahead. Eight months later, it’s a very different story. At the end of August, the S&P 500 was up about 17% year to date. The widely predicted recession has not yet materialized.

If you’d had money to invest at the start of this year, but decided to hold off in case the market dropped, you wouldn’t have benefited from that jump. As King points out, “Just get started. Even if it’s with a small amount. You’re bound to make mistakes, overthink decisions, and change your strategy over time, but getting started is the key. Dip your toe in and let yourself get used to the volatile nature of the stock market.”

It makes sense to have both cash and stocks

This doesn’t mean you should dive in and invest all your money. Make the cash versus stocks decision based on your finances, not newspaper headlines. For example, if you carry a balance on your credit card, pay this down before you buy stocks. It’s also important to have a solid emergency fund in cash that will cover your near-term needs. That way you wouldn’t need to take on debt or sell your investments if you lost your job or faced a medical emergency.

However, once those financial bases are covered, investing your extra cash may make sense. As King explained, “The opportunity cost of holding cash is inflation and generally speaking, investing beats inflation over the long term whereas cash loses out due to inflation. So any money that I don’t need in my emergency fund or sinking funds I get invested in the stock market.”

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Impulse buys can wreak havoc on your finances. Read on for ways to steer clear of them at Costco. 

Adding impulse buys to your shopping cart on a whim is a pretty natural temptation to have. Whether you’re shopping for groceries, clothing, or school supplies, you might easily end up adding items to your cart you weren’t planning on buying in the first place.

The good news is that 38% of Americans have managed to decrease their impulse spending this year, according to an annual survey commissioned by Slickdeals. But if you’re a Costco member, avoiding impulse purchases is not an easy thing at all.

For one thing, Costco sells such a wide range of products that you’re likely to be tempted by something. And also, given the lower price points, it can be easy enough to justify those extra credit card charges.

But if your goal is to save money or trim your spending, then you may want to do everything in your power to avoid impulse shopping at Costco. Here are some tips for pulling that off.

1. Make a list before you shop — and reward yourself for sticking to it

The simple act of making a Costco list won’t guarantee that you won’t stray. But having that list as an anchor might help you stay focused as you make your way around the store. And if you implement a reward system, you may be more likely to stick to your list.

Of course, you don’t want the cost of your reward to outweigh the cost of a typical Costco impulse buy. But let’s say you tell yourself that if you stick to your list, you can stop at Starbucks on the way home and treat yourself to your favorite latte. That drink might cost you $5. But if that reward system saves you from making a $15 impulse purchase at Costco, you’re ahead financially.

2. Don’t sample new goodies

Costco’s free samples are designed to tempt customers into buying new things. If you’re serious about avoiding impulse purchases, don’t try that yummy-looking cookie or cheese or granola cluster. Instead, keep walking. If you don’t know what you’re missing, you may be more inclined to keep those new products out of your cart.

In some cases, staying away from those samples can be pretty easy, such as when you don’t want to wait in a line or get stuck in a crowd. But seeing as how some Costco stores have rolled out machines that offer free samples, the temptation can be strong, so you’ll really need to try to steer clear of those.

Another option? Hit the store early in the morning or late at night. You’re less likely to find a variety of samples when the doors first open or when the store is getting ready to close.

3. Stay out of aisles you don’t have a need for

The more corners of Costco you explore, the more tempted you might be to purchase different things. If you want to cut down on impulse buys, make a point to steer clear of aisles that don’t contain an item on your shopping list. If you don’t have a need for apparel, for example, don’t walk over to that section to see what’s available. If you do, you may be tempted by the cute $10 shirt that seems affordable, but is really just an extra one you don’t need.

The temptation to buy extra things at Costco is real and intense for a lot of us. But that doesn’t mean you’re doomed to succumb to it. If you follow these tips, you might manage to reduce your impulse spending at Costco — or perhaps even kick that habit altogether.

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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 no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale and Starbucks. The Motley Fool has a disclosure policy.

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When I was applying for a mortgage, I made sure my credit report reflected that there was a $0 balance on my credit cards. Keep reading to learn why. 

Recently, I applied for a mortgage. I wanted to qualify for the best possible rate while doing so, as getting a better rate can save you more than $100 per month for each $100,000 borrowed to buy a house.

To make sure I was able to get the most competitive loan offer available, I kept my credit card balance at $0 during the mortgage application process. Here’s why I did that, and how I made it happen.

Here’s why I wanted a $0 credit card balance during the mortgage application process

There were two big reasons why I wanted my credit card balance to be as low as possible as I sought out a home loan.

First, I didn’t want a high credit card payment to affect my debt-to-income ratio. Mortgage lenders look at your debt relative to income in determining whether to approve you to borrow. Generally, they want your total debt costs (including the new mortgage) to be less than 36% of your income.

I regularly charge a lot on my credit cards and, although I pay it off in full when my statement comes, my card company frequently reports my balance before I’ve had a chance to pay the bill. When I obtained a mortgage a few years ago, this concerned my lender because my credit report showed I had a high monthly card payment due. By keeping my card balance at $0, though, the money I temporarily charge on the card wouldn’t affect my DTI.

I also wanted my credit score to be as high as possible, since mortgage lenders take that into account. Credit utilization (credit used versus credit available) is the second most important factor in determining your credit score, accounting for about 30% of your score. By keeping my card balance at $0, I’ll have the lowest utilization ratio possible.

The reality is, anyone applying for a mortgage needs to be aware of the effect high credit card bills have. You should try to avoid having your credit report show a big balance during the application process.

How I kept my credit card balance at $0

Although I wanted my credit card balance to be as low as possible so as not to hurt my mortgage prospects, I did not want to give up the chance to earn credit card rewards in the months leading up to applying for a home loan.

So here’s what I did to keep my balance down. When I charged stuff on my card, I simply made a payment every few days to bring the balance back down to $0. There’s no rule that says you can’t pay off your card many times a month, and you still get rewards if you charge something and pay it off immediately. So that’s exactly what I did.

Since my card balance was always at $0, or close to it, I knew no matter when it was reported to the credit bureaus, I’d have a low balance that would look good to my mortgage lender.

Remember, borrowing a lot of money means that even a small change in interest rates has a big impact. Let’s say you’re taking out a $400,000 loan. If you qualified for a 7.00% rate, you’d pay $2,129 per month in principal and interest and a total of $766,428 over the life of the loan. If your rate went up a tiny fraction to 7.125%, you’d instead be looking at a principal and interest payment of $2,156 per month and $776,124 over time.

So, it really does pay to do everything you can to get the lowest possible mortgage rate — which means you may want to follow my lead and try to keep your credit card balance as low as you can during the mortgage application process.

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Phenylephrine is the main ingredient in many over-the-counter cold medicines. But, find out why you could be wasting your money if you buy them. 

Colds and allergies can make you feel miserable, and can send you reaching for one of the many over-the-counter (OTC) drugs on the market that promise to help you feel better. Unfortunately, if you’ve been buying certain popular meds, you may have been wasting hard-earned money from your bank account.

An advisory panel to the FDA announced recently that phenylephrine, the main ingredient in many popular OTC cold and sinus meds, may not be effective. Here’s why.

Phenylephrine may not work to help fight cold and sinus symptoms

According to an FDA briefing document, all 16 members of an FDA advisory panel found that the nasal decongestant phenylephrine is most likely ineffective due to the fact it is metabolized too quickly, the oral bioavailability is less than 1%, and the half-life is very short.

All of this technical language basically means that cold and sinus drugs with phenylephrine as their active ingredient most likely do not provide the promised relief for a stuffy nose. And, that’s a big problem because phenylephrine is the active ingredient in a ton of popular drugs including (but not limited to) versions of drugs made by the following manufacturers:

Vicks (Nyquil and Dayquil)BenadrylSudafedMucinex

If you have an over-the-counter cold or allergy drug in your medicine cabinet that you didn’t specifically ask a pharmacist for, it probably has phenylephrine in it. That’s especially true considering this was recently the most popular oral decongestant in the U.S. and consumers bought $1.8 billion of drugs with this active ingredient in just the past year alone.

Don’t buy medication with phenylephrine to relieve your symptoms

With the FDA advisory panel unanimously agreeing that these meds don’t provide relief, you might assume they would be pulled from the market now. But that’s not necessarily going to happen right away.

Phenylephrine has been approved for over-the-counter use since the 1970s and grew in popularity when pseudoephedrine access was restricted by lawmakers in 2005. In 2007, an FDA committee reviewed phenylephrine and raised questions about whether it was effective, but determined further research was required.

Studies in multiple large clinical trials have revealed that it isn’t, but the FDA isn’t required to listen to the advisory panel. And, the same researchers pointing out problems today also questioned the effectiveness of the drug back in 2007 when the FDA declined to act.

Even if the FDA moves forward with pulling products with this ingredient from the market, it will take time to complete the process and stakeholders will be allowed to weigh in. An FDA spokesperson declined to say when the agency would move forward with taking action, and the Advisory Committee did warn the public would need to be educated on why these common drugs were removed.

Since these products are likely to continue being sold for a while, it’s important to be an informed consumer so you don’t charge cold medicine on your credit card that doesn’t provide the relief you’re looking for.

If you’re among the 50% of households that studies showed used an oral decongestant last year, you may want to look for meds with pseudoephedrine instead of phenylephrine. Drugs containing pseudoephedrine can be sold without a prescription as well, but they are kept behind the pharmacy counter, so you’ll have to ask for them.

The added hassle of asking a pharmacist to get your meds may be annoying, but it’s a lot less annoying than continuing to struggle with a stuffy nose while throwing away your hard-earned money on meds that may do nothing at all to provide relief.

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Mistakes happen to the best of us. Read on to learn about one financial blunder you might sorely regret. 

You’ll often hear that saving for retirement is an essential thing to do. If you don’t make an effort to build up a nest egg, you might struggle to pay even your basic expenses once your career comes to an end.

Some people opt to save for retirement in an IRA. But if you have a 401(k) plan through your job, then that could be a better option for you simply because many 401(k)s offer an employer match.

If you’re not familiar with the concept, it goes something like this: Your employer might match a specific amount of money you put into your 401(k) plan each year out of your own earnings. That match might come in the form of a percentage of salary or as a certain dollar amount.

So for the former, your company might say it’ll match contributions of up to 3% of your salary. If you earn $60,000 a year, to claim your full employer match, you’d need to put $1,800 from your earnings into your 401(k), and your employer would then give you an additional $1,800.

On the other hand, your company might say it’ll match contributions of a certain dollar amount. For example, it might put up to $3,000 into your 401(k), regardless of the salary you earn.

Setting money aside in a 401(k) plan isn’t easy when you have numerous bills and other financial priorities. But financial guru Suze Orman warns that giving up an employer match in your 401(k) is one of the biggest money mistakes you might ever make.

Don’t say no to free money

How often do you find yourself ordering takeout and being offered your meal for free? Probably not very often. It’s pretty rare to get things for free in life. So if your employer is offering you free money in the form of a 401(k) match, Orman says to do everything in your power to take it.

“You cannot pass up free money,” she insists. So even if you can’t come close to maxing out your 401(k), Orman says to “take your employer match at the very least.”

Of course, putting money into a 401(k) isn’t easy when you need every last dollar of your paycheck to cover things like rent and groceries. But if you’re able to work a side job that gives you enough income to make it possible to snag that free money, you’re apt to be happy for having done so in the long run.

Remember, when you pass up an employer match in your 401(k), you don’t just lose out on that sum alone. You also lose out on the opportunity to invest it.

The stock market’s average annual return over the past 50 years has been 10%, as measured by the S&P 500 index. Giving up a $3,000 employer match today could mean retiring with about $136,000 less in 40 years if your 401(k) can also generate a 10% return over time.

You might be able to use your 401(k) as your emergency fund

It’s generally not a good idea to think of your 401(k) plan as your emergency fund. Rather, that money should be earmarked for retirement, and you should have a separate savings account with money for unplanned bills.

But if you don’t have emergency savings and want to snag your employer match in your 401(k), Orman suggests contributing to that plan but opening a Roth 401(k) rather than a traditional one. With a traditional 401(k), you’re penalized 10% for withdrawing funds before age 59½ because you get a tax break on your contributions.

With a Roth 401(k), you don’t get that same tax break, and so withdrawals taken before age 59½ aren’t penalized as long as you only touch your principal contributions, not your gains. However, rest assured that if you’re eligible for an employer match, you’ll get it whether you opt for a traditional 401(k) or a Roth.

To be clear, Orman encourages savers to have separate accounts for emergencies and retirement. But if you can’t manage both, she thinks it’s smart to take your free money by contributing to your workplace 401(k). And if you have to tap your 401(k) for an unplanned expense because you funded that account instead of an emergency fund, so be it, as long as your 401(k) is a Roth.

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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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Keeping money under the mattress isn’t safe from thieves or inflation. Here’s where to put your shorter-term savings instead. 

Unanimity among personal finance experts is rare, but pretty much everyone will agree that it’s good to have financial goals. Opinions on how to save for those goals are as many and varied as you’d expect, but surprise again, there is general agreement on the where.

For your long-term goals, for instance, most experts will agree that investments of some type are the way to go. Pretty much anyone will tell you to get a retirement account, like an IRA or 401(k), to save for long-term retirement goals, for instance.

But what about your short- and mid-term financial goals, the ones you’re hoping to reach in the next few months or years? The stock market, while historically positive in the long term, isn’t ideal in these cases. Instead, look for something safer, or at least something with a shorter turnaround.

Keep your short-term savings accessible

You’ll get different answers from everyone as to how short is short-term, but I tend to consider it to be any goal you intend to reach within the next year or two. A lot of things could fall under the umbrella of a short-term savings goal, such as saving toward:

A family vacationYour emergency fundA down payment for a carUpgrading your TV or phoneA planned medical procedure

For most of these things, you won’t need immediate access to the money, but you’ll still want it to be accessible when you’re ready for it. You also want it somewhere safe — both from potential theft as well as from the evil clutches of inflation.

A good high-yield savings account is arguably the ideal place to keep your money for these types of short-term goals. The best accounts offer interest rates over 4%, which is appreciably above the current inflation rate of 3.2%.

The only exception here? Your emergency fund. Savings accounts tend to have limits on withdrawals and rarely come with ATM cards, making your cash hard to access in an emergency. A money market account, on the other hand, can have high rates as well as debit cards. Choose a money market with a competitive APY for your emergency fund.

Put mid-term savings in high-yield accounts

Your mid-term savings goals are things you want to save for over a period of several years, though not quite decades. This could be things like saving up to have children in the future, or putting aside the 20% for a house down payment.

Unlike your short-term savings, you probably won’t ever need quick access to your mid-term savings. However, you still don’t have time to play the long game with the stock market.

You could stick with a high-yield savings account for a consistent return. Or, consider some other options:

Certificate of deposit (CD): Offered by many banks, CDs come in a variety of term lengths, with some offering higher interest rates than a savings account. Plus, your money stays FDIC-insured. Remember that you’ll need to leave your money in the CD for the length of its term.Government bonds: Various types of government bonds can offer solid returns on your investment, often at least a point or two above inflation. In most cases, however, you’ll need to leave your money alone for at least a few years to earn that return.Peer-to-peer lending: If you’re alright with taking on some risk with your mid-term savings, you could become an investor on a peer-to-peer lending platform. These offer multiple term lengths so you can choose to invest in loans that fit your timeline. While many peer-to-peer platforms advertise returns above a high-yield savings account, your investments aren’t insured, so you could potentially lose money.

While tying up your funds isn’t great for short-term goals, if your mid-term goals are far enough out, these types of accounts could be great ways to earn more money on your savings.

One thing to keep in mind on this is that you should ensure you have a solid emergency fund — in an accessible money market account — before you start putting money into savings products that aren’t easy to liquidate.

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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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