Money Management

There’s a world of misinformation about retirement savings. Read on to get to the bottom of some dangerous myths. 

The average American has $89,300 saved for retirement, according to data from Northwestern Mutual. But no matter what savings target you’re aiming for, it’s important to come up with a solid strategy. And if you want your strategy to work, you’ll need to steer clear of these potentially dangerous retirement savings myths.

1. You need to earn a lot of money to build a large nest egg

Those people you hear about who manage to retire with a $1 million nest egg? They’re not all six-figure earners. Many people who retire wealthy were modest earners who simply prioritized their savings from a young age so they were able to build up large IRA or 401(k) balances over time.

Let’s say you earn $40,000 a year. You’re probably not going to be setting aside $5,000 to $10,000 a year for retirement. But maybe you can save $2,000 this year, or 5% of your salary, and then save $2,500 next year as your wages increase. Over time, those contributions could add up nicely.

2. A regular savings account is the safest place for your money

Many people worry that investing their money might lead to losses. If you have similar concerns, you may be inclined to keep your retirement funds in a regular savings account. But doing so could mean falling short of your retirement savings goal.

Over the past 50 years, the stock market’s average annual return has been 10%, as measured by the S&P 500 index. Meanwhile, the 4% to 5% interest rates high-yield savings accounts are paying today aren’t the norm. You might only average 3% in a savings account over time, or even less.

Meanwhile, let’s say you manage to save $200 a month for retirement over a 45-year period. At a 10% average annual return, you’re looking at a nest egg worth over $1.7 million. At a 3% average annual return, you’re looking at more like $223,000.

3. You should keep all of your retirement savings in an IRA or 401(k)

The benefit of saving for retirement in an IRA or 401(k) is getting a tax break in the process. Contributions to traditional IRAs and 401(k)s are tax-free, so by putting $2,000 a year into one of these accounts, you make it so the IRS can’t tax $2,000 of your salary.

But in exchange, IRAs and 401(k)s require you to leave your money alone until age 59 1/2. If you take a withdrawal at an earlier age, you’ll generally face a 10% penalty. And that’s why it’s best to keep some retirement savings in a separate account.

If you save a portion of your nest egg in a regular brokerage account, you’ll have investments you can cash out at any time without penalty. This might, for example, give you the option to retire at age 57 if you’ve saved enough money to do so rather than have to wait until 59 1/2 to avoid penalties.

Saving for retirement is something that takes a world of effort and commitment. So it’s important not to fall victim to these myths that could lead to some pretty poor choices on your part.

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Costco memberships aren’t always all they’re cracked up to be. To find out if you’ll save by joining the warehouse club, ask yourself these key questions. 

If you’re looking for ways to keep your credit card bills down, a Costco membership is sometimes the right choice. Costco is a members-only warehouse club that offers special bargains to those who join.

But, is it worth paying your hard-earned money to become a member? There are three questions you should ask yourself to decide.

1. Will you visit the store enough to cover the membership fee?

Costco’s entry-level membership costs $60 a year. This gets you and a household member a card and access to the warehouse clubs where you can buy discounted gas and consumer goods.

To break even for that upfront cost, you must save at least $60 a year — to end up better off, you’ll have to save more than that.

Now, this is pretty easy to do. If you fill up your car with gas at Costco once or twice a month, the gas savings alone would cover the cost of your membership fee. But if you don’t live close to a Costco and don’t go often, or can’t find anything you want to buy when you get there, then you may not end up with $60 in savings.

To determine if you’re really going to save, track what you spend on gas and groceries at Costco and compare it to what you’d pay elsewhere. If you save $3 on every tank of gas or $1 a pound on ground beef, and you buy both regularly, for example, you can easily see whether your savings will cover your membership costs. Say, for example, you buy five pounds of ground beef a month and save $1 on each one — that’s $5 a month or $60 a year in savings and the savings on that product alone covers your membership expenses.

2. Will you end up with a lot of waste?

You’ll also have to think carefully about whether Costco shopping will leave you with less money in your checking account because you’re not using all the products you purchase.

Costco requires you to buy in bulk, and not everyone can use bulk products before they go bad. Say, for example, you spring for Costco’s 96 ounce box of Bisquick which makes 155 pancakes. The price is $10.99, so you pay about $0.12 per ounce.

But, let’s say you don’t eat 155 pancakes before the box goes bad but you instead eat only 75 pancakes (which, let’s face it, is still a pretty good amount of pancakes.)

You’ve wasted about half the box in this scenario, so you actually ended up paying $0.24 per ounce while contributing to food waste. You would have been better off going to Target and buying a 40-ounce box for $4.89 (or about $0.122 per ounce).

This can happen with tons of Costco products, so really think about your consumption needs to determine if bulk buying will work for you. You can track how much pancake mix or pasta or cereal or toothpaste your family needs over a month, see how many months the Costco products would last you, and check the expiration date to see if they’ll expire before you use them all.

3. Are you a coupon shopper?

Costco does not accept manufacturer coupons. The store claims it’s because Costco offers its own deals and consistently low prices.

But if you are an avid couponer, you may be able to score items for pennies on the dollar or even get many things for free. Giving up that habit to shop at Costco may not make a whole lot of sense for you, especially if you enjoy couponing and can keep your grocery bills affordable by doing so.

By asking yourself these three questions, you can make an informed choice about whether Costco membership is a wise financial move or a big mistake that will leave you with less cash in the end.

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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 Costco Wholesale and Target. The Motley Fool has a disclosure policy.

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Personal loans aren’t a good way to borrow in all situations. Keep reading for two instances in which they really shine. 

Personal loans are a pretty easy way to borrow money, and they come with some pretty convenient features. Many are unsecured, meaning you guarantee the loan with your promise to repay it (and the interest rate you receive is dependent on your credit score and other factors the lender uses to decide your creditworthiness). The payments are in equal amounts and spread over a set period (often a few years, but many of the best personal lenders will let you choose the term that works best for you).

Personal loans really shine as a means of borrowing in a few situations. Let’s take a look at when a personal loan is a good idea — and a few times when it isn’t.

1. You need to consolidate debt

Got high-interest debt, like credit card debt? If you’ve got good credit, you can likely save yourself some money by turning to a personal loan. As of this writing, the average credit card APR is 24.76%, as reported by Forbes. Meanwhile, if you qualified for the best rate on a debt consolidation loan, you could pay as little as 7.99% APR on it. Plus, using a personal loan this way can simplify your financial life. If you’re trying to keep up with multiple credit card payments (and multiple due dates), imagine having to worry about just one personal loan payment and one due date.

If you’re considering a debt consolidation loan, make sure to run your numbers to tell if you’ll be able to handle your new loan payment. And getting rid of credit card debt this way also requires you to avoid running up your credit card balances again, since this won’t close the accounts. You could end up in real trouble if you add more credit card debt on top of your debt consolidation loan.

2. You need to make a big purchase or home repair/renovation

For expensive purchases or anything home-related, you often have other borrowing options besides a personal loan. Retail stores that sell appliances or furniture often have financing deals, but they might not come with the best terms. And you could get a home equity loan or line or credit (HELOC) if you need to fix your roof, pay for a remodel, or otherwise sink money into your home.

But home equity loans and HELOCs are secured loans, meaning if you run into trouble and can’t make your payments, you could lose your home. And HELOCs come with variable interest rates. So a personal loan could be a good choice in this situation instead, with the caveat that having a strong credit score means you’ll have more loan options — and more attractive APRs.

When shouldn’t you use a personal loan?

Think twice about using a personal loan for:

A vacation: Not to be a buzzkill, but a vacation isn’t a necessity. Consider saving money for a big trip, or booking a less-expensive getaway that you can pay for out of pocket — may I suggest a good old-fashioned road trip vacation?A wedding: If your wedding plans are so grand that you’re considering financing the day, I recommend finding ways to cut back — trim your guest list, book a cheaper venue, or DIY some of your decor. Do you really want to start off married life with a big debt hanging over your head?A car: An auto loan will generally offer better rates for a car purchase than a personal loan. These are secured loans, so if you can’t pay for the car, the lender can repossess it.Everyday expenses: If you need to borrow money to fund your lifestyle, the time to make some changes to your budget and income situation is now. Borrowing money to keep up with everyday bills is not a sustainable situation.Paying bills that have cheaper options: If you have medical debt, see if you can get on a payment plan. You might be able to consolidate credit card debt with a 0% APR credit card.

Personal loans are a great way to borrow in a few situations, but they’re not right every time. Weigh your options and pick the one that results in the most manageable payments and convenience.

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Investing is a good thing — but not if you’re unprepared financially. Here’s how to tell you shouldn’t put money into the market yet. 

It’s generally a good idea to open a brokerage account and start investing. Investing your money helps it grow. You can earn returns on the money you’ve put into the stock market (and, if you invest wisely, those returns are likely to be higher than the returns you’d earn on a savings account, CDs, or many other assets). Once you’ve earned returns, that money can be reinvested, growing your account balance and allowing you to earn interest on interest.

But, while it is usually smart to invest, it’s not the right choice for everyone at every stage. You must be financially ready to move into buying investments and not everyone is in that place yet. To help you decide if you may need to wait a bit, check out these three signs you aren’t ready to invest.

1. You have a lot of high-interest debt

If you have a lot of debt you’re paying a lot of interest for, investing may not be the right move to make. You may want to focus on taking care of those loans first if doing so would give you a better return.

When you pay off loans, your return on investment (ROI) is the interest you save. So, if you have a payday loan with fees so high your effective APR is around 400% and you pay off that loan ASAP, you’re effectively making a 400% return on the money.

If you invest in the stock market, it’s reasonable to expect around a 10% average annual return (assuming you invest in assets that present a reasonable level of risk). If your debt is at a much higher rate than that, it’s probably smarter to devote your extra money to paying off the loans first since you’ll get a higher ROI by doing so.

On the other hand, if you have low-interest loans like mortgage debt, you should not be paying extra toward that but instead should be getting your money into the market (assuming there’s no other reason not to do so).

2. You have no emergency savings

If you do not have money saved for emergencies, you should take care of that before you start investing. Specifically, you should make sure to put aside enough money to cover about three to six months of living expenses in a high-yield savings account.

There’s a simple reason for that. Emergencies can happen to anyone, anytime, and if you have no emergency savings, you could be forced to sell investments to cover surprise costs. And this could be a problem.

Here’s the issue. Over the long run, if you make smart investments, you should make money. But, in the short run, downturns can happen and you could sustain losses. If you happen to have bad timing, you could face an emergency at the same time that the market crashes — say, for example, because you lose your income due to a global pandemic that causes a stock market crash (can you imagine?) or even because of a simple recession that has the same effect.

If you need money, have no emergency fund, and are forced to sell your investments at a bad time, you could lock in losses that you otherwise would have recovered from. Just look at the performance of the S&P 500 in recent years. The S&P 500 is a financial index often used as a benchmark for how the stock market is doing, and it is made up of 500 of the largest companies in the U.S.

If you invested in an S&P fund in 2018, lost 6% of your money, and then had an emergency at the start of 2019, you’d have lost the chance to make your money back and then some.

Since you need time to wait out potential downturns, you should avoid investing unless you have an emergency fund in place first. If you will need the money you’re investing for any reason within the next two to five years or so, it doesn’t belong in the stock market.

3. You don’t have a plan for where to put your investments

Finally, you shouldn’t invest until you have a plan. You don’t want to just stick money in a brokerage firm and start buying assets randomly, as that’s more like gambling than investing.

Many people are best off just putting their money into an S&P 500 index fund due to its consistent performance and low risk. But you can research different investment strategies to see what you feel comfortable with. You’ll want to do this before you begin investing though.

If you see that these three signs suggest you aren’t ready to begin investing, don’t get discouraged. Start working on paying down your high-interest debt by sending in extra monthly payments each month, or begin working on putting money into an emergency fund by reducing your spending and setting up automated transfers to savings. You can search investment options as you accomplish these goals, so you’ll be ready to invest ASAP.

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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.
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Certificates of deposit (CDs) pay high interest, but come with one potential pitfall. Keep reading to learn about early withdrawal penalties. 

Right now is an especially good time to have money in the bank. Thanks to the veritable flood of Federal Reserve rate hikes, many banks have raised their own APYs on savings accounts, money market accounts, and CDs.

A certificate of deposit, or CD, is a special type of savings account that pays a higher rate of interest in exchange for you agreeing to keep your money in the account for a certain period of time. CDs benefit from FDIC insurance, making them very safe. CD terms vary, but you can find terms lasting from a couple of months up to as many as 10 years. When the term is up, you can withdraw your money (now made richer by a certain percentage; the best CD rates right now are 5.00% APY or better) and do whatever you want with it, including rolling it into a new CD account.

But what if something comes up and you need the money in your CD account — and the term’s not up yet? Therein lies a potential problem with CDs: Early withdrawal penalties.

How do early withdrawal penalties work?

If you need to take the money out of your CD account early, you won’t be allowed to withdraw just a part of it — rather, if you’ve got $5,000 in the account, that’s what you’ll be taking out. And unfortunately, you’ll also lose some or all of the interest you’ve earned on it, depending on how long your term was and how early you ended it.

How much interest you’ll forfeit depends on the terms of your account and the bank that holds it. I took a look at a few of our favorite CDs and found examples of early withdrawal penalties ranging from up to three months to 180 days of simple interest. So be sure to read the fine print on your CD account so you’ll know how much you’re risking if you withdraw early.

It’s important to note that no-penalty CDs do exist, but the rates are generally less than what you’ll get with a traditional CD. And this makes sense, as banks are more willing to pay a higher APY to consumers willing to leave their money alone for a set term knowing they’ll be charged a penalty if they don’t.

Consider these other options to avoid penalties

Thankfully, if you have a chunk of money you want to keep in a bank account (rather than exposing it to the short-term volatility of the stock market), you have other options for accounts. And these don’t work the same way as CDs — you won’t be locking your money up for a set term and can generally withdraw whenever you want (within certain limits; more on that below).

A regular savings account doesn’t pay enough interest to make one worthwhile if you’re hoping to grow your money (as of this writing, the average rate on savings accounts overall is just 0.43% APY). But a high-yield savings account is a very attractive prospect these days. In fact, you could earn around the same APY (5.00%) with one of these accounts as you might with a CD, and you won’t have to lock your money up, either. Look to online banks for the best high-yield savings accounts.

A money market account is also a great place for your money, and it comes with easier access than a savings account — many money market accounts have check-writing capabilities or even come with a debit card. These, too, have been favorably impacted by Federal Reserve rate hikes and are paying comparably to CDs and high-yield savings accounts.

One caveat for savings and money market accounts

It’s important to note, however, that just because you’re not locking your money up for a period with these accounts doesn’t mean you have unfettered access to it. Many banks still enforce pre-pandemic limits imposed by Regulation D. This limits you to six or fewer convenient withdrawals from these accounts every month.

If you have money you’re actively spending, a checking account is the best place for it. CDs, savings accounts, and money market accounts are much better for keeping your money safe and reasonably accessible, and growing it with interest, rather than having it available to spend readily.

CDs can be a great part of a larger financial and savings strategy, and with rates as high as they are right now, they’re certainly worth considering. Just remember to read the fine print and learn what early withdrawal penalty you’ll face, just in case you have to end your CD term early.

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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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