Money Management

Higher interest rates could make your HELOC more expensive. Read on to see why. 

When you have a need to borrow money, you have choices. You could take out a personal loan and use the proceeds as you see fit. Or, you could tap the equity you have in your home.

In this regard, you have a few choices. With a home equity loan, you’re borrowing a specific amount of money at a specific interest rate. To put it another way, you’re signing up for fixed payments until your loan is paid off.

You could also sign up for a home equity line of credit, or HELOC. With a HELOC, you’re not locking in a specific loan amount. Rather, you get access to a line of credit you can tap as needed during a predetermined time frame, whether it’s five years, 10 years, or longer.

The upside of getting a HELOC is that you get flexibility. Say you’re borrowing to complete a home renovation and you don’t know exactly what your final costs will be. If you take out a $20,000 home equity loan but wind up needing $24,000 to finish your work, you’ll be short $4,000. If you sign up for a $30,000 HELOC, you could simply borrow the $24,000 you need, leave the remaining $6,000 untapped, and only accrue interest on the sum you’ve actually withdrawn.

But while HELOCs may be convenient, one drawback associated with them is that their interest rates tend to be variable. And that means that when the Federal Reserve raises interest rates, it has the potential to make an existing HELOC more expensive to pay off.

Brace for higher costs if you have an existing HELOC

You may have seen that the Federal Reserve has been raising interest rates in an effort to slow the pace of inflation. The Federal Reserve doesn’t set HELOC rates, or any consumer borrowing rates for that matter. Rather, the Fed dictates what the federal funds rate looks like, which is the rate banks charge each for short-term borrowing.

But when the Fed raises that benchmark interest rate, it tends to drive the cost of consumer borrowing up across the board. So if you’re looking to sign a new home equity loan, for example, you might end up with a higher interest rate today than you would’ve locked in a year ago, assuming your credit score hasn’t changed.

How does this tie into HELOCs? Let’s say you’ve been making payments on a HELOC and are barely able to fit them into your budget. In light of the Fed’s recent rate hikes, you could soon see your HELOC payments rise even more. That could put you in a tough spot, because falling behind on a HELOC could mean suffering major credit score damage. It could also, in time, put you at risk of losing your home, since your HELOC is secured by your home.

Be careful when signing a HELOC

It’s easy to see why a HELOC might seem like an optimal borrowing choice. But remember, any time you sign up for non-fixed payments, they have the potential to increase. Carrying a HELOC balance is similar to carrying a credit card balance in that regard.

If you have an existing HELOC, your best bet may be to try to pay it off as quickly as you can. If not, prepare to make some room in your budget for higher payments, because in light of recent interest rate hikes, they might soon start to climb.

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With the right strategy, you can build savings even when you’re starting with none. Read on to see how. 

Being a gig worker can be both a good thing and a bad one. On the plus side, you can often set your own schedule and, in many cases, work from a location that’s convenient for you.

On the negative side, gig workers aren’t entitled to employee benefits like health insurance and paid time off. And if you want to save for retirement, you’ll need to open your own IRA, because you won’t have access to an employer 401(k) plan.

Another problem with being a gig worker? Your income might fluctuate quite a bit. That could make it difficult to manage your bills. And it could also put you in a position where it’s very difficult to build up your savings account balance.

In fact, many gig workers do not have money socked away in the bank. A good 37% have $0 saved, according to a Branch survey. That’s up from 31% who had no savings a year ago. And that’s a problem.

You can’t afford to go without emergency savings

If you don’t have any money in savings to fall back on, you might instantly be forced into debt if your workload dries up or your gig opportunities go away. Another problem with being a gig worker is that you’re not entitled to unemployment benefits in the event of a lost job.

You may be thinking, “Wait a minute — didn’t gig workers get to collect unemployment benefits during the pandemic?” But that was a special provision put in place specifically during the early days of the COVID-19 pandemic to help gig workers during what was an unprecedented time.

Generally speaking, gig workers, or anyone who’s self-employed, cannot receive unemployment benefits. So if your work goes away, you might become immediately dependent on your savings to get by. And so if you don’t have savings, that’s a problem.

How to build an emergency fund as a gig worker

Saving money can be particularly challenging when you’re a gig worker because you can’t rely on the same paycheck week after week. So if you want to build savings, what you need to do is get yourself on a budget that’s based on the lowest income you think you’ll earn in the course of a given month. Find a way to eke out savings based on your lowest earnings, and you’ll have even more opportunities to save during months when you do better.

As an example, say you comb through your checking account and see that over the past four months, your income has ranged from $2,800 to $3,800. If you rearrange your spending so you’re able to not only pay your bills on $2,800, but also, say, save 5% of that sum, then you’ll be in an even stronger position to save during the months when your income is higher.

You’ll also, of course, need to pay close attention to what you’re spending money on. If there are non-essential expenses in your budget, slash them until your savings account has at least some money in it.

It’s extra important to have emergency savings when you’re a gig worker. Your goal should really be to save enough to cover three full months of expenses at a minimum. But if you’re starting with $0, do the best you can to at least give yourself some type of cushion, and then work your way up gradually.

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You can quickly put as little as $50 to work. Find out how to effectively invest $50 for your financial future. 

Maybe it’s your first time investing. Maybe you’ve got a bit of moolah left over after paying the bills because you’re just that awesome. Whatever the reason, you’ve got $50 burning a hole in your wallet and a desire to spend responsibly (Mom is very proud right now).

Because sure, you could buy another set of H&M T-shirts. But there are better investments out there. Assets that will last you a lifetime and have you saying things like “I have no regrets” and “best $50 I ever spent” on your deathbed.

Savings, stocks, and cures, oh my! Here are three simple ways to invest $50 in your long-term financial future.

1. Invest in a high-yield savings account

The quickest way to put that money to work? Toss it into a high-yield savings account. Over time, your money will grow. Rates are historically high right now. Some banks pass that on to their customers by offering to pay them more interest on stashed cash.

The best savings accounts can help prevent that $50 from losing value to inflation. Even better, you can put that money toward your emergency fund. That way, you’ll be even better prepared to weather the recession financial experts are forecasting.

2. Invest in the stock market

Invest in your financial health. Download a free investment app, and stick that $50 into your favorite company. Now you’re the proud partial owner of a business you stand by. Even better, you can watch that money grow over time.

While you can totally toss that $50 into the S&P 500, consider starting with a company that interests you personally. That way, you’re more inclined to pay attention to your money. Even if the stock doesn’t do well, you can learn valuable lessons about the stock market for the low, low price of $50.

The best brokers for beginners make starting your investment journey simple and easy.

3. Buy a $50 cure

I work from home. A lot. It’s great, but things sneak up on you. Like chronic back pain. Turns out, sitting in front of a computer all day wreaks havoc on your skeletal system. Who knew?

I purchased an ergonomic chair off Amazon for under $50, reducing my back pain by at least 20%. The best part? That investment will continue to pay dividends as long as I work from home. Once I save enough for a standing desk, I’ll be on my way to a permanent cure.

Another winner: blue light glasses. Staring at my glowing computer screen all day? Exhausting. Dries my eyes right out. After purchasing a cheap $10 pair of blue light glasses from Amazon, my eyes are fine, and I don’t get screen headaches.

Both investments were 100% worth the money. Why? Because they fixed health issues that could have gotten progressively more painful and expensive down the line.

Invest in compounding returns

Some of the best investments are those that keep on giving for years. Investing in savings, stocks, and cheap cures can stretch your money’s value past its typical expiration date. Why? Because all three affordable investments grow increasingly more valuable over time.

For example, a $50 investment in the stock market with an annual 8% return (the average historical rate) would earn you $4 in a given year. But say you continue to invest $50 every month. After 20 years, you’d have $27,690.23 invested. That’s over $15,000 more than if you’d kept those savings in zero-interest cash balances.

Savings and stocks compound your wealth. Cures fix health issues before they can become progressively more painful and expensive. Combine cheap remedies with investments in high-yield savings and stocks to squeeze the most out of $50 or less.

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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.John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Cole Tretheway has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon.com. The Motley Fool recommends Progressive. The Motley Fool has a disclosure policy.

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Your bank might be paying a nice amount of interest. But read on to see why switching to another institution could still make sense. 

Banking is one of those things you tend to get used to. If you’ve had your money at the same bank for many years, it can be difficult to push yourself to make a switch. This especially holds true if your bank happens to be paying a pretty good interest rate on your savings account right now.

But even if you’re happy with the rate you’re getting, switching to a new bank could still work to your benefit. Here are some of the reasons why a change could make sense.

1. You can snag a higher interest rate elsewhere

Maybe your bank is paying 3.75% on savings accounts right now. But if there’s another bank offering 4.25% on your money, moving over could mean earning a lot more interest.

Let’s say you have $20,000 in savings. An extra 0.5% of interest means walking away with an additional $100 in the course of a year — all for basically doing nothing. So you shouldn’t necessarily let your familiarity with your current bank stop you from earning more money at another.

2. You can sign up for a CD whose early cash out penalties aren’t as harsh

CD rates tend to be higher than savings account rates because you’re required to commit to keeping your money in the bank for a preset period of time. That could be six months, 12 months, two years, or longer.

When it comes to the principal amount of money you put into a CD, there’s no risk in opening one provided your deposit doesn’t exceed $250,000 and your bank is FDIC insured. However, you do run the risk that you might have to cash out your CD before it comes due. Go that route, and you’ll likely face a penalty, the extent of which will depend on your bank.

Capital One, for example, charges a penalty of three months of interest for cashing out a CD early when its term is 12 months or less. And your bank might have a similar policy. But if you can find a bank that offers a smaller penalty for cashing out a CD early, then it could pay to move your money over.

3. You’re hoping for better customer service

Whether you reach out for help from your bank occasionally or frequently, it should be a good experience from start to finish. If your bank doesn’t offer such great customer service, then it doesn’t matter that it’s paying a good interest rate on your savings. You still deserve to be able to walk in or pick up the phone and have an efficient, pleasant, helpful interaction with the person tasked with assisting you. Period.

Moving from one bank to another can be a jarring experience if you’ve banked at the same institution for many years. But if these situations apply to you, it could pay to make a change. And remember, you’re apt to get used to that change in time, even if it feels strange to bank elsewhere initially.

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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.Maurie Backman 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.

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Savings can provide a safety net, but your financial habits could result in your having to dip in and drain the funds. Find out more. 

Having extra money set aside in a savings account can be comforting. You never know when you’ll need to use your funds to cover an unexpected expense, and you’ll feel better knowing you have extra money available. But your everyday spending habits could unintentionally drain your savings if you’re not careful.

Being mindful of your day-to-day financial choices can help you avoid depleting the savings account you worked hard to build. Here are a few ways you might be emptying your account without realizing it.

1. Spending more than you make

A common way to drain your savings quickly is to overspend. It’s never a good idea to spend more than you make because there’s a risk you’ll use up most or all of the funds in your bank account. If that happens, you may need to move money from your savings account to your checking account to recover or, worse, you may end up with credit card debt.

If you struggle with managing your money, you’re not alone. You can learn better money management habits by following a budget. Using budgeting apps can make it easier to plan for necessary expenses and monitor your spending habits so you only spend what you can afford. You’ll be less likely to need to dip into your savings as you get better at budgeting.

2. Paying unnecessary bank fees

It’s important to monitor your bank account activity regularly. You can review your transactions or check your monthly statements through your bank’s website or mobile app. Doing this allows you to be informed. You may be paying bank fees, like maintenance fees, without being aware. All those extra fees add up and drain your bank account balance.

3. Not replacing the money you took out of savings

The purpose of a savings account is to have extra money available when you need it. But replacing the money you take from your savings account is essential. Otherwise, there may come a time when you have little or no savings left because you use it all up.

The easiest way to avoid this is to save money regularly. You can set up automatic transfers to transfer money from your checking account to your bank account. By saving regularly, you’ll feel less stress when you dip into your savings to cover an unexpected expense.

4. Forgetting to save for non-monthly expenses

In addition to saving for unexpected costs, saving up for the irregular bills you pay is essential. Most of us have monthly expenses like rent and utility bills. But some other non-monthly expenses can creep up and negatively impact your personal finances if you don’t plan property.

Expenses like yearly membership dues, home insurance premiums, property taxes, and vehicle registration and inspection fees may occur less frequently but still need to be paid. If you don’t set aside extra money throughout the year to cover these expenses, you may have to dip into your emergency fund, which could quickly deplete your savings.

You can avoid this by establishing a sinking fund to save for upcoming, expected expenses. By doing this, you’ll be prepared when the next non-monthly bill comes your way, and you won’t have to dip into your other savings accounts. Don’t forget to contribute to this fund regularly.

Do this to help your savings grow

It’s crucial to consider your everyday habits and take steps to avoid pitfalls that could drain your savings. If you’ve been saving, make sure you’re keeping your extra cash in a savings account that earns interest. Otherwise, you’re missing out on free money. Stashing your cash in a high-yield savings account is an excellent way to grow your bank account balance faster.

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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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