Money Management

Carrying debt can be stressful. Read on for ways to shed yours as quickly as possible. 

Recent data from Northwestern Mutual finds that Americans have an average of $21,800 in debt, not including their mortgage balances. And that’s clearly not a small sum.

But what’s equally discouraging is that 49% of consumers expect to be in debt for up to five years. That means they risk throwing away a lot of money on interest. And also, they risk spending up to five years weighed down by the mental load of carrying debt.

Being in debt can be stressful. It can impact your productivity at work, your relationships at home, and your general well-being. So if you’re carrying debt and don’t see a light at the end of the tunnel anytime soon, here are some steps you can take to shed your debt at a faster pace.

1. Spend very carefully

The money you receive each month in paycheck form needs to go toward a host of expenses, from housing to utilities to food. But the more money you have left over at the end of the month, the more money you can apply to your debt to knock it out. So take a look at your recent bank and credit card statements to see where your money has been going, and identify a few expenses to eliminate or at least cut back on.

It’s definitely not easy to reduce your spending, especially if you live somewhat frugally to begin with. But paying off debt takes money — it’s that simple. And the less you spend, the more you’ll have.

2. Pick up a side job

It can be tricky to find the time for a second job when you already work full-time and have other responsibilities to manage. But if you want to get out of debt quickly, a side hustle could be your ticket to doing that.

The beauty of a second job is that it’s money you’re not relying on. So you should be able to take all of your extra income, minus what you owe in tax form, and use it to chip away at your existing loans or credit card balances.

3. Set yourself up with a lower interest rate on your debt

If your current debt is a home equity or personal loan, then you may have a pretty competitive interest rate on it. But Northwestern Mutual reports that 28% of consumer debt comes in credit card form. And if that’s the type of debt you have, you may be racking up loads of interest by the week.

If that’s the case, you may want to consolidate your debt with a personal or home equity loan, which may result in a lower interest rate. That alone could help you get rid of that debt sooner.

Plus, credit card interest rates can rise over time. If you sign a personal or home equity loan and use its proceeds to pay off your credit cards, you’ll have the benefit of fixed interest and predictable monthly payments.

Being in debt can be a drag in the most stressful sense of the word. If you can’t imagine yourself being debt free before the five-year mark, make these moves to speed up the repayment process.

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Stimulus payments were a lifeline during the pandemic. Could they make a return? Read on to find out. 

For months on end, financial experts have been warning consumers to gear up for an economic recession. The Federal Reserve itself even said recently that a recession could hit in 2023 and last for a couple of years.

The last time economic conditions took a serious turn for the worse, lawmakers were pretty quick to approve stimulus payments to help Americans keep up with their bills. But are those stimulus payments gone for good? Or could they make a return if a recession hits later on this year?

It’s a matter of how bad things get

Lawmakers have historically turned to stimulus payments during periods of extreme economic turmoil. Consumers were privy to stimulus payments during the Great Recession of 2007 to 2009, and there were several rounds of stimulus payments issued during the pandemic.

But it’s important to note that during these periods, economic conditions deteriorated to a dire extent. And so while stimulus payments are not necessarily done, things would have to get really bad for lawmakers to agree to another round.

The last round of stimulus checks lawmakers approved came through in March 2021 as part of the American Rescue Plan. Following that bill, millions of Americans saw $1,400 checks hit their bank accounts.

But it’s important to understand that in March 2021, the national unemployment rate sat at 6%. This past June, it sat at just 3.6%.

Granted, that 3.6% jobless rate accounts for the fact that we’re not in a recession currently. If economic conditions were to decline, that rate would no doubt increase.

But either way, whether stimulus payments come to the table once again will hinge on how bad future recessions are. And hopefully, if a recession does hit later on in 2023, it won’t be too bad since the economy is currently in a fairly strong place.

In fact, while the Federal Reserve may be anticipating a 2023 recession, it also thinks such a decline will be mild in nature. That’s somewhat encouraging.

Don’t bank on a stimulus check

Given the potential for a near-term recession, it’s a good idea for consumers to take steps to prepare for one — namely, by boosting their savings. And one thing Americans should not do is neglect their savings and plan to fall back on an incoming stimulus check that may not arrive.

While it’s true that those checks have served as a lifeline in the past, they’re by no means guaranteed for the future. So those who want to weather any upcoming economic storm that hits should beef up their cash reserves while they can.

Boosting job skills is another important step to take in the course of being recession-ready. Doing so won’t always mean avoiding a layoff. But it could mean getting to keep a job when employers have to make cuts. It could also mean having an easier time finding a job after a layoff, which may be an important thing if a recession hits and there’s no stimulus aid to fall back on.

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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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A higher home down payment could save you money. Read on to see how. 

When you sign a mortgage, you’re generally required to bring some amount of money to the table in the form of a down payment. Putting down 20% on a conventional mortgage will allow you to avoid private mortgage insurance, a costly premium that gets tacked onto your mortgage costs. But some mortgage lenders will accept less money down.

Rocket Mortgage says a 20% down payment is widely considered ideal for most loan types and lenders. But if you have the ability to make an even larger down payment than that, it could work to your benefit. Here are some of the perks you might enjoy when you make a higher down payment on a home.

1. You’ll have lower monthly mortgage payments

The more money you put down on a home, the less money you have to spend each month in mortgage payment form. It’s that simple.

So, let’s say you’re signing a 30-year fixed mortgage at 6.81%. That’s the average interest rate for that loan type as of this writing, according to Freddie Mac.

If you’re buying a $250,000 house and you make a 20% down payment, you’ll be looking at spending $1,306 a month on principal and interest on your home loan. But if you make a 40% down payment, you’ll only have to spend $979 a month. That’s a much easier payment to work into your budget.

2. You’ll build equity in your home sooner

Equity refers to the portion of your home that you own outright, and it’s something you can borrow against as needed. As an example, if you own a $500,000 home with an outstanding $300,000 mortgage, you have $200,000 worth of equity.

The higher your down payment, the more home equity you get from the start. That can be a really good thing should you need to tap your equity, or should you decide to sell your home shortly after buying it.

3. You’ll save money on interest

The less money you have to borrow to buy a home, the less you’ll end up spending on interest. Going back to our example above, if you make a 20% down payment, you would spend $270,156 on interest alone in the course of paying off your home. A 40% down payment, on the other hand, would have you spending $202,613. That’s a total savings of $67,543.

But there’s a downside, too

Clearly, there’s plenty to be gained by making a larger down payment on a home. But remember, the more money you put down when you buy a home, the less you have left for other purposes. That could create a problem should you wind up with home repairs, for example, or other expenses you need to tap your savings account for.

Also, while making a larger down payment can save you money on interest in the course of paying off a home, you tie up that money so you can’t invest it. Over the past 50 years, the stock market’s average annual return has been 10% (before inflation), as measured by the S&P 500. Investing an extra $50,000 rather than putting it into a home down payment could mean growing that sum into around $872,000 over 30 years if your portfolio generates a 10% average yearly return during that time.

That represents a gain of $822,000. Compare that to $67,543 on interest, and, well, there is no comparison.

Of course, this assumes that you’ll actually invest the money you don’t put into your home’s down payment, and that you generate a strong return. The point, however, is that while making a larger down payment could benefit you in many ways, it’s also important to consider the other things you might be able to do with that money.

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Looking to shed your HELOC? Read on to see why raiding your nest egg isn’t your best move. 

There’s a reason consumers are told to be careful when borrowing via a home equity line of credit, or HELOC. Unlike personal loans, which come with fixed interest rates, HELOC interest is often variable. This means your HELOC payments could rise over time, costing you more money and making your debt harder to keep up with.

If you owe money on a HELOC, you may be thinking of tapping your nest egg to pay it off. But doing so could be a big mistake for multiple reasons.

You don’t want to face costly penalties

The IRS gives you a tax break on the money that goes into a traditional IRA or 401(k) plan. And so if you touch that money ahead of retirement, you’ll be penalized for taking a withdrawal.

A 10% early withdrawal penalty will come into play if you remove funds from your IRA or 401(k) prior to age 59 1/2. And while there are some exceptions, such as taking a limited IRA withdrawal to purchase a first-time home, if you remove money from your retirement account to pay off a HELOC, you’ll lose 10% of your withdrawal. You’ll also be taxed on the money you remove.

You don’t want to end up short on retirement income

Another big reason not to raid your retirement plan to pay off a HELOC? You’ll risk ending up short on income during your senior years.

Remember, when you take an early IRA or 401(k) withdrawal, you lose out on the opportunity to grow your money by investing it. So let’s say you withdraw $15,000 today to pay off your HELOC, and your retirement plan is invested heavily in stocks.

Over the past 50 years, the stock market has delivered an average annual 10% return, as measured by the S&P 500 index. If that’s the return you’re able to snag in your retirement plan, and you take out $15,000 when you’re 20 years away from ending your career, you’ll actually cost yourself about $100,000 in savings. That’s not exactly a negligible sum.

A better way to pay off your HELOC

You may be tempted to raid your retirement savings to pay off a HELOC when that money is sitting there in your name. But a better bet is to reduce your spending and pick up a side job so you’re able to pump more money into your HELOC and get it paid off ahead of schedule. The sooner you pay off your HELOC, the less interest you’ll end up paying on that debt.

You can also look at taking out a personal loan and using its proceeds to pay your HELOC off. In doing so, you will be swapping one type of debt for another.

But with a personal loan, you’ll at least get the benefit of predictable monthly payments because your interest rate won’t rise. So it may be a route worth considering, especially if you happen to be a borrower with strong credit. The higher your credit score, the more favorable a rate you’re likely to qualify for on a personal loan.

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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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Overfunding a savings account with emergency cash isn’t always a safe idea. Learn what happens when you save too much. 

No matter what financial guru or planner you follow, most seem to agree on at least one principle: You should aim to have emergency savings stored in a safe, accessible place, like a savings account at a bank. Where they differ, however, is in how many months of savings you should have.

More often than not, financial experts will advise you to save between three to six months of living expenses. But it’s not uncommon to hear even larger numbers, like six to 12 months, or, for those nearing retirement, one to two years’ worth of emergency savings.

It’s important to have money set aside to cover surprise bills or help you stay afloat if you lose a source of income. But too much money in a savings account isn’t always a smart idea and could work against your ability to build wealth over long periods.

Inflation can work against big emergency funds

Emergency funds are best kept in FDIC-insured savings accounts, which have maximum security, little risk, and flexible withdrawals. These accounts are not the best choice for long-term growth, but they guarantee your money will be safe up to $250,000 per depositor per bank ($500,000 for a joint account).

The problem with savings accounts, however, is that their APYs often don’t outpace annual inflation. So while you might avoid investing risks by stashing large lump sums at a bank, you might also devalue your savings over a long period.

This year is unique in the sense that you can store money in a high-yield savings account with an APY that is above the annual inflation rate, which was 3% in June. Even so, the APYs on these accounts are not guaranteed and will fluctuate over time. You might earn 4.5% today — a great interest rate for a savings account — but if rates return to pre-2022 levels, outpacing inflation could become more difficult.

You could miss an opportunity to invest

Now, don’t get me wrong — if you’re near retirement, it might be wise to have more cash in a low-risk savings account. But for those who have long time horizons — who don’t plan to retire anytime soon — hoarding fat sums in a savings account can run the risk of growing your money too slowly and making it difficult for you to accomplish long-term financial goals, like saving for your retirement.

To grow your money at a higher rate of return, it might be a good idea to invest in the stock market, buy real estate, or start your own business. Not everyone is business-minded or wants to flip houses, but if you can stomach some risk, the S&P 500 could be a good place to park surplus savings. Over the last 30 years, the S&P 500 index has delivered a compound average growth rate of roughly 10.7% (before inflation). While you’re not guaranteed 10.7% every year, keeping your money invested in an ETF or mutual fund that follows the S&P 500 could return something close to that if you stay invested and don’t sell during market downturns.

Investing in individual stocks carry more risk and would require a more hands-on approach. You could, however, use a robo-advisor to help you create a portfolio that aligns with your risk tolerance and investing goals. Robots can’t guarantee you higher returns than the S&P 500 or even a rate higher than today’s top-paying CD. But keeping a long-term perspective and investing consistently over time has historically delivered investors better returns than the meager rates on savings accounts.

Strike a balance between saving and investing

Emergency funds are super important for your personal finance goals and can prevent you from depending too much on credit cards and personal loans. But if you’re overfunding a savings account because you’re worried you’ll lose money in other assets, you might be selling yourself short. A massive emergency fund might give you peace of mind today, but investing for the long term could give you greater financial security and a nest egg to retire on.

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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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