Money Management

An early IRA withdrawal can be bad for your finances in several ways. Read on to learn about the consequences. 

It’s important to save for retirement so you end up with enough money to cover your living expenses without worry. And a good way to do that is to consistently put money into an IRA.

The upside of saving for retirement in an IRA over a 401(k) plan is that you’ll generally get more investment choices. Want to buy individual stocks like you do in your regular brokerage account? That’s usually an option, whereas with a 401(k), it often isn’t.

Meanwhile, one big perk of funding an IRA is getting a tax break on the money that goes into your account. But in exchange, the IRS requires that you keep your money in your IRA for a certain period of time.

And so if you take a withdrawal from your IRA prior to age 59 ½, you’ll generally face an early withdrawal penalty of 10%. This means that if you remove $10,000 from your IRA at age 35, you’ll lose $1,000 right off the bat (though it’s worth noting that there are exceptions, such as if you’re taking that withdrawal to purchase a home for the first time).

But taking an early IRA withdrawal doesn’t just mean facing a 10% penalty on the sum you’ve taken out of your account. It could also mean subjecting yourself to far greater losses than that.

When you miss out on the chance to grow your money

As just mentioned, IRAs allow you to invest your money in stocks. And it’s a good idea to do so, because over time, a stock portfolio might generate strong returns that allow you to grow plenty of wealth in time for retirement.

When you take an early IRA withdrawal, though, you don’t just lose out on the principal amount you’ve removed from your account. You also lose out in the form of forfeited investment gains.

Over the past 50 years, the stock market has delivered an average annual 10% return before inflation, as measured by the performance of the S&P 500 index. So let’s assume you remove $10,000 from your IRA at age 35, when your retirement age doesn’t arrive until 65. By not keeping that $10,000 invested at 10% for those 30 years, you’ll end up short around $175,000 in retirement income. And that’s a pretty big deal.

Steer clear of early withdrawals if you can

In some extreme situations, tapping your IRA early may be inevitable. Let’s say you need to repair your home immediately but you don’t have the money in a regular savings account and you’re unable to qualify for a loan. If there’s really no other way to get the money you need, then raiding your IRA may be your only option.

But generally speaking, try your best to avoid taking funds out of your IRA before retirement — even if you’re old enough to do so without incurring a penalty. Keeping your money invested for even a few extra years could do a lot for your nest egg, so if possible, avoid touching your IRA until your career has officially come to an end.

Our best stock brokers

We pored over the data and user reviews to find the select rare picks that landed a spot on our list of the best stock brokers. Some of these best-in-class picks pack in valuable perks, including $0 stock and ETF commissions. Get started and review our best stock brokers.

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.

 Read More 

If you’ve been carrying a credit card balance and finally pay it off, your financial outlook gets brighter. Read on to learn what to expect. 

Paying off debt is one of the best things you can do for your finances, and this is especially true if the debt you pay off is that of the credit card variety. Credit card interest is variable, meaning it can change over time. And compared to interest rates for other means of borrowing money (such as personal loans or mortgages), credit card interest rates are quite high. Right now, the average interest rate for a credit card is over 20%, according to the Federal Reserve. It’s for this reason that it’s best not to carry a balance forward from month to month.

The realm of personal finance is full of best practices, shoulds, and should-nots, but sometimes life circumstances make it harder to pay off your credit card balances every month. This is especially the case if you’re living without emergency savings and have had unexpected expenses pop up. That was my life for a long time, and you won’t get any judgment from me for having to carry a credit card balance. Regardless of the why or the how, here’s what you can expect if you do manage to pay off all your credit cards.

Your balances won’t grow due to interest

Remember that credit card interest we discussed above? In addition to being high and variable, it also compounds daily. Compounding interest can be a great thing if you’ve got cash in a high-yield savings account or invested, but it’s bad news when it comes to credit cards.

Credit card interest will grow the balance you have by compounding. This means that every day, more is added to your balance, and then you’ll pay interest on the new amount the next day. And the next day. And the next. This is part of what gives credit cards the potential to be so dangerous if you’re not careful — your balance owed grows even if you’ve stopped using the card. If you pay off all your cards, though, you won’t owe more money day after day.

You’ll have fewer bills to worry about

Paying off all your credit cards is a great way to simplify your finances. Having to keep track of multiple credit card bills every month is exhausting and can be a bit nerve-wracking. Did you remember to pay that card this month? Double-check to be sure, because the last thing you need is a late fee on top of the balance you owe. If you get out from under those balances, it’ll help you sleep better, and it’ll also make budgeting a lot easier.

Your credit score improves

If you pay off your credit cards, you’ll see a positive difference in your credit score. This is because credit utilization ratio has a big impact on that three-digit number. Credit utilization ratio is the amount of available credit you’re using at any given time, expressed as a percentage. For example, if you have $20,000 available to you in the form of credit cards, and you’re carrying balances totaling $5,000, you have a credit utilization ratio of 25%.

It’s recommended that you keep this number under 30%, as a higher percentage shows lenders that you might struggle with managing credit and could be in over your head financially. For your FICO® Score, the amounts you owe on various debts reflect 30% of the score. So if you had a high credit utilization ratio and then cut it down in the process of paying off your credit cards, you’ll see a credit score bump.

You might improve your relationship with credit cards

If you pay off all your credit cards, it’s almost like getting a fresh start in your relationship with them. You start to see credit cards for what they are — a useful financial tool that can be used to earn cash back and rewards on your everyday spending, as well as easily build credit. You might decide that the benefits of credit cards (the aforementioned rewards, but also the convenience and security of paying with one) make them worth keeping in your life.

So you evaluate all the card options available to you (especially now that you have a higher credit score), and you pick out cards to apply for that really fit your life and spending, like one that offers awesome grocery rewards. You get in the habit of paying your balance off every month (or perhaps even more frequently than that). And you remember what it was like to owe money on credit cards from month to month, and decide to avoid that in the future.

No matter how you get your credit cards paid off (may I recommend the debt snowball method?), getting out of credit card debt feels pretty darn fantastic. March into your financial future feeling freer, lighter, and more in control of your finances.

Alert: highest cash back card we’ve seen now has 0% intro APR until 2024

If you’re using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR until 2024, an insane cash back rate of up to 5%, and all somehow for no annual fee.

In fact, this card is so good that our experts even use it personally. Click here to read our full review for free and apply in just 2 minutes.

Read our free review

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.

 Read More 

Many 60-year-olds are coming up on retirement and want to ensure they have enough put away. Learn how to figure out if you’re on track. 

If you’re 60, you may be dreaming of the day you can retire. You may also be confused about how much money you should have in a retirement account and, more specifically, how much you should be socking away each month. The answer is frustratingly simple: It depends on your lifestyle and how you hope to spend your retirement years.

The experts weigh in

It’s no wonder that so many people ignore that they’re growing older and may one day want to retire. Look at dueling financial expert opinions regarding how much a 60-year-old should have saved:

Financial services organization Thrivent: Eight times your current salary. So, if you currently earn $100,000 annually, Thrivent’s advice is to have $800,000 in a retirement account. Fidelity Investments agrees that 60-year-olds should have eight times their salary ready for retirement.According to T. Rowe Price, a 60-year-old who is five years away from retirement should have between 5.5 and 11 times their annual salary put away. If you’re earning $100,000, you should have between $550,000 and $1.1 million in your retirement fund.

The financial services firm Edward Jones calls these numbers “retirement savings goalposts.” Like the other financial advisors, how much you have put away should depend on your earnings. Here’s how much 60-year-olds should have, according to Edward Jones:

Reality

What we’re told we “should” save and what we’ve actually slipped into our retirement and savings accounts are very different. For example, according to Vanguard’s “How America Saves 22” study, the average 55- to 64-year-old is pretty far behind. Even after factoring in wealthy and extremely wealthy investors, the average American nearing retirement has $256,200 earmarked for retirement.

And according to a study conducted by career site Zippia, the average 60- to 64-year-old has slightly less, with $221,452 ready for retirement. A more sobering fact uncovered by Zippia is that half the country has never had more than $15,000 in retirement savings.

Retirement: The snowflake of the personal finance world

Just as there are no two snowflakes alike, there are no two retirement plans that are precisely the same. Much depends on the cost of living in your area, how much you earn during your working years, other sources of income you can expect, and how you plan to spend your time.

With that in mind, these seven steps will give you a rough idea of how much you should save each month.

Step No. 1: Make a list of fixed expenses in retirement. Include mortgage or rent payments, car payment, utilities, and other fixed costs. Do not include discretionary expenditures, such as eating out, new clothes, vacations, or other expenses you have greater control over.

Step No. 2: Check your Social Security benefits. If you’re set to receive a pension, determine how much that will pay you monthly. The goal is to pay as many of your fixed expenses using this guaranteed income. If you have a spouse, remember to add their retirement income.

Step No. 3: Check for a shortfall. Let’s say your fixed bills amount to $3,000 a month, but your expected monthly Social Security benefit is $1,800. You know that you have a $1,200 shortfall.

Step No. 4: Estimate miscellaneous expenses, including dining out, home repairs, medical costs not covered by Medicare, gifts, travel, vehicle repairs, and other expenditures you are bound to run into. If you’re unsure how much things will cost after you retire, err on the side of caution by overestimating. For the sake of this illustration, let’s say you plan to spend $1,300 monthly on miscellaneous expenses.

Step No. 5: Add your fixed expense shortage ($1,200) to the miscellaneous expense shortage ($1,300). You need an extra $2,500 per month.

Step No. 6: Multiply the monthly amount by 12 for a yearly total. For example, $2,500 x 12 = $30,000. This is how much you’ll need to withdraw each year.

Stick with us here. Step No. 7 will explain how much you’ll need in retirement savings to withdraw $30,000 annually.

Step No. 7: Generally speaking, retirees can safely withdraw about 4% of their retirement savings in their first year of retirement. In the following years, they can adjust their withdrawals by the inflation rate.

Based on the 4% rule, multiply $30,000 by 25, and you come up with a total of $750,000. That’s your customized retirement number, the amount of money you’re aiming for. Now, subtract what you’ve already tucked away from $750,000, and you’ll know precisely how much more you need. By dividing the amount you need by the number of months you intend to keep working, you have a good idea of how much you’ll need to invest each month to reach your goal.

Insider tip: When you multiply the amount of money you need annually by 25, the calculation assumes that you will continue to invest and grow your nest egg, making it last longer than 25 years.

Speaking with a financial advisor is one of the best ways to ensure you’re on track. If you don’t want to commit before you get to know someone, look for an advisor who charges an hourly fee for their services. Advisors are good at spotting retirement expenses you might have missed and helping you develop a plan.

The thought of living without a paycheck is scary for some of us. If it doesn’t seem possible to retire with enough money in the bank, think about a part-time job, side hustle, or turning a hobby into a money-making enterprise.

Time may not be on your side, but experience is. At 60, you’re old enough and wise enough to know what works for you, and clever enough to come up with an alternative plan.

Our best stock brokers

We pored over the data and user reviews to find the select rare picks that landed a spot on our list of the best stock brokers. Some of these best-in-class picks pack in valuable perks, including $0 stock and ETF commissions. Get started and review our best stock brokers.

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.Dana George has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

 Read More 

Paying your rent ensures you’ll continue to have a roof over your head. Read on to learn how it’ll go if you can’t make rent payments. 

Thanks to rampant inflation (currently 4.0% year over year, per the most recent Consumer Price Index Summary report, but it was as high as 9.1% in June 2022) and inadequate wage growth, many people are having trouble meeting their everyday expenses lately.

For many of us, our housing (be it rent or a mortgage loan payment) is our largest bill every month. Since keeping a roof over your head is paramount to your safety and comfort, being unable to afford your home is a scary situation indeed. Let’s take a look at what you can expect if you’re a renter and stop making rent payments.

Your landlord will definitely notice

Chances are, when you agreed to move into your home, you signed a lease that laid out how much rent is per month, along with the date it’s due (which is likely the 1st of the month, but not necessarily). Your lease also probably states how many days of grace period you get — for example, rent is due on the 1st, but as long as it’s received by the 5th, you’re good to go. Whether you rent from a corporation or an individual, your failure to pay rent will be noticed, and chances are, your landlord will get in touch to ask about it, and possibly also send you late notices.

You’ll likely be assessed late fees

Along with information about how long of a grace period you get, your lease might also spell out how much your checking account will be dinged by late fees if you don’t pay your rent on time. For example, you might owe $25 extra for each day you’re late. This means that being late with rent will just get more and more expensive, and if you’re already struggling to keep up, this can make a bad situation worse.

You could be evicted — eventually

Tenant laws vary depending on which state you live in, so you’ll have to investigate the matter for yourself. But taking a look at New York, there are set procedures in place for how an eviction might come to pass. TenantHelpNY notes that your landlord must send you a minimum of two late notices before taking you to court to proceed on an eviction. The first late notice is when you’re five days late, and the second is sent when you’re 14 days late. Only after this point may a landlord pursue an eviction case against you.

In New York, your landlord will start an eviction case by “service of process,” which leads to you being served and assigned a court date. You can request an adjournment of this date, and a second will be scheduled at least 14 days later. When you go to eviction court, you’ll have the opportunity to make your case (if there’s a reason why you’re not paying your rent — for example, your landlord has failed to make necessary repairs to your home and your health and safety are at risk).

The judge could find for you, or you could settle with your landlord (and pay what you owe), or the judge may issue a warrant of eviction. In this last case, your local sheriff will issue a 14-day eviction notice, and you and your belongings will be removed after 14 days. This is a scenario you absolutely don’t want to find yourself in.

You might have trouble getting another lease

In addition to being tossed out of your home, if you stop paying rent, it might be harder to get another rental in the future. This could be the case even if you’re not evicted, and just pay your rent late frequently. You might be required to provide references to a future prospective landlord, including names and contact information of prior landlords. If you burn a bridge with a landlord by not paying rent, others may not be so keen to rent to you.

Here’s what to do if you can’t make rent

If you’re having trouble paying, here are a few steps to take:

Contact your landlord: Don’t delay, get in touch with your landlord as soon as you realize you’re going to come up short on rent money. They may be willing to work with you, or cut you a break temporarily, if you’re honest and upfront about your issue (and don’t wait until rent is already late).Lean on family or friends: Can you borrow some money from loved ones to help cover your shortfall? Be sure to create an agreement in writing so they know you’ll pay them back.Look to local agencies: You may have a rental assistance program in your area. Head to the National Low Income Housing Coalition’s site to see.Consider getting a roommate: If your struggle with rent is longer term (and you have the extra space), you might ask your landlord to see about adding another person to your lease to defray your costs.Pick up a side hustle or more hours at work: If you live paycheck to paycheck and are only one unplanned bill away from having trouble paying rent, increasing your income can do wonders for your finances and peace of mind.

Take a deep breath, and make your landlord your first call if you’re coming up short on rent money. Don’t just stop paying and ignore the problem, as that’ll hurt your personal finances to a much larger degree.

Alert: highest cash back card we’ve seen now has 0% intro APR until 2024

If you’re using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR until 2024, an insane cash back rate of up to 5%, and all somehow for no annual fee.

In fact, this card is so good that our experts even use it personally. Click here to read our full review for free and apply in just 2 minutes.

Read our free review

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.

 Read More 

Rich people know how to avoid credit card trouble, right? Read on to learn the worst credit card habits of the rich. 

Credit cards are a useful financial tool and they are often very accessible to the average American. Research from The Ascent into the credit card habits of high earners showed that of those surveyed, just 9% of those earning $1 million or more per year didn’t use credit cards at all (compared to 24% of the rest of us regular folks).

You might take this information to mean that one way to live more like the rich do is to use a credit card for regular purchases. It’s definitely the case that doing so is the easiest way to build your credit and show lenders that you know how to handle (and repay) borrowed money. Plus, credit cards are a very secure way to pay, and some give you the chance to earn rewards, like cash back and points, on spending you’d have to do anyway. What’s not to like?

Well, as the research shows, having an even higher income ($1 million or more) doesn’t necessarily mean making all the right moves with credit cards. Let’s take a look at some bad credit card habits of the rich, and learn the right credit card moves to make instead.

Carrying a credit card balance gets expensive

Credit card interest is expensive, and this is due to both the APR (which averages over 20%), as well as the fact that interest is charged daily and compounds extremely fast. Carrying a credit card balance can mean watching the amount you owe snowball over time, so to avoid this fate, it’s best to only charge to a credit card what you can afford to pay off every month. Despite this, The Ascent’s survey of rich credit card users found that just 33.07% actually pay off their balance every month — while nearly 20% almost never do! With a net worth of more than $1 million, perhaps they are less concerned about how much of their money goes to pad the pockets of credit card companies.

Automatic payments can keep you out of credit card debt

It can be very easy to forget that you owe money on a credit card, especially if you have more than one card and the hustle and bustle of life gets in the way. Setting up automatic payments can help, because your bill will be paid automatically every month, eliminating forgetfulness and also helping you avoid those nasty interest charges (assuming you have autopay set up to pay off the card entirely every month).

Unfortunately, The Ascent’s study found that a little less than 51% of those millionaires surveyed actually have autopay set up, and the remaining respondents make their payments manually. I’m not a fan of autopay myself, but I recognize its utility, especially when it comes to avoiding credit card debt and late payment charges.

Maxing out a credit card is a bad idea

You probably realize that maxing out your credit card (meaning, you’ve spent up to your credit limit) is one of the worst credit card moves you can make. Doing so can push your credit utilization ratio up past 30%, which can harm your credit score. And the more you owe on a credit card, the less able you might be to pay it off in a timely manner. And yet, over half of the respondents to The Ascent’s survey admit to having done just that.

What are they doing right?

Thankfully, the rich do have some credit card behaviors worth imitating. In fact, they keep some of the best credit cards out there in their wallets. While Americans earning less than $1 million annually are more likely (72%) to have a cash back credit card, cash back cards still have an excellent showing for the rich (59% have one). Nearly half (49%) of those surveyed had a travel rewards card (the second most popular type of credit card). Both cash back and travel credit cards offer very attractive benefits, and if you’re not already using one yourself, they’re worth checking out — after all, how can you go wrong with free money back on your spending and the potential to earn free flights and hotel stays?

Rich Americans are also more likely to have more than one credit card; nearly 70% of those surveyed had two or more. You might think that multiple credit cards can mean a short trip to debt city, but as long as you’re paying off your balances and not charging more than you can afford to pay off, having multiple cards can be a great thing. Imagine having the ability to earn cash back or reward points on the biggest spending categories in your budget, such as groceries, dining out, or online shopping. It’s unlikely that you’ll find one credit card that rewards you handsomely for all three of these, but in my own wallet, I have one credit card to use for each.

Credit cards can be a great financial tool, as they’re convenient, secure, and help you build credit. Just be careful to avoid the worst credit card habits of the rich — pay off your balance every month, avoid maxing out cards, and consider setting up autopay to ensure you don’t forget a bill — and reap the benefits that credit cards have to offer.

Alert: highest cash back card we’ve seen now has 0% intro APR until 2024

If you’re using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR until 2024, an insane cash back rate of up to 5%, and all somehow for no annual fee.

In fact, this card is so good that our experts even use it personally. Click here to read our full review for free and apply in just 2 minutes.

Read our free review

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.

 Read More 

Not sure you want to hang onto your I bonds? Read on to see what questions you should address first. 

Last year, many people rushed to buy I bonds as inflation surged. I bonds are government-backed bonds whose interest rate is tied to the rate of inflation. And given that inflation was a massive problem for consumers last year, 2022 was actually a pretty good time to load up on these bonds because they were paying quite generously.

Not only that, but I bonds are virtually risk free because they’re guaranteed by the U.S. government. If you buy stocks in a brokerage account, by contrast, you risk losing money if market conditions sour.

But you may be reaching the point where you’re tired of having your cash locked away in I bonds and want access to that money. If so, and you’re thinking of redeeming your I bonds, be sure to run through these key questions first.

1. Have I held my bonds for a full year yet?

If you bought your I bonds less than 12 months ago and want to redeem them, well, sorry — you can’t. You must hold your I bonds for a complete year before redeeming them is even an option.

If you’re not sure when you purchased your I bonds, log into your Treasury Direct account (which is likely how you bought those bonds in the first place) to look at the date. You can also try looking at your linked checking account to see when the money for your I bond purchase was debited.

2. Have I held my bonds for five years?

Once you’ve held your I bonds for a full year, redeeming them is possible. But you should know that you’ll face a penalty for redeeming I bonds before having held them for five years. Specifically, your penalty will amount to three months’ worth of interest on those bonds, which is money you may not wish to give up.

3. What am I going to do with the money?

It’s one thing to redeem your I bonds and invest your cash in something more lucrative. But if you’re pulling that money out to spend on a vacation, you may want to think twice.

Right now, I bonds are paying 4.3% interest through October. That’s not too shabby for a government-backed investment, and it’s comparable to what many certificates of deposit are paying right now.

However, you may decide that you’re not happy with a 4.3% return. If so, and you’ve held your I bonds for at least five years, it could make sense to redeem them, take the money, and use it on what could be a more lucrative investment.

As an example, the S&P 500 index has delivered an average annual return of 10% before inflation over the past 50 years. If you were to redeem your I bonds and buy shares of an S&P 500 ETF, you might score a much higher return on your cash.

Redeeming I bonds is not necessarily a bad idea under certain circumstances. But run through these questions first so you don’t end up making a costly mistake.

Our best stock brokers

We pored over the data and user reviews to find the select rare picks that landed a spot on our list of the best stock brokers. Some of these best-in-class picks pack in valuable perks, including $0 stock and ETF commissions. Get started and review our best stock brokers.

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.

 Read More