Money Management

Will this interfere with your efforts to save? 

Putting money into a savings account is important for everyone. You’ll need some cash in a savings account for emergencies and for short-term purchases and you will also need to make sure you’re investing in a brokerage firm to accomplish long-term goals such as retirement.

But, it can be really hard to save — especially if you have current expenses you’re paying. Finance expert Dave Ramsey identified one such expense, which he has referred to as “the biggest money suck when it comes to saving.”

Could this expense interfere with your ability to save?

According to Ramsey, debt payments are the money suck that could prevent you from being able to save the money you need. That’s because, as Ramsey explained, debt “robs you of your income.”

Ramsey recommends aiming to become debt free as soon as you can so you can eliminate this obligation and have more of your hard-earned money to put towards accomplishing the financial goals you have set for yourself.

“Once your income is freed up, you can finally use it to make progress toward your savings goals,” Ramsey said.

How can you make sure debt doesn’t interfere with your financial goals

Ramsey is 100% correct that if you have a lot of debt payments, it’s going to be harder to be successful at accomplishing savings goals. When you borrow, you commit future income you haven’t even earned yet to covering yesterday’s expenses. You cut your paycheck down before it even comes, so you have less money to live on — and to save.

But, it’s important to distinguish between different kinds of debt, as some types of loans can actually be a good thing if they improve your ability to earn money or if they help you grow your net worth. Taking out a business loan that enables you to increase your earnings wouldn’t necessarily rob you of future income if it increased how much you can earn.

What you want to avoid is debt that doesn’t improve your financial situation and make savings goals easier for the long haul. This would be things like credit card debt or personal loans taken out for vacations or for any unnecessary purchases that aren’t critical to make.

You can avoid taking on this kind of debt by making a budget that enables you to spend less than you earn — and sticking to it. Setting aside some money for emergencies so you don’t have to charge them can also help, as can keeping your fixed costs (like housing expenses) low so it’s actually easier to live within your means.

How to pay off debt

If you have already borrowed, Ramsey recommends using the debt snowball method to become debt free ASAP. This would involve making extra payments on your loan or credit card with the lowest balance until it’s paid off, then putting all those extra payments towards the one with the next lowest balance until you’re done.

You could try this approach, or could use a similar strategy (the debt avalanche) to pay off your highest-interest debt first if you want to lower repayment costs as much as you can. Whatever method you adopt, paying down your debt and freeing up that money for saving as Ramsey suggests could definitely help to make accomplishing your goals easier.

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There are several intermediaries involved in credit card transactions, and they all get a cut of the money you spend. 

When you swipe your credit card, it allows you to instantly borrow money for purchases and maybe earn rewards. But have you ever stopped to think about what is actually happening behind the scenes? Here’s a rundown of what actually happens when you use your credit card to pay for a purchase, including which companies take a cut and how much the merchant actually gets.

The mechanics of a credit card transaction

Without getting too complex, let’s consider what happens in a basic credit card transaction. To keep things simple, let’s assume it’s a domestic purchase made with a card issued by a U.S. banking institution, as foreign transactions add another layer of complication (this is why many credit card issuers charge foreign transaction fees).

There are generally four parties involved in a credit card transaction. These are:

The merchantPOS provider (Square, Toast, etc.)Payment network (Visa, Mastercard, Amex, etc.)Issuing bank

In a nutshell, when you swipe your credit card at a merchant’s POS (point of sale) terminal, a payment network like Visa or Mastercard (or whatever logo is on the card) moves money from the issuing bank to the merchant’s receiving bank account. It’s also worth noting that in some cases, the payment network and issuing bank can be the same company. American Express and Discover play the roles of both lender and payment network, a system that is referred to as a “closed loop” payment network.

The flow of money

As we saw, there are several intermediaries in a credit card transaction, and it shouldn’t come as a surprise that none of them provide their services for free. You likely already know that merchants pay fees when accepting credit cards — anywhere in the 2%-3% range is typical. But many people assume that these “swipe fees” go to the payment network exclusively, while they actually get split among all of the facilitators of the transaction.

Let’s say that you buy something for $100. While the exact fee structure depends on several variables, here’s what happens in the average credit card transaction, according to data from restaurant POS provider Toast.

First, the POS provider collects an average of $0.77 (0.77%) of the transaction for providing the hardware and other infrastructure used to initiate the credit card payment. These companies often make additional money for providing software solutions to merchants, as well.

Second, the payment network gets an average of $1.19 (1.19%) for facilitating the movement of money between the customer’s bank and the merchant’s account.

Finally, the bank that issued the credit card, such as Chase, Citi, or Bank of America, gets an average of $0.73 (0.73%) as a fee for acting as the lender. So, even if you pay your credit card balance right away and have no interest due, the bank is still making money when you use your card. And in the cases of Amex and Discover, they get both the payment network and bank portions of the fee.

Here’s a graphical representation of where the money in a credit card transaction flows:

When you add all of these fees up, the average merchant is left with $97.31 out of the $100 transaction. This means the typical merchant pays 2.69% of each transaction for the convenience of accepting credit cards. Some merchants have even started to pass these fees along to the customer — if you’ve ever noticed a “credit card surcharge” on your restaurant check, this is why.

The bottom line

Accepting credit cards is a necessity of doing business for merchants, and that has become increasingly true over the past decade or so. Even though it costs money to accept credit cards, many businesses are happy to absorb the cost due to the higher sales volume it produces and the relative safety of digital payments. After all, cash has its own risks, such as theft and loss, that are important to consider in the context of credit card fees.

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You should aim to check these items off your to-do list. 

Are you actively preparing for retirement?

It may be tempting to put off planning for your future if you are focused on keeping out of credit card debt and maximizing the money in your bank account for today’s needs. But, retirement is something you need to work towards throughout your life.

In fact, finance guru Suze Orman has listed six retirement must-dos for 2023. Here’s what they are, along with some advice on whether you should follow each tip.

1. Maxing out your employer match

Orman said as many as 1 in 4 people with a 401(k) are leaving some money on the table by not contributing enough to their 401(k) account to earn the full amount of matching money their employers offer. People who accept their company’s auto-enrollment, rather than setting their contributions themselves, may be especially likely to fall short.

Missing out on your match is a huge mistake since you’re passing up the cash your employer would contribute if you only invested enough. Orman says you can fix this problem very easily, though. “Call up HR and find out what your contribution rate needs to be to qualify for the max match. Make the switch ASAP.”

You should absolutely follow this advice, even if that means making cuts to other things in your budget.

2. Inching up your 401(k) contribution

Orman says if you aren’t yet investing at least 10% (and ideally 15%) of your income in your 401(k), you should increase your contributions by at least 1%.

“Don’t tell me you can’t afford it,” she said. “You can’t afford not to do this. And I am confident a 1 percentage point increase is something you can adapt to.”

This is great advice everyone should listen to. In fact, you should do this right now (you can probably do it online). You likely won’t miss having this extra 1% taken out of your paycheck, but it will make a difference in the long haul to your retirement fund total.

3. Bank your raise

Orman’s third suggestion is to devote at least half of any raise you receive to retirement savings. “You can’t tell me (or yourself) that you can’t afford this, because you’re setting aside new money that you never had hit your checking account before.”

This is also great advice. If you never get used to having the extra money coming in, you can’t possibly miss it — so divert the cash before you even get a single higher paycheck. You’re already living on what you’re currently earning, so this should be a really easy way to invest more in your brokerage account for retirement.

4. Opt for a Roth 401(k)

Roth 401(k)s don’t offer you a deduction for contributions in the year you invest in them. Instead, you get to take money out of this account without paying taxes on withdrawals. Orman (and Dave Ramsey) both prefer Roth accounts. In fact, Orman has such a strong preference that she recommends limiting 401(k) investing if your employer doesn’t offer a Roth.

“If your plan doesn’t have a Roth option, your strategy should be to contribute just enough to the traditional 401(k) to qualify for the maximum matching contribution,” Orman advised. “Then do more retirement saving in a Roth IRA.”

This advice makes sense for some people — but it depends on whether you expect your tax bracket to be higher or lower in retirement. If you think you’ll be in a lower bracket as a senior, you may be better off using a traditional account and getting an upfront tax break for contributions.

5. Using a Roth to save if you don’t have a 401(k)

Orman says anyone who doesn’t have a 401(k) should set up a Roth IRA at a brokerage firm and invest in funds or ETFs within the account.

Setting up your own tax-advantaged retirement plan is indeed good advice, as is selecting a total-market index fund to invest in, which is what Orman recommends. But, again, you should think about whether an upfront or deferred tax break makes the most sense when deciding between a traditional and Roth IRA.

6. Review your asset allocation

Finally, Orman says you need to be sure you’re invested in the right mix of assets given your current risk tolerance and investing timeline.

“If your 401(k) plan doesn’t offer automated rebalancing, it’s up to you to check that your mix of stocks and bonds is where you want it to be,” Orman said.

This is also a very important tip to follow as you don’t want to be too conservative and risk lower returns, nor too aggressive and risk big losses. If you aren’t sure, one rule of thumb is to subtract your age from 110 and put that percentage of your portfolio in stocks.

As you can see, most of this advice from Orman is great and you should aim to take as many of these steps as possible in 2023 so you can set yourself on the path to a more secure future in your old age.

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It’s an easy way to set yourself up to grow wealth over time. 

If you have money you’re reserving for emergencies and unplanned bills, it should sit in cash in a savings account. But money you have beyond that is money you should invest, whether in a brokerage account or an IRA for retirement.

Now when it comes to investing, you have plenty of options. And you may feel compelled to get creative when it comes to building your portfolio. That could mean buying individual stocks or branching out into alternative investments like real estate and cryptocurrency.

But if you’d rather take a simplified approach to investing, then it pays to put your money into the broad market. Doing so could spare you a world of stress while setting you up for solid returns.

Why it pays to invest in the S&P 500

You’ve probably heard of the S&P 500 index, and in case you’re not sure what it is, it’s a market index that’s made up of the 500 largest publicly traded companies. Companies that are a part of the S&P 500 index generally tend to be larger and well-established. And that can be comforting to investors.

But that’s not the only reason to focus your investing strategy on S&P 500 index funds or ETFs. The other reason is that the S&P 500 has consistently delivered excellent returns over time.

This doesn’t mean the index hasn’t had its share of bad years. But over time, it’s returned an annual average of 9.7%, said investing expert Charlie Bilello in a recent tweet. And while Bilello acknowledged that going all-in on the S&P 500 index does carry risk, as he said, “There’s no upside without downside, no reward without risk.”

So, let’s say you put $10,000 into S&P 500 index funds (funds that will simply aim to match the performance of the S&P 500). Let’s also say you don’t add another dollar, and that your portfolio delivers an average annual 9.7% return through the years. In 25 years, you’ll be sitting on a little more than $101,000. All told, that’s over 10 times your initial investment.

A solid bet for experienced investors and newbies alike

When you invest in the S&P 500, you’re effectively investing in the broad stock market. And that’s important, because you’ll often hear that having a diverse portfolio is the key to success.

Keep in mind, though, that this strategy really only works well when you’re investing over a long period of time. On a year-to-year basis, the S&P 500 has the potential to lose money. Just look at what happened in 2022 as a prime example. So if you’re going to pump most or all of your assets into the S&P 500, make sure you’re willing to keep your money there for a decade or longer.

Investing in the S&P 500 carries risk. But it might carry less risk than alternative investments like crypto, and it may even be less risky than building a portfolio of individual stocks you pick yourself. So there’s absolutely nothing wrong with taking what could be the easier, less stressful way out and falling back on the S&P 500 to build wealth of your own.

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Lots of people are hoping for a much-needed vacation this year. 

With out-of-control inflation and talk of a recession, 2022 was full of economic uncertainty. Combine that with rising travel costs, and it’d make sense if people were holding off on going anywhere for the time being. But recent research suggests that none of those issues are deterring Americans from traveling.

58% of U.S. adults said they planned to take a vacation in the next six months, according to a December 2022 survey by MMGY Travel Intelligence. Of that group, 25% shared they’re likely to travel internationally. That’s the highest percentage in three years.

For those who weren’t planning to travel in the next six months, the most common reasons were high travel costs and their financial situations. If you’d like to travel, but you’re not sure how to manage it financially, here are a few tips to make it happen.

Make a travel fund

One of, if not the biggest impediment to traveling is money. If you feel like a vacation will do a number on your bank accounts, it’s hard to get excited about going. Taking on debt to travel isn’t great, either, because it costs you money in interest and can hold you back from accomplishing financial goals.

That’s why a travel fund is a must. A travel fund is a bank account reserved for your travel costs. Here’s how to set one up:

Make a bank account specifically for your travel fund. You can open a new account for this. Or, if you already have a savings account you like, many banks will let you set up as many sub-savings accounts as you want.Decide how much you can save each month. It could be $50, $100, $500, or whatever works for you. The key is picking an amount you can afford, so you save consistently.Automate deposits to your travel fund. Set up a recurring transfer for the amount you chose earlier on a date that works for you, like right after you get your paycheck.

Make sure you choose a quality savings account for this. High-yield savings accounts offer much more generous interest rates than the national average, so they’re usually the best option.

Start earning travel rewards

You don’t need to pay for all of your travel expenses out of pocket. With a travel credit card, you can earn rewards on the money you spend, and later redeem those rewards for travel costs, such as airfare and hotels.

If you like to travel, it’s a good idea to have at least one of these credit cards. Here are the types of travel cards to choose from:

Airline credit cards are tied to specific airlines and work well if you’re loyal to one carrier.Hotel credit cards are tied to hotels, so they’re valuable if you have a certain hotel chain you like.Some of the best travel credit cards earn more flexible, transferable points. You can transfer their points to multiple airlines and hotels or redeem them at a fixed, cash rate.There are also basic, no annual fee travel credit cards if you want to keep costs down.

This is a popular type of credit card, so there are lots of options available. Find one you like and start using it for all your expenses — just make sure to pay in full every month to avoid interest charges. The points or miles you earn could cover your biggest travel costs.

Pick a destination and make a plan that fits your budget

There are a couple of things that make all the difference in how much you spend on a trip. The first is where you travel. Some destinations, such as Latin America, Southeast Asia, and even certain parts of Europe, are budget-friendly. Others aren’t. If you’re trying not to spend too much, it’s probably best not to set your sights on, say, Switzerland or the Maldives.

Your travel plans also have a big impact. Anywhere can be expensive if you want to stay in a luxury hotel and dine at the nicest restaurants. On the other hand, even places with an above-average cost of living get more affordable if you’re willing to rent a room or stay in a hostel and focus on low-cost activities.

See if you can work remotely

Travel can be a bit of a double whammy financially. It costs you money to go on vacation, and if you don’t have paid time off, you aren’t making any money while you’re gone. Some people also have limited time off, which makes it hard to fit in a vacation with their work schedules.

Consider seeing if there’s an opportunity to do your job remotely, at least while you’re away. If that’s not an option, but you’d prefer more flexibility, you could also start looking for remote jobs.

Working on vacation may sound sad. If it’s not your thing, by all means, discard this tip. But it doesn’t have to be the worst thing in the world, especially if it allows you to travel more. What if you could add three days to your vacation, but only if you work a few hours here and there? For some people, that’s worth it.

An amazing vacation doesn’t need to be something you put off for years. With a travel fund, a travel credit card, a good plan, and maybe some remote work, you could definitely make it happen in the next six months.

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Mortgage rates are well below the highs — is refinancing worth it? 

Mortgage rates are getting lower. The average 30-year mortgage rate peaked at 7.08% in November 2022 according to Freddie Mac, but has fallen to 6.09% as of early February.

While this is still much higher than the 3% mortgage rates common in 2020 and 2021, this is a significant drop. In fact, it’s so significant that refinancing could already make sense for many people who bought in the latter months of 2022 when rates were near the peak. Here’s a quick guide that can help you determine whether refinancing your mortgage might be a smart option.

How to know if refinancing is worth it for you

I’ll try to keep the mathematics here as light as I can. But the best way to know whether refinancing your loan makes sense for you is to crunch some numbers. And there are two basic steps.

Step one is to find out how much refinancing will cost. Your new loan will have closing costs such as origination fees, document prep fees, and more. On average, you can expect to pay 1% to 3% of your loan amount, with the average borrower paying about $5,000 according to Freddie Mac.

Step two is to calculate your savings from refinancing. First, figure out how much you’ll save each month by subtracting your new mortgage payment from your current one. Then, multiply this amount by the number of months you are reasonably certain you’ll stay in the house. In other words, if you think there’s little possibility of you moving within five years, multiply by 60.

If the result from step two is significantly higher than the amount from step one, refinancing can make a lot of sense.

Example of refinancing the right way

For example, let’s say you bought a house in late 2022 and used a $350,000 mortgage loan at 7% interest, which gives you a monthly payment of $2,329 (principal and interest). A mortgage lender offers to refinance your loan at 6.25%, lowering your monthly payment to $2,155. Closing costs for the loan are estimated to be $6,000 and you plan to stay in the home for at least five years.

Your monthly savings from refinancing will be $174 in this simplified hypothetical example, so over the course of five years (60 months), you can expect to save $10,440.

In a situation like this, refinancing can certainly be a good option if you plan to be in the home long term. And it’s also worth noting that closing costs are generally not paid out of pocket but are rolled into the loan in most refinancing transactions. For example, when I refinanced in 2020, my loan balance went from $288,000 to about $292,000, and the math still worked out very much in my favor with a lower rate.

A one-way renegotiation

One of the most common objections to refinancing that I’ve heard recently is something to the effect of “well, if I refinance now and rates drop even more, I’ll be out of luck.”

Nothing could be further from the truth. There’s no rule that says you can’t refinance again if rates fall even further, especially if the math discussed here works out in your favor. It’s true that some banks won’t refinance you again within a certain time period (six months and a year are common), but you can always explore your options with other lenders.

As a final thought, refinancing is why legendary investor Warren Buffett thinks mortgages are such an excellent financial tool for Americans. In fact, Buffett has called a 30-year mortgage “the best instrument in the world.” The reason? “It’s a one-way renegotiation.” In other words, if rates drop, you can choose to refinance. And then refinance again. But if rates rise, your rate is locked in for 30 years.

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