Money Management

Building a college fund? Read on to see how yours stacks up. 

Most parents want to make it possible for their children to get a college degree. And to that end, many are doing their best to save.

A good 30% of Americans are saving for college in a 529 plan, according to the Education Data Initiative. And the average 529 balance is $28,953.

That’s not a small amount of money. It also, however, may not be enough to cover the cost of a college education in full.

The cost of college keeps climbing

Based on recent data from U.S. News & World Report, the average cost of college for the 2022-2023 academic year was:

$39,723 for private colleges$22,953 for out-of-state public college$10,423 for in-state public college

This means that $29,000 in college savings would only cover about three years of public in-state tuition.

Of course, just because the average 529 plan balance is a little under $29,000 doesn’t mean that parents in that boat are done saving for college. But still, it’s important to have a realistic view of what college costs these days. And it’s also important to have honest conversations with your children about what you can and cannot afford to spend.

Is a 529 plan the best home for your college savings?

You won’t get a federal tax break on the money you put into a 529 plan (though some states might offer their own incentives). But the upside of housing your college savings in one of these plans is that your investments get to grow tax free, and withdrawals for qualified educational expenses are tax free.

By contrast, with a regular brokerage account, investment gains are not tax free. And you’re liable for taxes on gains year after year.

That said, if you end up with too much money in a 529 plan (clearly, a good problem to have), you’ll face a 10% penalty on the gains portion if you take withdrawals for non-education purposes. And withdrawals for non-educational expenses are taxable.

However, 529 plans are fairly flexible in that you can switch beneficiaries. So let’s say you have two children and one decides not to attend college. You can, at that point, designate your second child as the beneficiary of that account so that they can use that money.

Now if you want more flexibility with your college savings, you may want to stick to a taxable brokerage account or a Roth IRA. If you go the latter route, you’ll get a tax break on gains and withdrawals, too, but you’ll also have the option to reserve funds not needed for college for retirement.

All told, it’s encouraging to see that parents are doing their best to build up nice balances in their 529 plans. If you’re saving for college, whether in a 529 plan or another vehicle, and your balance isn’t close to what the typical American has saved, fear not. If your children are still years away from college, there’s time to ramp up. And if not, your children can always explore different options for keeping their education costs down, like spending a couple of years at community college or pursuing scholarship opportunities.

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Americans haven’t saved this little since 2008. Find out what happens when everything becomes more expensive. 

The price of goods and services rose more than 8% in 2022, according to the Consumer Price Index (CPI). Stuff got expensive. But wages only grew 4%-5%, according to the Atlanta Fed wage growth tracker — overall, not enough to cover surging grocery and gas prices.

When inflation outpaces wage growth, everything gets more expensive. People can afford to buy less stuff. The cost of living goes up, and people save less. The Fed raises rates to combat inflation, making it costlier for the average person to borrow money.

Inflation cheapens cash, but stocks and housing remain valuable. From 2020 to 2022, the stock market snowballed, taking investors with it. According to St. Louis Fed data, homeowners may have benefited from inflation because their property values kept pace.

Here’s what happens when inflation outpaces wage growth, and how to stay strong financially.

You can afford less

Inflation eats into purchasing power. People spent more when the government distributed big stimulus checks, and businesses inflated prices. Now stimulus has run out, and prices are still up. This isn’t a problem when you’re getting paid more.

But when your income doesn’t keep up with inflation, you can’t afford to buy as much.

For example: Let’s say you earn $80,000 a year, and you spend 10% of that ($8,000) on food. If inflation rises by 8%, but your wages only increase by 5%, your income would be $84,000 the next year. However, your grocery bill would now be 10.2% of that ($8,640).

Over the course of the year, you would spend an extra 0.2% of your budget on groceries, reducing what you can spend on other things. When wages fall behind inflation, you can afford less.

Your cost of living rises

When inflation outpaces wage growth, the bills become harder to pay. You can cut down on discretionary expenses, but you must still pay for energy and housing. When the rent price rises 6%, but your manager only gives you a 4% raise at work, you’ve little choice but to take the hit.

Homeowners can combat this somewhat. Fixed-rate mortgages don’t suddenly become “more expensive” during inflationary periods. But it might cost more to leave the lights on or turn on the AC during hot summer months.

Your savings may shrink

During hard times, folks tend to save less money. According to Fed data, personal savings rates skyrocketed in 2020 and 2021 when people got stimulus checks. But now that stimulus has run out, savings rates have plunged to lows not seen since 2008.

That means people are saving less — storing less money in the stock market and housing. Folks may even withdraw cash from emergency savings to maintain their quality of life, disrupting long-term plans and leaving people vulnerable to unexpected price shocks.

How to stay strong financially

On average, the stock market has risen faster than inflation over the long term. The same can be said for property, which typically keeps pace with inflation. One of the best things you can do to combat inflation is to invest in stocks or property long term.

Money in savings accounts tends not to hold up as well. But bank accounts are less risky than investing in stocks. And unlike cash, savings accounts offer you some return on investment.

That said, throwing savings into the stock market isn’t always wise. The markets are volatile. If you need the money soon, you may want to keep some of it in a high-yield savings account so you don’t have to withdraw investments when the market is down and lock in losses.

Consider your situation before drawing up a savings plan. The longer you keep your money invested, the more likely your investments will beat inflation.

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A rent hike is never fun. But read on to see if you should withdraw from your emergency fund to cover your extra costs. 

Housing is often the typical American’s largest monthly expense. This holds true whether you’re paying a mortgage or writing a landlord a rent check.

The problem with being a tenant, though, is that your landlord generally has the right to raise your rent every time your lease comes up for renewal. And so if your landlord has recently decided to exercise that right, you may be wondering how you’re going to come up with the extra money.

A rent increase can clearly constitute a financial blow. And if you have money in an emergency fund, you may be thinking about tapping it to pay your landlord that higher amount. But that’s a decision you might sorely regret.

Don’t blow your emergency fund on a planned expense

Average rent prices have increased 8.85% per year since 1980, according to iProperty Management. So if you’re now looking at a rent increase, it may be a substantial amount.

But as difficult as it may be to manage higher rent payments, one thing you really don’t want to do is raid your emergency fund to cover them. The whole purpose of having that money in your savings account is to be able to pay for unplanned bills, like car repairs, or to cope with a period of unemployment. If you keep raiding your emergency fund to cover your rent, which is a planned bill, you may end up with little to no money left when an actual emergency strikes.

Ways to manage a rent increase

If your rent is going up significantly, it may be a sign that it’s time to move to a new home. But moving can be a large expense, so that may not be the most feasible option for you.

If you have no choice but to stay in your current rental, you could always try negotiating with your landlord before resigning yourself to a massive rent hike. Your landlord may be willing to work with you if you’re a good tenant who never gives them any trouble and always pays on time.

But if that’s not an option, you may need to make some lifestyle changes to afford your higher rent. One avenue to pursue is getting a roommate. You’ll lose out on privacy, but you might have a much easier time covering not just your rent, but also, your utilities, which you can split with the person you share a home with.

Otherwise, take a look at your budget and see if it’s possible to cut your spending. If your rent is going up by $100 a month and you normally spend $100 a month on social outings, you’ll need to ask yourself if you’re willing to not do that for a period of time so you can cover your housing costs without having to get a roommate. Or, you could pick up a side hustle to come up with your rent money.

A rent increase is hardly fun, but it’s something you run the risk of as a tenant. Raiding your emergency fund to cover a rent hike, however, is a dangerous move. And it’s one you should really try to avoid at all costs.

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Savings rates have fallen from 26.3% to 4.1% among Americans. Find out how to take advantage of a turbulent market. 

People are saving less than ever. According to the St. Louis Fed, Americans went from saving 26.3% of disposable income in May 2021 to saving 4.1% in April 2023. Yikes. What happened? Short answer: Stimulus checks ran out, and everything is still more expensive.

Unsurprisingly, the stock market took a bit of a beating and the Fed raised rates.

But all that created an opportunity for today’s investors to gain above-average returns. Market lows offer investors good stocks for cheap, and banks are paying savers more on deposits.

Get in on the action while the getting’s good. Here are four places to put your investments for the rest of 2023 and beyond, before things settle down.

1. Certificates of deposit

You can lock in high interest rates by investing in a certificate of deposit (CD), a kind of temporary bank account. You deposit money for a set period of time (known as a term) and earn interest on it once the CD expires. The catch is that you can’t withdraw funds until your CD matures, or else you lose some of the interest you’re earning.

It’s generally a good idea to invest in CDs when rates peak. That way, you can lock in the highest returns for your investments. Online banks offer some of the best CD rates.

2. Emergency savings

You can keep money easily accessible by building an emergency fund. Need to pay for a surprise hospital bill? No problem. You can access funds held in savings accounts at any time. Right now, they offer returns comparable to certificates of deposit.

Savings accounts earn you the most money when interest rates peak. Right now, the best high-yield savings accounts offer at least 4% returns on investment.

3. Stock portfolio

You can earn the highest returns on investment by investing in a diversified stock portfolio. Right now, the market is fearful. Prices are low across the board compared to 2021 and 2020. Savvy investors will make outsized returns if they play their cards right.

Stocks are considered riskier than savings accounts and certificates of deposit. You can lose money on investments, so money experts recommend diversifying your portfolio.

You can invest in a diversified portfolio through a stock broker — ideally, one with low fees.

4. Pay off debt

You can lower your monthly bills by paying off debt. Saving is only half the battle — the other bit, paying off debt, is just as important. Too much debt can overwhelm you, forcing you to withdraw your savings before you’re ready. Debt can even derail long-term retirement plans.

There are several easy-to-follow debt repayment strategies, including consolidation, the debt avalanche, and the debt snowball. Those with debt can try one of these tactics to secure their financial futures.

Which is best?

To determine the best investment for you, consider the following:

When do you need your money back?How much are you paying on your debt?

If you need to withdraw investments by this year’s end, consider limiting investments to a short-term CD or an emergency fund. That way, you don’t risk having the value of your investments plunge or have them locked up when you need to withdraw your money.

But if you plan on staying invested for five years or more, consider investing in the stock market or a long-term CD for higher returns. Quick comparison: The stock market typically offers higher returns, but returns aren’t guaranteed. A CD is a lower-risk, lower-reward option.

If your investment gains lag behind high-interest debt repayments, consider paying that down first. The less debt you have, the less you’ll pay in interest.

How long do you plan to stay invested? Do you have high interest rates on debt? Answering these questions will help you determine where to put your investments for the rest of 2023.

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Paying a personal loan off early can make sense in certain circumstances. Read on to learn when it’s worth doing. 

Personal loans can be a great way to borrow money. With a personal loan, you have flexibility regarding what you do with the funds the lender provides to you. You can usually use the money for just about anything.

Unlike credit cards, personal loans can come with pretty affordable rates. While the average rate on a 24-month personal loan was 11.48% as of February 2023, this average has dropped below 10.00% numerous times in the recent past. And, personal loans also have set payoff schedules — such as a 24 or 48 month loan — so there’s no surprises about when you’ll be debt free.

Despite these benefits, there’s no question that personal loans can be a financial burden. If you have one, you will be losing money to interest charges and have a monthly obligation that eats up your income. As a result, you may wonder whether it makes sense to get ahead on personal loans and pay more than required to become debt free sooner.

To decide whether that makes sense for you, there are a few key questions to ask yourself.

1. How much money will you save?

The first thing to think about is just how much early payoff is going to save you. Say, for example, you borrowed $10,000 on a 48-month loan with an 11.48% interest rate and $260.79 monthly payments, and you had 36 months remaining on your loan. You might opt to pay an extra $100 per month on top of the $260.79 you were already paying on the loan.

If you make these extra payments to get ahead on paying off your personal loan, you would become debt free 11 months faster and would pay a total of $2,051 in interest instead of the $2,516 that you’d have paid if you didn’t get ahead.

Saving so much money is a major advantage — especially since personal loan interest isn’t tax deductible, unlike mortgage loan interest (which you can usually deduct if you itemize).

The amount you save may make early payoff worth it — especially if the interest rate on a personal loan is above 10.00%, which is the average annual return (before inflation) the S&P 500 provides. If your rate is higher, then you can likely get a better return on investment with early personal loan payoff than by putting your money into the stock market.

2. Are there prepayment penalties?

When deciding if you should get ahead on paying off your personal loan, you do need to consider whether you’ll get hit with penalties. Many lenders promise you won’t be charged if you pay off your loan early — but that’s not the case in every situation.

If you are charged a prepayment penalty, this could negate the savings from early payoff so it would no longer be worth it. Check your loan paperwork to see if this is an issue for you and, if so, see how your penalty stacks up to the interest you’d save.

3. What other kinds of debt do you have?

Finally, before you decide to get ahead on your personal loan, check to see if there’s any other debts you should be paying off first. If you have credit cards or other loans at a higher interest rate, it makes sense to pay off your costlier debt first as you’ll save more on interest.

By asking yourself these three questions, you can decide if getting ahead on personal loan payments is the right move or if there’s something else you should be doing to better improve your net worth over the long run.

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It can be expensive just to be a guest at a wedding. But read on to see why raiding your emergency fund to cover that cost is not a smart move. 

The cost of throwing a wedding can range from expensive to downright astronomical. But the cost of attending a wedding isn’t exactly cheap, either.

The average cost of attending a wedding in 2021 was $460 per guest, according to The Knot. But those who flew to a wedding spent an average of $1,270. Yikes.

If you’re invited to an out-of-town wedding, you may be worried that attending will result in a massive credit card balance you’re forced to carry forward. But what if you have money in your savings account earmarked for emergencies? You may be tempted to tap your emergency fund to avoid racking up debt in the course of going to a wedding. But that’s a move you might sorely regret.

Don’t take a non-emergency withdrawal from your emergency fund

The whole point of having an emergency fund is to cover unplanned expenses, such as home or car repairs. Your emergency fund might also be the thing that gets you through a period of unemployment should your job end up on the chopping block.

As such, it’s important to reserve that money for emergencies only. And attending a wedding just doesn’t fall into that category.

If you take an emergency fund withdrawal to pay for your flight to a wedding, for example, you might end up racking up new debt a few months down the line if your car winds up needing work. So while it’s okay to tap non-emergency savings to attend a wedding, you shouldn’t use your emergency fund for that purpose.

You may need to say no

If your close cousin, best friend, or long-time neighbor is getting married out of town, then you may have no choice but to push yourself to swing that trip — even if it means cutting back on expenses to a major extreme to cover the cost. But otherwise, if you can’t afford to travel for a wedding, you may need to just be honest with the bride and groom and say so.

The happy couple may be disappointed to learn that you won’t be attending their event. But if they’re good friends and good people, they’ll understand that it’s just not within your financial means, and that you’re not willing to drive yourself into debt to be able to go.

That said, there are steps you can take to soften the blow. Send a nice card and, if you can afford it, a generous gift. You might also offer to take the happy couple out for a celebratory dinner once they’re back from their honeymoon to acknowledge their milestone.

But ultimately, attending a wedding is not an emergency. And as such, it’s not a good reason to tap your emergency savings. If you can’t afford to attend a wedding without landing in serious debt, decline the invitation.

You may be disappointed to miss out on a big event like a wedding. But you might end up even more disappointed if your financial situation deteriorates due to you accruing a pile of debt by attending.

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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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