Money Management

Dave Ramsey believes the housing market is cooling down. Find out what four things he recommends doing to make a successful purchase in this market. 

Home prices skyrocketed during the pandemic as mortgage rates plummeted. Many people jumped into the property market, eager to buy a home and take advantage of record-low rates.

Now, however, finance expert Dave Ramsey believes the market is slowing down thanks to rising mortgage rates and reduced demand. This doesn’t mean that buyers can just jump into purchasing a place without some thought about the financial impact, though.

In fact, Ramsey recommends following four rules when purchasing a property in a cooling market. Here’s the advice he wants you to follow, along with some thoughts on whether it’s worth listening to.

1. Get mortgage pre-approval

Ramsey recommends working with a mortgage lender early in the process of looking for homes so you’re ready when a house comes up.

“Get a mortgage pre-approval,” he advises. “This way, you have proof from a lender that they’re willing to work with you. Getting pre-approved will show sellers you can back up your offer with real money, which will put you in a much more competitive position.”

To get pre-approved, you’ll need to provide your financial information to mortgage lenders who will review it to make sure you can get a loan. They’ll offer you a rate based on how qualified a borrower you are, which you may be able to lock in for a period of time. They will also give you a pre-approval letter.

Ramsey is right that it makes a lot of sense to get pre-approved for a mortgage. Many sellers won’t let you come see a property without pre-approval, much less accept an offer from you. Even though the market isn’t as competitive as it was, not having pre-approval could mean missing out on a chance to buy a home.

2. Stay on budget

Ramsey’s next tip is to make sure you don’t overspend and end up purchasing a house that comes at a higher cost than you’ve determined you can afford.

“Stick with your budget. We know it’s frustrating to look for a home, only to see the ones you want are all outside your price range. But buying a house you can’t afford turns the blessing of homeownership into a curse real quick,” Ramsey warns. “Stay patient and keep your mortgage payment to 25% or less of your monthly take-home pay!”

This is another Ramsey tip worth following. It is really tempting to stretch your home-buying budget, especially if a lender is willing to loan you more. But, when you become house-poor by devoting too much of your monthly income to your mortgage and other housing costs, it can make life stressful and leave you falling short of other important financial objectives.

3. Get the right mortgage

Getting the right mortgage is another key piece of Ramsey’s advice. And there’s one specific kind of loan he recommends.

“The only home loan we recommend is a 15-year fixed-rate mortgage. It’s the cheapest, quickest way to own your house outright — other than paying with cash,” Ramsey explains.

On this point, though, listening to him likely isn’t wise. A 15-year mortgage is going to cost you a lot more per month even though the starting rate is lower. That’s because you’ll be paying off your loan in half the time.

Say you’re borrowing $240,000. With a 30-year fixed-rate loan at 7.245%, you’d be looking at a monthly payment of $1,636 (not including taxes and fees). But if you opted instead for a 15-year loan at 6.242%, your monthly payment would go all the way up to $2,057.

RELATED: Mortgage Calculator

Spending so much extra on a home loan rarely makes sense because the return on investment (ROI) is just the interest saved. You can usually get a better return by investing the amount you would save by opting for the loan with the longer term. This means you’ll have a higher net worth in the long run.

4. Work with a real estate professional

Finally, Ramsey recommends hiring a buyer’s agent to help in your home purchase. “Whether you’re in a hot market, a cold one or somewhere in between, buying a house can be stressful. So partner with an experienced real estate agent,” he advises. “A good agent will walk you through all the complex details to close on a home — no matter what the housing market looks like!”

This advice makes a lot of sense as well. You don’t pay a buyer’s agent directly — the seller does. And your real estate agent can help at every step of the process, from finding houses to making an offer.

You should seriously consider following three of these four tips, with the only exception being opting for a 30-year loan instead of a 15-year loan. If you do, you’ll help to set yourself up for a successful purchase in this cooling market.

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Is a Costco executive membership right for you? Read on to find out. 

Some people refuse to join Costco because they don’t want to take the risk of paying an annual membership fee only to not get great use out of it. But many people find that shopping at Costco means racking up lower credit card tabs compared to other retailers. So you might find that a membership more than pays for itself.

When it comes to joining Costco, you have choices. You could stick with a basic membership, which costs $60 a year and gives you access to a host of benefits, from access to Costco’s warehouse club stores to its auto and travel services. But if you’re willing to upgrade to an executive membership, you might benefit even more.

A Costco executive membership costs twice as much as a basic one — $120 a year. (It’s worth noting that Costco has not raised its membership fees for several years, so these numbers have the potential to change in the near term.) In exchange for paying $120 versus $60, your Costco executive membership will give you 2% back on all Costco purchases you make, including online orders. And that could result in a lot of extra cash back, depending on your shopping habits.

Costco is eager to have its members benefit from its executive membership program. To that end, it commonly advises cashiers to remind customers with a basic membership that the option to upgrade exists.

But some members insist that Costco has gotten too pushy in promoting its executive membership. And they’re tired of being ambushed every time they go to check out.

Are you being pressed to get an executive membership?

Eat This, Not That! reports that the bulk of Costco members — about 57% — maintain a basic membership rather than an executive one. Since Costco generates a lot of its revenue from membership fees (in 2022, it took in more than $4 billion), it makes sense for the warehouse club giant to train cashiers and customer service reps to push members to pay for the upgrade.

Meanwhile, some Costco customers have taken to complaining on Reddit that they’re tired of being pressured to upgrade their memberships. And that’s understandable.

That said, signing up for an executive membership could end up working out well for you financially. So before you write off the idea, you may want to crunch the numbers.

Do you spend more than $3,000 a year at Costco?

If you spend over $3,000 a year at Costco, then an executive membership makes financial sense. The reason? It costs an extra $60 to upgrade to an executive membership, but when you spend $3,000, you get $60 back on your purchases. So if you spend more than $3,000 in a year, you come out ahead with the costlier membership.

Here’s another lesser-known fact about the Costco executive membership. If you decide to downgrade after a year and you didn’t spend enough to earn $60 back from it, Costco will actually refund you the difference. So, let’s say you spend $120 for an executive membership, only when you get your annual reward certificate, it only amounts to $50. You could then simply go to customer service, downgrade to a basic membership, and get your $10 back.

It may be annoying to get hassled about a Costco membership upgrade when you’re trying to do your grocery shopping and move on. But in many cases, getting an executive membership makes sense, so don’t be too quick to write it off.

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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 positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.

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You can generally buy a term life insurance policy that covers you for 30 years. But do you need one? Read on to see. 

If you have people in your life you support financially, then it’s really important that you put a life insurance policy in place. And when it comes to buying life insurance, you have choices.

You could get whole life insurance, which accumulates a cash value and covers you for the rest of your life. But whole life insurance can be prohibitively expensive. And if you get whole life insurance, you might struggle to cover the cost of your premiums. Fall behind on those payments, and it could result in your coverage lapsing.

That’s why term life insurance is generally a better bet. It can be far less expensive than whole life insurance, so you’re less likely to fall behind on your premium payments and risk losing your coverage.

Now, the nice thing about term life insurance is that you can pick the length of coverage you want. Most life insurance companies that offer term life will write you a 30-year policy (though this may not be the case if you’re older when you apply).

But does someone actually need 30 years of coverage? For the most part, financial guru Dave Ramsey thinks not.

A shorter term could easily suffice

The purpose of term life insurance is to make sure your loved ones are protected. So the length of the term you lock in should hinge on who it is you’re protecting.

Let’s say you’re in your 30s with two children. Your primary goal in getting life insurance may be to ensure that your children’s costs are covered until they reach adulthood and can start working. In that case, you may be fine to put a 20-year term life policy in place.

In fact, Ramsey says that when it comes to life insurance, “For most people, a term of 15 or 20 years does the job.” This isn’t to say that buying coverage for a longer period of time is a terrible idea. Rather, you might end up paying for coverage you don’t actually end up needing.

The longer your term life insurance policy is set up to last, the more it’s going to cost you. That’s because your life insurance company is at a higher risk of needing to pay out a benefit on your policy if it lasts for three decades versus one and a half decades or two.

Run the numbers when making your life insurance choice

Depending on your age and the state of your health when you apply for life insurance, you may find that the difference in cost between a 20-year term life insurance policy and a 30-year term life insurance policy isn’t so significant. You may decide to just buy the lengthier policy and get extra peace of mind.

But if you’re looking at a more substantial difference in cost, consider whether you truly need a full 30 years of life insurance coverage. You may come to realize that a shorter term gives your loved ones the protection they need without you having to worry about paying for those extra years.

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Suze Orman is known for her strong opinions. On this topic, she didn’t mince words. Read on to find out what she had to say. 

One of the best things about personal finance guru Suze Orman is that she doesn’t mince words. When Orman has an opinion, you know about it. So when a listener recently asked her whether it was time to sell the I bonds they purchased last April, Orman was quite clear in her reply:

“That is 100% incorrect advice.”

Orman says definitely don’t sell I bonds yet

In true Orman fashion, of course, her opinion was actually a bit more enthusiastic than just that:

“I don’t know where you read that you should get out of I bonds now,” she told her listener, “But wherever you read that, can you do me a favor? If it’s an email or a text, block them from you. If it was a newspaper article or a magazine, never read that publication again.”

While Orman seemed somewhat flummoxed as to why someone would consider selling I bonds right now — especially I bonds purchased last year when rates peaked — it does make a certain sense. Current I bond rates are significantly lower than the highs from last spring. Simultaneously, other rates, like those on short-term CDs, are going up. Even high-yield savings accounts can give you a remarkable return right now.

But, as Orman reminded her listeners, the money you already have in I bonds is still compounding. And the rate at which it is doing so is nothing to scoff at. So it makes sense to keep your money where it is — especially since you’ll likely lose money if you sell right now.

I bonds have penalties for selling too soon

If you, like Orman’s listener, were one of the many folks who purchased I bonds at their prime last year, then I agree with Orman 100%: Cashing out now would be a huge mistake.

There are two key rules about I bonds that you always need to remember:

You can’t cash out an I bond at all within the first 12 months.If you cash out within the first five years, you forfeit the last three months’ worth of interest.

Rule No.2 is what you really need to focus on when you think about, “Is it time to cash out my I bonds?” Because if you haven’t hit that five-year mark, cashing out comes with a pricey penalty.

If your bonds are less than five years old and you’re thinking about cashing them out anyway, make sure you look to see how much interest you’ll be losing. Even with current rates much lower than last year, it could be a significant sum — particularly since that interest has been compounding on top of the interest you earned when rates were higher.

When will it be time to sell? Orman promised she’d tell her listeners if they just stay tuned. Otherwise, just wait until the math tells you it’s worthwhile. The numbers always know.

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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.Brittney Myers 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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Putting off retirement plan contributions could leave you a lot less wealthy. Read on to learn more. 

To be eligible to contribute to an IRA, you need to have earned income. So if you’re a full-time student without a job and you’re given $200 as a birthday gift, you can’t use it to make an IRA contribution.

But once you start earning money, you’re eligible to fund an IRA. And it’s a really good idea to do so from as young an age as possible.

The sooner you start contributing to an IRA and investing your money, the more opportunity you’ll have for your money to grow. In fact, you may be surprised to see what an impact a five-year delay in IRA contributions has on your total nest egg.

Waiting could hurt you

When you invest money in an IRA (or a regular brokerage account, for that matter), you get the opportunity to load up on stocks. That could end up being very lucrative.

Stocks are known as a volatile investment, and so it’s not a good idea to invest in them on a short-term basis. On a long-term basis, however, they can be a great bet.

Meanwhile, when you invest your money for retirement, you get to benefit from a concept called compounding. On a basic level, compounding is the concept of earning interest on interest.

In the context of your IRA, it could work like this: You buy stocks and earn a nice return on those investments. You then reinvest your gains to grow your IRA even more.

Now, you might assume that if you hold off on funding your IRA for just a bit of time — say, while you get on your feet as a young adult — that it won’t really hurt you so much in the long run. But actually, you may be shocked at how much retirement wealth you might give up by holding off on investing in your IRA.

Let’s assume you sock away $300 a month in your IRA for 40 years — say, ages 27 to 67. The stock market has, over the past 50 years, rewarded investors with an average annual return of 10%, as measured by the performance of the S&P 500 index. So if you snag that same return in your IRA, you’ll be looking at an ending balance of close to $1.6 million.

But watch what happens when you start funding that IRA five years earlier (in this example, age 22), thereby extending your investment window to 45 years instead of 40. In that case, you stand to retire with almost $2.6 million. That’s roughly a $1 million difference at a cost of just $18,000 in extra contributions ($300 a month over a five-year period).

Fund that IRA as soon as you can

You can put as little as $100 into an IRA if that’s all you can manage at first. But the key is to start somewhere, and to start young.

So if you’re 16 years old and earning $800 from a summer job, put it into your IRA. And if you’re 22 years old fresh out of college, sock $50 a month in your IRA if you need the rest of your paycheck to cover your living expenses.

When it comes to growing wealth in your IRA, your greatest tool is time. The sooner you can add money to that account, the more financially secure a retirement you stand to enjoy.

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Are you all set on emergency savings? Read on to see if your cash reserves should get a boost. 

A lot of people these days are feeling the strain of inflation. They’re also worried about a potential recession, and understandably so. Even the Federal Reserve has come out and said that a recession is likely in 2023, albeit a mild one.

Because of current economic conditions, it’s a really good time to assess your emergency fund needs. A good 66% of Americans say that current economic conditions have made them rethink how much money they need in emergency savings, according to a recent Quicken survey. So if you haven’t given your cash reserves a closer look, it’s time to make that a priority.

Do you have enough savings to get through a period of unemployment?

During recessions, it’s common for more jobs to land on the chopping block. And that’s why it’s really important to make sure you have enough money saved to get through a period of unemployment. If you don’t have a robust enough emergency fund, you might have to resort to costly credit card debt in the event of a layoff.

Take a look at your monthly expenses and figure out how much you spend on essential bills — things like rent, car payments, utilities, and food. Next, look at your savings account balance. Do you have enough money in the bank to cover at least three full months of essential expenses? If not, then it’s a sign that your emergency fund could use a lift.

In fact, three months’ worth of bills is really the minimum amount of expenses your emergency savings should cover. If you lose your job, it could take you three months to find another even in the best of economic circumstances. During a recession, it might take you four months, six months, or longer to get hired again. So the more cash reserves you’re able to build, the better.

How to boost your emergency fund

There are different steps you can take in the coming months to shore up your emergency fund. First, if you haven’t yet spent your tax refund, bank it. Whether that refund amounts to $500, $1,000, or $2,000, that’s money you can sock away in your savings in case you end up needing it in a pinch.

You can also boost your cash reserves by cutting back on spending. This doesn’t mean you should stop buying vegetables at the grocery store or cancel the streaming service you rely on for entertainment that costs under $20 a month. Rather, it means to cut back in a reasonable manner.

Instead of dining out twice a week, do it once and bank the difference. And if your emergency fund needs work, perhaps skip the concert this month that will cost you $150 to attend.

Finally, look to the gig economy for an income boost. If you’re able to take on a side hustle for a period of time, it might allow you to grow your earnings nicely and put that extra cash into savings.

Although the economy seems to be in a good place right now, we don’t know what the rest of the year has in store. Between that and persistent inflation, it’s definitely a good time to reassess your emergency fund needs and make sure you have enough cash in the bank to get through a period of joblessness.

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