Money Management

It’s not the best time to finance a big purchase. Read on to see why. 

These days, many consumers are buckling under the weight of inflation. For some, inflation has resulted in depleted savings account balances. For others, it’s resulted in altered spending habits.

Not only are many consumers cutting back on spending due to inflation and economic concerns, but in a recent Quicken survey, 29% said they’re holding off on making big purchases. If you have a large purchase on your radar but can afford to pay for it outright, then you may not need to push yourself to hold off. But if you need to take out a personal loan to finance that purchase, then you may want to reconsider.

Now’s not a good time to borrow

The Federal Reserve has been raising interest rates in an effort to slow the pace of inflation. Not only did the central bank raise interest rates seven times in 2022, but it’s already raised rates three times in 2023. And all of these rate hikes are driving consumer borrowing costs upward.

To be clear, when we talk about the Fed raising interest rates, it’s not directly telling lenders to charge consumers more for things like mortgages and auto loans. Rather, the Fed oversees the federal funds rate, which is what banks charge each other to borrow on a short-term basis. But when that benchmark interest rate rises, lenders tend to raise their borrowing rates, too, which hurts consumers.

Getting back to personal loans, right now, they’re more expensive than they’ve been in a long time. So if you can hold off on taking one out, that’s a good thing.

Normally, personal loans are hailed as an affordable way to borrow. And they can be particularly cost-effective for borrowers with great credit scores.

But currently, even a higher credit score may not result in a personal loan rate you’re happy with. So rather than spend an excessive amount of money on interest, you may want to consider delaying whatever large purchase you have on your radar.

A side hustle could come to your rescue

Maybe you really want to upgrade your furniture, buy some new electronics, or put in an outdoor playset for your kids. These are purchases that can be expensive, and you may not want to wait for personal loan rates to come down to make them.

But before you take out a personal loan, look at getting a side hustle. Some of these gigs can be quite lucrative, and if you’re willing to push yourself, you might manage to earn enough money to cover the purchase you have in mind without having to borrow money at all.

Let’s say, for example, that you’re looking to borrow $2,000 for a new dining room set. If you can side hustle your way to $500 a month of extra income after accounting for taxes, suddenly, your purchase is nice and covered. And that way, you won’t have to sign yourself up for a higher interest rate on a loan.

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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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Overfunding a flexible savings account (FSA) comes with some risks. Learn more about what happens when you don’t use your FSA money by the annual deadline. 

A flexible spending account (FSA) is a savings account that lets you save for health-related expenses, while also reducing your taxable income. Like 401(k)s and IRAs, the account is funded with pre-tax dollars, which could potentially put you in a lower tax bracket and help you cut your tax bill.

But there is a caveat: you must use your FSA contributions before an annual deadline or risk forfeiting your money. For example, if you contribute $3,050 for 2023 (the contribution limit for this year), you should plan to spend at least $3,050 on medical expenses. If you spend only $1,000 in 2023, then you might lose the remaining $2,050.

The IRS is very strict about this rule, but your employer may cut you a little break. Let’s take a look at what happens when you don’t use your FSA and what you can do to avoid losing this money.

What happens if you put too much money in your FSA?

FSAs have a “use it or lose it” policy. Any contributions you make expire by an annual deadline, usually Jan. 1. If you contribute more than you can reasonably use within a year, the money will ultimately return to your employer. More than likely, your employer will then use this extra money to pay administrative costs on FSA accounts.

That said, some employers offer a grace period that bumps the annual deadline to a later month. For instance, if your annual deadline is Jan. 1, your employer may give you until mid-March to drain your FSA money.

Other employers will allow you to “carryover” a portion of surplus funding from one year into the next. That can be a sigh of relief, but don’t get carried away: The IRS sets limits on how much you can carryover. For 2023, the maximum carryover amount is $610. So if you end 2023 with $1,500, you might still have to forfeit $890.

But there is one last hope for unused contributions: Your employer may pool them together and distribute them equally to employees who contributed for that year. In this way, you’ll get a small piece of the pie, either as a fringe benefit or as a contribution match for FSA contributions made in the following year.

How to avoid forfeiting FSA money

A high-yield savings account might be a better option if your medical bills are variable and you don’t have many health-related expenses. But if you’re contributing to your FSA right now, and you’re worried you won’t be able to spend it before the deadline, here’s what I would do:

Take a trip to the pharmacy. You may not realize just how many things you can buy with your FSA: bandages, heating pads, massage guns, alcohol wipes, sunscreen, and feminine products are just a few of the many things you can buy. If it comes down to it, go on a shopping spree before you forfeit your money. Try to prepay upcoming expenses. If you have ongoing treatments or prescriptions, you might be able to prepay for them.

An FSA is a great way to save money for medical expenses, but it’s not right for everyone. Even though the tax benefits are sweet, you’re taking a gamble if you contribute too much. For those who don’t have many medical expenses, you might be better off with a high-yield savings account. You’ll earn interest on your savings, and you won’t have to forfeit any money by an annual deadline.

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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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Buying a home before you’re ready could be a mistake. Keep reading to learn our take on a few pieces of Dave Ramsey’s home-buying advice. 

Buying a home can be a great decision or a disastrous one depending on whether you’re in a good financial position. You don’t want to get a mortgage loan and commit to the costs and responsibilities of homeownership unless you’re sure you can rise to the occasion.

If you aren’t certain whether you are really ready, you may want to read Dave Ramsey’s advice about three things you need to do in order to feel confident to purchase a home. He’s absolutely right about two of these three things, and dead wrong about the last one, though.

Here’s what Ramsey says you should do.

1. Keep your housing costs to 25% or less of take-home income

Ramsey’s first recommendation has to do with how much of your income you should spend on your home.

“Limit your house payment to no more than 25% of your monthly take-home pay,” Ramsey advises. “This payment includes principal, interest, property tax, home insurance, homeowners association (HOA) fees and, if your down payment is lower than 20%, private mortgage insurance (PMI) — an extra fee added to your mortgage to protect your lender (not you) in case you don’t make payments.”

Keeping your housing costs to this percentage is advice everyone should follow. If you stretch to buy a home, you’ll always be worried about where mortgage payments are going to come from and will spend your life living in a state of financial stress. You may also not be able to avoid going into more debt for other expenses, and saving for your future will be really hard if all your cash goes into paying for your home.

Lenders are often willing to allow you to borrow a little more than this, but you should avoid that temptation. Being house poor is not a fun way to live and you could be left with lots of regrets if you spend the maximum the bank will give you without taking other priorities into account.

2. Put enough money down on the home

Ramsey’s next piece of advice relates to your down payment, or the money you put down to buy the house that comes out of your own pocket rather than from the mortgage loan.

“Ideally, you’ll want to save a down payment of at least 20% to avoid PMI,” Ramsey says. “For first-time home buyers, a smaller down payment like 5% to 10% is okay too — but then you’ll have to pay PMI.”

PMI, or private mortgage insurance, typically comes at a cost of around .5% to 1.5% of the amount of the loan. This adds a lot of money to your monthly payments. You don’t get the insurance protection from this, even though you pay for it. Lenders mandate you buy it if you don’t put 20% down to protect them from losing money in case of default.

Avoiding PMI is just one of several good reasons to put money down on a home. If you have a good-sized down payment, you will have more lenders willing to lend to you at a competitive rate and won’t have to worry much about ending up in a situation where you owe more than your house is worth in case property values fall.

Because of the big advantages of a down payment, Ramsey is right that you should aim for 20%. In fact, even first-time buyers should really try to hit this goal.

3. Opt for a 15-year conventional mortgage

Finally, Ramsey suggests that you should choose a 15-year fixed rate conventional mortgage. On this, he’s very wrong. A 15-year mortgage comes with higher monthly payments, and you will be tying up a lot more of your money in your house.

Most people are better off getting a 30-year loan, and then investing the extra money they would have spent on mortgage payments, as you can usually get a higher ROI by investing than the return you get from avoiding interest.

If you can easily afford the monthly payments on a 30-year mortgage, are going to remain in your home for at least a few years, you have some emergency money saved, and you are able to make a good down payment, these are the key signs you should look for that will tell you it might be a good time to move forward with your home purchase.

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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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