Money Management

Emergency funds are a safety net against life’s curveballs. Find out whether bank failures could put that in jeopardy. 

Emergency funds are a financial cushion against the unexpected, whether it’s a job loss, vet bill, or medical emergency. It isn’t always easy to build an emergency fund. So if your savings are well stocked, congratulations. Not only can having three to six months’ or more of living expenses in the bank give considerable peace of mind, it’s also something to be proud of.

That said, it may also make the current banking crisis all the more stressful. However remote the possibility, the idea that all your savings efforts could be undone by factors outside of your control is nerve racking to say the least. However, it is extremely unlikely that you’ll lose your savings because of issues in the banking world. Read on for two key reasons why.

1. No savers have lost their deposits

Back in the 1930s, thousands of banks failed, wiping out billions of dollars of savings. Almost a century later, and there are a number of safeguards to ensure history does not repeat itself. One key protection is FDIC insurance, which covers up to $250,000 per bank, per customer, per account type.

We may have seen three huge bank failures this year, but none of their customers lost the money they’d deposited. Indeed, the FDIC says, “No depositor has ever lost a penny of insured deposits since the FDIC was created in 1933.”

Sure, the FDIC draws a distinction between insured and uninsured deposits. The majority of banks are covered by FDIC insurance, but it’s worth double checking yours just in case. Plus, there are limits. A decent chunk of banking deposits are over the $250,000 threshold and therefore fall outside the FDIC coverage.

Even so, in the recent bank failures, people’s money was safe even if they had more than $250,000 in the bank. People with uninsured deposits did not lose their funds when Silicon Valley Bank and Signature Bank collapsed. And JPMorgan Chase took First Republic’s accounts, including those with uninsured deposits, so those customers didn’t lose their cash either.

There are no guarantees about what might happen if more banks collapse. That’s why you might want to take steps to protect your savings if you have significant sums of money in your accounts. There are a couple of moves you can make if you have over $250,000 in the bank. For example, you could open a bank account with a different bank, which would effectively give you double the FDIC insurance. Depending on your situation, you could also consider a joint account, which would give you additional protection.

2. The worst may be over

It’s been almost a month since JPMorgan Chase acquired First Republic. The hope is that the acquisition marked the end of the SVB fallout, and so far, this looks likely. It certainly appears that the most pressing issue of worried customers withdrawing their funds is easing. The reason that matters is that your bank is less likely to fail if the dominoes have stopped falling.

That isn’t to say we’re home and dry — as American Banker points out, there’s still the lurking bogeyman of commercial real estate (CRE) to contend with. High interest rates combined with high vacancy rates in office rentals are a source of considerable pressure for this market. Unfortunately, small and mid-sized banks have a lot of exposure to the CRE market. These institutions may have weathered the SVB storm, but there’s a chance the issues in CRE could still drag them under.

Is your emergency fund at risk?

Given how important emergency funds are to our financial stability, fears about the impact the banking crisis could have on yours are understandable. However, FDIC insurance is a powerful force, as are the other safeguards in place to protect your money. Nearly all banks are covered, and there’s a similar protection for credit unions called National Credit Union Administration (NCUA) insurance.

On top of which, having your money in a high-yield savings account is safer than many of the alternatives. This is not the time to withdraw your money and keep it under the proverbial mattress. Not only are savings accounts earning high rates of interest right now, bank accounts are much better protected against thieves than most household security systems.

Bottom line

Simply put, authorities do not want Americans to lose faith in the banking system. As we saw with SVB, they will take steps to ensure people don’t lose their deposits. In the unlikely event that your bank fails, as long as your account is FDIC insured, your emergency fund is still in the safest place it can be.

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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.JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Emma Newbery has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.

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Is your portfolio conducive to meeting your long-term goals? Find out how to tell. 

The whole purpose of investing your money is to grow it into a larger sum over time. That could, in turn, make it possible to meet different goals, such as being able to retire comfortably or retire at an early age.

A recent CFP board survey, however, found that 30% of Americans are very concerned about their investments. And if you fall into that category, you may want to take a closer look at your portfolio.

Are you investing aggressively enough?

Some people opt to play it safe in their brokerage accounts or IRAs because they’re worried about losing money. But if you stick to conservative investments like bonds, you might end up with a shortfall on your hands.

Let’s say you’ve played it safe with bonds. That might mean you’re able to generate around an average annual 5% return in your portfolio. The stock market, on the other hand, has delivered an average annual 10% return over the past 50 years, as measured by the S&P 500.

So, let’s say you’re able to put $200 a month into a brokerage account or IRA over a 30-year period. At an average annual return of 5%, you’re looking at an ending balance of about $160,000. Make that a 10% average yearly return, and you’re looking at $395,000.

As such, if you’re mostly investing in safer assets, consider making some changes. You can shift toward more conservative assets as retirement (or whatever big goal you’re saving for) nears. But you want to make sure your portfolio is delivering higher returns so it grows at a fast enough pace.

Are you diversified enough?

It takes a diversified portfolio to not only grow, but get protection during periods of stock market volatility. So if your portfolio consists of just a few stocks, or several stocks within the same market sector, you could be setting yourself up to fail.

The solution? Branch out. Aim to own at least 25 to 30 stocks across a range of market sectors. Or, load up on broad market exchange traded funds, or ETFs.

If you buy shares of an S&P 500 ETF, what you’ll effectively be doing is investing in that entire index. To put it another way, you’ll be investing in 500 different companies without having to go out and buy shares of each one individually.

Another thing you should know is that many brokerage accounts today allow investors to buy stocks as well as ETFs on a fractional basis. This means you’re not limited to whole shares. Instead, you can buy one-tenth of a share of a given company if that’s the route you want to take. If you take advantage of fractional shares, you may find that diversification becomes even easier.

It’s natural to be nervous about your portfolio, especially if you’re a newer investor. But if you’re generating high returns in your portfolio and you’ve assembled a diverse mix of assets, then you can take some comfort in the fact that you’re most likely on the right track.

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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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A consultant could help your business get back on track. Read on to learn if it’s the right move for you. 

As a small business owner, you may want to do it all, from managing staff to overseeing your product line. And you may be the person who personally signs every check your business issues and pays the credit card bill every month.

But that doesn’t mean you can’t benefit from the perspective of an outside professional. And so you may be at the point where you’re thinking of hiring a consultant to assess your business and make recommendations for improvements.

Of course, the only real downside to going this route is the cost involved. But if you’re willing to make that investment, it might truly pay off in the long run. Here are a few signs that it may be a good time to bring in a consultant.

1. You’re burning through cash

These days, a lot of small businesses are spending more money than usual to cover their costs. So are consumers, for that matter. We can thank inflation for that. In fact, 26% of small business owners reported that inflation was their single biggest issue in January, according to the National Federation of Independent Business.

But whether you’re burning through cash due to inflation or another reason, that’s a pattern you generally do not want to uphold. It might take a consultant to help you identify ways to trim your spending so you don’t put your venture at risk.

2. Your growth has stagnated

Inflation is generally a sign of a strong economy, even though that may not seem like the case. In fact, the economy has been strong since staging a recovery in 2021. But if your business’s growth has come to a standstill, it means the problem may be with your venture, not the broad economy. In that case, it could pay to have a consultant come in and identify ways to regain momentum.

3. You’re not sure if the time is right to expand

Between recession warnings and inflation, growing your business might read like a risky prospect these days. A consultant could help you make the decision as to whether it’s a good time to expand or not. They can also help you understand the ramifications of not expanding versus taking that chance.

4. You’re looking to streamline operations

There may be aspects of your business that could work more effectively, whether it’s the way you fulfill customer orders, do your marketing, or run payroll. A consultant might be able to identify ways you can streamline your operations and save yourself and your staff valuable time.

And when you’re running a business, saved time can equal saved money, or more revenue.

Hiring a consultant doesn’t just mean paying a fee for a professional’s advice. It also means putting yourself out there and acknowledging that you may not have all the answers when it comes to business decisions. But if these signs apply to you, then bringing in a small business consultant could be not only a smart move, but one that prevents a host of unfavorable financial consequences.

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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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Worried about falling short on long-term savings? Read on for signs that you’re doing just fine. 

The idea of retirement can be scary to a lot of people. After all, you’re going from earning a paycheck from a job to having to live off of savings. And given that you’re apt to face a host of expenses as a retiree, from housing to healthcare, you might worry that your nest egg is going to let you down.

A recent CFP board survey found that 35% of Americans are very concerned about preparing for retirement. If you’re worried that your savings aren’t cutting it, that’s understandable. But here are a few signs you’re actually in really good shape.

1. You’re saving a nice portion of your income in an IRA or 401(k)

Once you have enough money in savings to cover three months of living expenses, it’s a good idea to focus on funding a retirement plan. It’s generally advisable to sock away 15% of your income or more, if possible, in an IRA or 401(k) plan. So if you earn $50,000 a year and are contributing $6,000 to your IRA, that’s actually a really respectable sum, even though $6,000 may not seem like a ton of money.

2. You’re boosting your savings rate every year

When you first start working, it can be difficult to part with large chunks of money — especially if you’re only bringing home an entry-level salary. But if you’re increasing your IRA or 401(k) contribution rate year after year, that alone is a sign you’re getting to a good place.

So, let’s say you started working a few years ago, and your out-of-college salary was $35,000. Let’s also assume you put $1,200 into your IRA that year, which represents about 3.5% of your income. If, at this point, you’re earning $40,000 a year and you’re putting $3,000 into your IRA, that’s 7.5% of your income. If you keep up that pattern, you should eventually get to the point where you’re socking away 15% or more of your earnings.

3. You’re generating solid returns

Let’s say you’ve been contributing $100 a month to your IRA for the past five years, or 60 months. That means you’ve put in $6,000 from your earnings.

But if your IRA balance is now at $9,000, it means you’ve been snagging around a 9% annual return on your money. That’s pretty impressive, and largely on par with the stock market’s average return. And if you keep your IRA invested savvily, as you’re able to ramp up your contributions, you may find that your balance is really able to soar.

It’s easy to worry about not having enough money in retirement. But if these signs apply to you, it means you’re doing a good job of saving. That doesn’t mean you can’t, or shouldn’t, aim to ramp up your contributions even more. But you can rest assured that you’re in a great place. And if you continue doing what you’re doing, there’s a really strong chance that come retirement, you’ll have more than enough money to enjoy the comfortable lifestyle you deserve.

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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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Have a CD that’s about to mature? Read on to see why it pays to make a decision about it rather than leave that choice up to your bank. 

Money you might need for emergency expenses should sit in a savings account. But if you have money beyond your emergency fund, it could pay to open a CD (certificate of deposit).

The upside of opening a CD is that you’re likely to get a better interest rate on your money than what a savings account will pay you. And also, with a CD, that rate is guaranteed for the term of your CD.

Let’s say your savings account is paying 4% interest today. There’s no guarantee that it will be paying 4% in two months from now. But if you lock in a 12-month CD at 4.5%, you’re guaranteed a 4.5% interest rate on your money for a full year.

Now, the downside of putting money into a CD is that you can’t access your cash before your CD matures without incurring a penalty. That penalty will depend on the institution you bank at. At Capital One, for example, you’ll be penalized three months of interest for cashing out a 12-month CD before it comes due.

Meanwhile, if you already have money in a CD, it’s important to keep track of its maturity date. It’s also important to take action before your CD comes due. If not, you may wind up unhappy with what your bank does with your money.

When you sit back and do nothing

Generally, your bank will notify you when you have a CD that’s about to come due so you can make a decision on what to do with your money. You may decide to have that CD renew. Or, you may want to cash it out at maturity and have the money deposited into your savings or checking account. From there, you’ll get access to your cash, which means you can leave it with your current bank or opt to open a CD at a different bank offering a better interest rate.

But if you do nothing as your CD comes due, what’ll generally happen is that your bank will simply roll your CD into a new one with the same term length. So if you have a 12-month CD coming due and you take no action, your bank might start you over with a new 12-month CD. From there, you’ll be committed to that term unless you want to risk a penalty.

You should also know that when this happens, you’ll be signed up for that new CD at whatever interest rate your bank is offering at the time. That rate may be better or worse than the rate you locked in on the CD that’s maturing. And it may be better or worse than the rate you might get at another bank.

It pays to take action

Putting money into a CD can be a smart move, but it’s important to know when your CD is set to come due and decide what you want to do with your money once that happens. It’s equally important to inform your bank of your decision before your money is rolled into a new CD automatically.

If you bank online, you can usually go into your account and make your choice so your bank knows what to do on your CD’s maturity date. If not, you’ll need to contact your bank and ask how to make your choice known. But either way, it’s better that you decide what to do with that money — not your bank.

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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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A U.S. default would have ripple effects across the financial system and economy. Here’s why mortgage rates could go up by close to 25%. 

The possibility of a U.S. debt default has been making headlines in recent news, and for a good reason. The aftermath of default could have far-reaching effects on every aspect of the economy, including mortgage payments. Here’s how a U.S. default may impact monthly mortgage payments and what we can do to prepare ourselves.

What is the debt ceiling?

The first debt limit was set by Congress in 1917. Similar in function to a credit limit for a credit card, the debt limit ensures that the federal government operates within its means and does not spend beyond its allotted resources.

The government has hit the debt ceiling, and if Congress doesn’t raise it soon, the U.S. won’t be able to borrow money and would default on all its obligations. If this happens, the country’s economic stability would be put at risk.

How does a default affect mortgage rates?

Should the U.S. default, it would be unable to pay its creditors. When investors lose confidence in the U.S. government’s ability to repay its debt, they demand higher yields to compensate for the risk. This, in turn, would result in a chain reaction of higher interest rates across the board — including on mortgages, credit cards, and car loans.

The ultimate result? These financial products would all become more expensive for everyone. For those in the housing market, this could mean a sharp increase in borrowing costs and a decrease in sales activity.

According to a recent Zillow report, mortgage rates could increase significantly, possibly up to 8.4%. Such a rise in interest rates means that monthly payments on a typical $500,000 home would increase by 22% up to $3,800, compared to a monthly payment of $3,095 with a 6.3% interest rate.

How would a default affect the house market?

A significant increase like this would put homeowners under considerable financial stress, and some might not be able to pay their mortgage and be foreclosed on. Higher mortgage rates would lead to a drop in the overall demand for homes.

Higher mortgage rates will also reduce home appreciation values. However, according to Zillow forecasts, the impact on home values is expected to be modest. Home values would dip by 1% from current levels starting in August until February 2024 but are expected to end up 1% higher by the end of 2024 compared to current values.

Steps you can take

Nobody wants a U.S. default to happen, as the ripple effects can damage the economy, the housing market, and affect millions of people. Although we cannot control what happens, we can position ourselves better just in case such a scenario occurs.

If you’re a home buyer, you might want to consider locking in a low rate now by getting pre-approved for a mortgage and shopping around for the best rates and terms. This can help you secure a lower monthly payment and reduce the risk of rates rising later.

If you’re a homeowner, you could refinance your existing mortgage to a lower rate (which would be hard in today’s rate conditions) and save money on interest or shorten the term to pay off the loan faster. You could also pay down your mortgage principal faster by making extra payments or switching to bi-weekly payments. This would also reduce the amount of interest you pay over the life of the loan.

A U.S. debt default is not a certain outcome, so it’s essential to stay informed and not make any rash decisions regarding your mortgage payments and real estate investments. Homeownership is a long-term investment, whether the interest rates are high or low. The most important thing is to make decisions based on facts, not fear.

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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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