Money Management

When deciding where to invest, Dave Ramsey urges you to think about the impact of inflation. Read on to learn why. 

In recent months, Americans have been getting a good demonstration of the devastating impact that inflation can have.

Inflation hit a 40-year high last year. The price of many goods and services substantially increased due to factors such as the interruption of normal supply chains due to the pandemic, as well as increased demand due to stimulus payments and people not having much to spend money on for months.

While this level of inflation was unprecedented, the reality is that the cost of goods and services goes up regularly. And, that’s why Dave Ramsey warns against a money mistake that could leave you ill-equipped to deal with this natural economic phenomenon.

Dave Ramsey has an important warning about where to put your money

According to Ramsey, many people make a big error when it comes to their money. They assume that they can avoid the risk of loss by putting most or all of their assets into a CD, savings account, or an annuity — and they shy away from investing in a 401(k) or brokerage account because they are scared of facing potential losses.

“If you bury your hard-earned money into a savings account or CD hoping to avoid risk, guess what? You may have avoided short-term risk, but you’ve also guaranteed that your money won’t grow enough to keep up with inflation long term,” Ramsey said. “Which sounds riskier?”

Should you listen to Ramsey?

Ramsey is absolutely right on this important issue. While it might feel safer to stash all your money in accounts where you can’t lose it, the fact is that if the interest you are earning on your investment is below the current rate of inflation, you are slowly losing a little bit of money all the time.

To take a really simple example, say you were earning 1% annual interest on $100 and inflation was 2%. At the end of the year, you would have $101 but you would need $102 just to be able to maintain the same buying power that your $100 had at the start of the year.

When you have bigger numbers in the form of more money invested or a bigger gap between your interest earned and the rate of inflation, the effects of this become even more dramatic. You could end up losing a ton of buying power and effectively becoming poorer than when you started out by sticking your money in a savings account or a CD or annuity with a low rate of return.

To make sure you are growing your wealth rather than slowly seeing the value of your savings decline due to inflation, you need to avoid the money mistake that Ramsey warns about. You should have some money in savings — enough to cover emergencies or short-term purchases.

But if you are putting away money for any long-term goals and you won’t need it for the next couple of years, your money belongs in a brokerage account where you can invest it in assets that can produce high enough returns not just to keep pace with inflation, but to beat it and grow your account balance over time.

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Travel redemptions are by far the most valuable use of travel rewards. But they aren’t the only use. Read on to learn other options for unused rewards. 

Travel rewards are easier than ever to collect thanks to travel credit cards. But they aren’t always so easy to actually use. And sometimes you may find yourself with a surplus of travel rewards — and nowhere to go.

There are two big reasons most experts will tell you to use your travel rewards sooner rather than later:

They expire. Many types of credit card rewards only expire when you close your account, but travel points from hotels and airlines often have a limited shelf life.They get devalued. This is arguably the bigger issue. Rewards programs change all the time. Those changes are rarely to give people more bang for their buck (or rewards, in this case). Think of it like inflation for rewards points.

So, you have a pile of points but you aren’t going to travel. What do you do now? While options vary depending on the specific program, you may have a surprising variety of options.

1. Use them for cash back

This is most often an option if your travel rewards are the kind offered by an issuer, instead of a hotel or airline. The four most popular programs are:

American Express Membership RewardsCapital One Venture RewardsChase Ultimate RewardsCiti ThankYou Rewards

These programs all allow you to redeem your rewards as a statement credit. You can also redeem for gift cards. The downside to this option is that it’s usually a poor value. At best, you’ll maybe get $0.01 per point. At worst, you may get half of that.

2. Make a charitable donation

If you’re in a giving mood, you could give your idle travel rewards to a worthy cause. There are a few charities that take donated airline miles, for instance, including Delta‘s SkyWish program. And many rewards programs let you turn points into cash donations to partner causes, such as Amex‘s partnership with Just Giving.

3. Shop with points

Pretty much everyone has partnered with at least a few retailers to let you pay for purchases with your points. For example, you can use United miles to pay for eligible Apple purchases. Multiple programs also pair with Amazon to let you pay with points for just about anything.

4. Redeem for a unique experience

A lot of travel rewards programs have some sort of “experiences” portal where you can redeem your rewards for things like special dinners, or tickets to concerts or sporting events. The per-point dollar value you’ll get for your points can vary a lot, but depending on the experience, the personal value could make up for it.

5. Enjoy a staycation

If going on vacation out of town isn’t in the cards, you could still potentially put your hotel points to good use by taking a staycation. Does your city have a posh hotel you’ve always wanted to try? Do you and your partner want an extra fancy date night? Use your points to splurge a little on a local hotel that would normally be out of your budget or that’s in a different part of town.

6. Gift them to a family member

Many rewards programs let you gift your points to a friend or family member — but there’s usually a catch. In most cases, there will be a fee for doing so, and that fee can get large depending on the program.

7. Go for a ride

While travel rewards often make us think of long-distance travel, you may also be able to use them for more local locomotion, such as getting a ride share. For example, Hilton lets you use your Hilton points to pay for Lyft rides. Similarly, Marriott points can be used to pay for Uber purchases. Alternatively, use your travel rewards to get a fancy rental car for the weekend or for a special event.

The controversial option: save them

There’s a good argument against hanging on to credit card rewards too long. Devaluations happen all the time.

But there’s just as much of an argument in favor of using them when they’ll benefit you the most. Sometimes that may mean you hang on to them for a while. Is there a risk they’ll be worth less later? Sure. But if you’re going to make a low-value redemption now to avoid a possible drop in value later — well, that’s where you have to act within your own risk tolerance.

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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.American Express is an advertising partner of The Ascent, a Motley Fool company. Citigroup is an advertising partner of The Ascent, a Motley Fool company. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Brittney Myers has positions in American Express. The Motley Fool has positions in and recommends Amazon.com, Apple, JPMorgan Chase, and Uber Technologies. The Motley Fool recommends Marriott International. The Motley Fool has a disclosure policy.

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Teaching money management doesn’t have to wait. I’m already helping my son to understand that money only goes so far. Read on to learn how. 

Learning about money can be a lifelong process. And I want to start my kids off early with developing smart money habits that will make it easier for them to save later and avoid going into credit card debt.

Because this is important to me, I’m already starting to teach my 3-year-old about how to make smart decisions with cash. Here’s my technique for doing that.

This is how I’m helping my son learn to make smart money choices

One of the first lessons I want my son to learn is that money is not unlimited and you have to make choices about how best to spend it to bring you the most joy.

I’m using a very simple technique for doing that.

When we go to the Dollar Tree or we go to garage sales, I’ll take a few dollars out of my bank account and hand my son several $1 bills to keep in his little wallet. Depending on the situation, I might hand him $3 or $5 or $10. This is money that he is free to spend as he wants, but once it is gone, then he is not able to buy anything more.

I explain to my son each time that this is all the money that’s available for him to spend on toys and games, but that he can do anything he likes with it. The first time we did this, he bought the first two toys that he saw at a garage sale — and then was upset that he had nothing left to spend when he found an even cooler truck at a later place.

The next week, when we went to the Dollar Tree, he remembered that lesson. Instead of putting things into the cart right away, he walked around the entire store to look for which toys would be the most enjoyable to play with, and he made a smarter decision about which ones he wanted to buy.

Now, of course, since he is just 3 years old, he doesn’t do this perfectly every time and sometimes he wants the first thing he sees. But he’s already starting to realize that when you spend what you have, there is no more if something better comes along — and this is a lesson that I hope he will carry through for the rest of his life so he can prioritize what he wants to do as far as spending and saving.

It’s never too early to teach kids about money

Financial education isn’t a part of the curriculum in most schools and it’s something many people are lacking — which makes it really hard to develop good money habits as an adult.

I plan on teaching age-appropriate financial lessons through simple examples throughout my kids’ lives. And other parents may want to do the same. There’s no reason to wait to start helping your children to develop smart money habits so they learn to make financial decisions for themselves.

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Many millionaires make a surprising mistake with their credit cards. Learn what it is and why this credit card habit is one you should avoid. 

It’s easy to assume that wealthy Americans generally follow good financial habits. When someone has built a net worth of $1 million or more, you’d probably expect that they got there in large part because of how they manage money.

This is often true, but it doesn’t mean they do everything right. In fact, there are some surprising areas where millionaires have poor financial habits. Case in point, The Ascent’s recent study on wealthy Americans’ credit card habits found that two-thirds of millionaires are making a huge mistake in how they pay their credit card bill.

Millionaires’ worst credit card habit

Most millionaires (66.93%) don’t consistently pay the statement balance on their credit cards. When asked how often they pay the statement balance, here’s what they said:

33.07% said every month22.20% said not every month, but often24.80% said a few times a year19.93% said almost never

Why is that a problem? It’s because when you don’t pay your credit card’s statement balance, the card issuer can charge interest on your balance.

That’s something you’re better off avoiding whenever possible, because most credit cards have very high interest rates. That has been true for years, but rates have also gotten much higher in the last year. Currently, the average credit card APR is over 20%. At that APR, a $5,000 balance would cost about $1,000 per year in credit card interest.

To avoid interest charges, you just need to pay the statement balance every month. This also helps you stay out of credit card debt.

Why don’t millionaires pay off their credit cards?

It’s better financially to pay off your credit card in full. You’ll save on interest, which is an extra expense you don’t need. And it would seem like millionaires could pay off their credit cards. So, why don’t they? There are a few explanations.

Millionaires might not always be able to pay off their credit cards. Just like anyone else, they can overspend and end up with an expensive balance. Even people with a net worth of $1 million or more usually don’t have nearly that much cash on hand. It’s tied up in property, investments, retirement accounts, and so on.

Potential evidence supporting this theory is that over 50% of the millionaires surveyed said they had maxed out a credit card. Maxing out a credit card is often a sign of overspending. It could be that when millionaires don’t pay off their credit card, it’s because they don’t have enough money accessible in the bank to do so.

There are also situations where people carry balances on their credit cards even when they don’t need to. Sometimes, it’s because they prefer not to use up too much of their savings. Others, it’s because they believe the myth that carrying a balance is good for your credit score (it’s not). Millionaires can make these kinds of mistakes, just like non-millionaires.

Wealthy Americans have plenty of valuable financial habits that are worth emulating, such as living below your means and investing regularly. But this credit card habit definitely isn’t one of them. Instead, make it a habit to always pay your credit card bill in full. If you think you won’t be able to do that because of some big expenses coming up, look into 0% intro APR credit cards so that you can avoid costly interest charges.

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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.The Motley Fool has a disclosure policy.

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I bonds are paying generously right now. Read on to see if they’re a good investment for your household. 

Any time you invest money, whether it’s the crypto you’ve purchased through an app or the stocks you’ve added to your brokerage account, you bear the risk of taking losses. In fact, there’s generally no such thing as a risk-free investment. But the closest thing to it may be I bonds.

I bonds are government-backed securities whose interest rate is directly pegged to inflation. Generally, when you buy bonds issued by companies, you’re given a fixed interest rate on your investment that will remain in effect until your bonds mature. But in that scenario, you run the risk of the issuing company falling on hard times and failing to keep up with its bond payments.

I bonds are backed by the U.S. government, which makes them more secure. And since the interest rate they pay is tied to inflation, during periods when living costs are high, I bonds can be a lucrative bet.

That’s precisely the scenario we’re in today. Many consumers have spent the past year and change racking up credit card debt and dipping into their savings to cope with inflation. That’s not a good thing.

But what is a good thing is that you can snag a competitive interest rate on an I bond investment today. And if you’re married, you may want to encourage your spouse to do the same.

How I bonds work

When you buy I bonds, you must hold them for a full year before selling, and there are penalties for selling before having held your bonds for five years. There’s also a limit as to how much in I bonds you can buy in a given year, and it’s $10,000. That limit, however, is per person, not per family. So if you have a spouse, you’re each allowed to buy $10,000 worth of I bonds in a given year.

Meanwhile, right now, I bonds are paying 6.89% interest through April. From there, the rate on those bonds has the potential to change and drop, since inflation has been dipping. So if you’re looking to buy I bonds, you may want to do so sooner rather than later.

Are I bonds a good investment for your family?

The upside of I bonds is getting to snag a nice return now for minimal risk. In fact, the biggest risk of I bonds is that they may not end up paying a lot of interest down the line. But remember, once you’ve held those bonds for five years, you can cash them in without penalty, so that’s something to consider.

If you and your spouse have the money to invest in I bonds this year, doing so could be a good bet — but only if I bonds are one of several assets you own. Because you must hold these bonds for at least a full year, you should have other assets in your respective portfolios that give you more flexibility in case you need cash in a pinch or want money for another investing opportunity. Stocks, for example, can be bought or sold at any time.

You’ll also need to consider whether I bonds are likely to lend to your long-term financial goals. The rate I bonds pay in the future is likely to drop from where it is today. That rate might still end up being competitive, but you might generate a higher return by purchasing shares of different stocks instead and holding them for many years.

All told, this is the sort of conversation to have with a financial advisor, if there’s one you work with. If not, sit down with your spouse, read up on I bonds, and review your options jointly. If you put your heads together, you’re likely to come to the right decision.

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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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It’s best to spread out your credit card applications. Read on to see why. 

Some consumers have one or two credit cards and nothing more. Others might have 10 or 12.

When it comes to determining what the ideal number of credit cards is, that really depends on the individual. Generally, as long as you’re managing your spending well, you’re in good shape whether you have three credit cards or nine.

But one thing you don’t want to do is apply for too many new credit cards in a short period of time. Doing so could cause damage to your credit score, making it more expensive to borrow money when you need to.

Don’t wreck your credit for no good reason

When we talk about credit score, generally, we’re referring to the FICO® Score. That score is made up of five distinct components, each of which carries a different amount of weight:

Payment history: 35%Amounts owed: 30%Length of credit history: 15%New credit cards: 10%Credit mix: 10%

As you can see, new credit cards only accounts for 10% of your total credit score. So you might think it’s not a big deal to apply for a bunch of new cards within the same few weeks or months.

But remember, each time you apply for a new credit card, it results in a hard inquiry on your credit report, which could lead to a five- to 10-point drop in your credit score. A single drop like that may not matter so much, but multiple small hits in short order could bring your score down quickly.

That’s why it’s a better idea to space out your credit card applications. A good bet, in fact, is to limit yourself to a new credit card every six months. If that’s not doable for you, aim to only apply for one new card every three months.

Remember, if you establish a pattern of applying for too many new cards, it might raise a red flag that credit card companies pay attention to. That could mean getting rejected from a great credit card offer, like a card that offers outstanding rewards or a super generous sign-up bonus.

Too many credit cards could also lead to debt

Credit score damage aside, another problem with applying for too many new credit cards at once is that you might be tempted to spend more. And that could lead to a situation where you’re unable to pay off your balances in full and you end up with expensive debt.

In the course of applying for credit cards, it’s easy to focus on factors like rewards and less so on the interest rate you’ll be charged once you fail to pay off a balance in full. But getting access to a higher spending limit quickly might lead to a scenario where you’re loaded with debt and the interest you accrue eventually exceeds the initial balances you racked up.

So all told, spacing out your credit card applications really is your best move. It might mean passing on some great offers, but it might help you avoid a financial hit.

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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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