Money Management

Read this to avoid potentially buying a bad product. 

Finance expert Dave Ramsey has lots of suggestions about what people should do with their money — including which financial products to steer clear of (like credit cards).

Ramsey’s advice isn’t always right. For instance, that anti-credit card stance mentioned above doesn’t make sense for most people. That’s because cards can help build credit and earn rewards and have no real downside as long as the bill is paid off before interest is owed.

But one of Ramsey’s warnings about a terrible financial product is absolutely spot on, and it’s a warning everyone should take seriously. Here’s why.

This is the financial product Ramsey says to steer clear of

Whole life insurance is the financial product that Ramsey has spoken out against and warned consumers away from.

Ramsey said whole life insurance is “expensive, and it’s one of the worst financial products out there.” Ramsey warned many insurance salespeople try to sell whole life coverage despite this. They do that because they can earn a large commission from these policies. However, he explains these agents are the only ones who think the purchase of whole life coverage is a good idea.

This doesn’t mean Ramsey is against life insurance entirely, though. He believes anyone with people depending on them should get a term life insurance policy with a death benefit of 10 to 12 times their annual income, or with a $250,000 to $400,000 death benefit if they are stay-at-home caregivers.

Here’s why Ramsey’s right

Ramsey is 100% correct that the vast majority of people should not buy whole life insurance and should opt for term life coverage instead.

Whole life insurance premiums are five to 15 times costlier than term life insurance premiums. The premiums are higher because the coverage remains in effect indefinitely, so the death benefit is always paid. The premiums are also higher because of the investment component of whole life coverage. Policies accrue a cash value, as some of the money paid in premiums is invested.

But, as Ramsey has explained, permanent coverage for life isn’t usually needed — or worth paying for — due to the fact most people eventually “self-insure” or have the money their loved ones need to survive without their income (or services). And policies are a bad investment because of high fees, strict rules for when and how money can be accessed, and lower returns than many other safe investments provide.

There is very little reason to pay extra for a more expensive insurance policy that is unnecessary for most people when this money could be invested in a brokerage account and produce better returns. The fact that whole life policies are so expensive without offering any added value does indeed make them one of the worst financial products in existence.

Unless there’s a specific reason why permanent coverage is needed (such as a disabled relative who will need expensive care after a death), it’s best to follow Ramsey’s advice and just say no to a whole life insurance plan. Opt for term life instead.

Our picks for best life insurance companies

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Everyone pays taxes, so why are Black filers more likely to have their returns further scrutinized? 

Filing a tax return can be a daunting process. First of all, if you end up owing the IRS money and don’t have the cash in your savings account to cover that obligation, that alone could be a major source of distress.

There’s also the idea of getting audited that many tax-filers fear. An IRS audit isn’t always a drawn-out, dramatic affair. Contrary to the way you might see audits portrayed in the movies and on TV, the majority of the audits the IRS conducts are correspondence-based in nature — meaning, they happen through the mail. The IRS simply doesn’t have the manpower to send agents into taxpayers’ homes every time there’s a question about a tax return, or a discrepancy the agency can’t reconcile without asking for further information.

But still, tax audits can be stressful in their own right. And a new report reveals that Black taxpayers are more likely to get audited than those who identify as non-Black.

Black tax-filers are more likely to be targeted

A recent Stanford University collaboration with the Department of the Treasury found that Black taxpayers receive IRS audit notices at least 2.9 times, and potentially up to 4.7 times, more often than non-Black taxpayers.

The researchers involved in this study do acknowledge that this disparity most likely is not intentional. Rather, the IRS uses a specific set of algorithms to determine when returns need further examination. But based on those formulas, Black tax-filers may be more likely to end up receiving an audit letter in the mail.

Now, one reason for higher audit rates among Black taxpayers could boil down to a problem with the IRS’s algorithm use of the Dependent Database, which uses various data points to confirm the identity of those being claimed as dependents on tax returns. Another reason, however, could boil down to the fact that audit rates tend to be higher among tax-filers who claim the Earned Income Tax Credit (EITC) — a credit designed to assist low-income households.

One thing that makes the EITC so valuable is that it’s a fully refundable credit. Most tax credits will only reduce a given filer’s liability down to $0, whereas the EITC will put money in filers’ bank accounts if they’re due a refund by virtue of the credit alone. But because of high rates of fraud associated with the EITC, the IRS cannot issue refunds associated with that credit prior to mid-February, even though the tax-filing season commonly opens up in late January.

As such, it’s not surprising to see that audit rates are higher among filers who claim the EITC. What’s interesting, though, is that Black taxpayers accounted for just 21% of EITC claims, but were the subject of 43% of EITC audits, the aforementioned researchers found.

The IRS can try to make things more fair

Although the IRS doesn’t seem to intentionally be targeting Black tax-filers as far as audits go, the agency can try to take steps to remedy the problem. That could involve making changes to its algorithms so Black filers are less likely to be disproportionately targeted. It could also involve having the IRS focus more on large-scale audits — the ones where the IRS does send field agents to the offices of wealthy tax-filers suspected of major underreporting — and less so on correspondence audits done by mail.

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Don’t buy a home before reading this. 

When buying a home, there are a lot of tasks to take care of. Home buyers need to make sure they shop around for a mortgage loan and that they find a property that is both a good fit for their family and priced fairly.

There’s another essential task to complete before getting to the closing table, though. It involves buying homeowners insurance. This isn’t optional in most cases and, even if it wasn’t mandated, home buyers should still make sure to get coverage before closing on a property.

There are two big reasons why that’s the case.

1. Lenders require homeowners insurance

Any homeowner who is using a mortgage to purchase a property will be required to have homeowners insurance coverage in place. Lenders mandate this for a simple reason: They have a legal interest in the home because it’s the collateral for the loan.

Lenders need to be able to foreclose and get paid back if homeowners don’t pay, so they want to make sure the property is properly insured. If a mortgage lender didn’t require insurance and the home was destroyed with no coverage in place, the buyer could theoretically walk away, and the lender would be left with a loan that they had no means of collecting on.

To make certain this doesn’t happen, lenders require insurance that would be sufficient to rebuild the property if it was destroyed or to repair it if it was damaged by a covered peril. It’s not possible for a buyer to get the funds from a mortgage to close on a home without providing proof of insurance, and if homeowners were to cancel a policy later, the insurer would have the right to buy coverage on their behalf (often at an inflated price).

2. Buyers shouldn’t leave a valuable asset unprotected

If a home buyer does not get a mortgage to purchase a property, then there may be no lender requirement that they purchase homeowners insurance. This doesn’t mean it’s a good idea to close on a new house without a policy in place, though.

At the end of 2022, the average price of a sold home was $535,800, according to data from Federal Reserve Bank of St. Louis. This is a pretty substantial sum of money. Most people cannot afford to just lose that money if something were to happen to the house after closing but before insurance was put in place.

By buying replacement cost insurance, homeowners can make sure they don’t end up losing the substantial funds they put down if they paid out of pocket for the property. If they close on the house and a fire happens the next day or the home is vandalized, insurance would foot the bill (minus any deductibles).

Homeowners should be aware of the importance of having insurance in place by the time of closing and should start shopping around for coverage early on. By taking the time to find the right insurance from an affordable company, home buyers can be ready and able to protect their property from day one of ownership.

Our picks for best homeowners insurance companies

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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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The more, the better — but shoot for a specific goal. 

The recession warnings have come thick and fast these last few months — we here at The Ascent have certainly covered our fair share of them. Recessions are a normal occurrence in our economy, but the concern over a potential economic slowdown later in 2023 or possibly 2024 is certainly justified. Right now, there’s plenty of news about layoffs from big tech companies, and a lot of people are understandably worried.

While we may not be able to prevent economic downturns like recessions, it is within our power to prepare for them and be ready should the worst happen. Your best cushion against a recession is an emergency fund, and it’s worth working on yours right now, if you’re able to.

Emergency funds 101

An emergency fund is a stash of cash savings, ready and waiting for an unplanned expense (such as a car repair bill) or a more serious financial hit, like a period of unemployment. As much as we like to think we have some measure of control over our lives, a catastrophe can strike at any time. Having money put aside can help you cope.

It’s really important that your emergency fund savings be readily available to you. This means keeping it in a good high-yield savings account, where it can be easily withdrawn without penalties or fees. If all your money is in a retirement or other brokerage account, you’ll be able to access it, but you’ll incur a tax penalty, or may have to sell stocks at a loss to get your money out. And if you have to tap a retirement fund, you could be hurting your future financial security as well. Financial expert Suze Orman has a prescient recommendation for how much money you should aim to save in your emergency fund in light of a possible recession.

Suze Orman’s perspective

Like many big names in the personal finance world, Orman is a big believer in emergency funds. Orman has changed her recommendation based on the last few years of pandemic-related economic disruption, however. While she used to advocate for saving three to six months’ worth of expenses, she now recommends that Americans have even more savings.

Recently on Twitter, she noted that while your long-term goal should be to eventually save up a year’s worth of expenses (to cover your housing, transportation, healthcare, and other bills), right now, the best move is to just add as much money as possible to that account. If you run your bills through an emergency fund calculator, and find that your usual monthly expenses total $3,000, a year’s expenses for you will be $36,000. That’s a lot of cash savings, but don’t despair if you can’t reach that goal anytime soon. Any amount of money you can put aside can provide you with some cushion against the unexpected.

What should you do?

Orman is certainly right that the more money you can save now, the better off you’ll be in the face of an uncertain economic future. That said, don’t let this recommendation to save for a year of costs stress you out if your savings account is a little light after the last year of inflation we’ve all experienced. Consider cutting some of your discretionary expenses if possible, but it would be even more effective to increase your income.

If your employer is willing to give you a raise, that can help, but getting a side hustle could mean dedicating most or all the extra money you make to your savings. Plus you could add to your resume and have a back-up source of income, both of which are very good side effects of having a side hustle. Try not to worry too much over impending financial uncertainty, but do your best to be prepared for it by padding your emergency fund.

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An alarming number of Americans are having a hard time saving any money. 

“Living paycheck to paycheck” is an expression used to describe spending all the money you make every month. It’s a precarious position to be in because you won’t be able to save money, and any unexpected emergency could lead you into debt.

Unfortunately, recent research has found that living paycheck to paycheck is the most common financial lifestyle in the United States. It’s not something that just affects low-income Americans, either. As you’ll read, this is also a problem for people across income brackets.

The latest data on Americans living paycheck to paycheck

A whopping 64.4% of Americans are living paycheck to paycheck, according to a report by PYMNTS and LendingClub. While that’s challenging enough, what makes it even worse is that many also have trouble paying their bills. The report found that 23.8% of Americans have issues paying bills, while 40.5% live paycheck to paycheck but don’t have issues paying bills.

It stands to reason that lower earners are more likely to live paycheck to paycheck. That’s true, but more than half of those earning six figures were in the same position. Here’s the percentage of people who live paycheck to paycheck by income bracket:

Less than $50,000: 77.7%$50,000 to $100,000: 65.6%More than $100,000: 50.8%

Overall, there were 9.3 million more Americans living paycheck to paycheck at the end of 2022 than in 2021. A whopping 8 million of them earn over $100,000 per year.

How to break the cycle of living paycheck to paycheck

Habits are hard to break, especially when they’re forced on you because of your financial circumstances. If your current income is just enough to break even on your bills, then it may feel like being paycheck to paycheck is your only option. But you can break this cycle, and you’ll be much better off for it.

Start by keeping track of every dollar you spend. You might find that there are areas where you’re spending more than you realize, and making simple changes could free up some cash. To better track your spending, check out budgeting apps that connect to all your financial accounts. You Need a Budget, in particular, is great for managing money by giving every dollar a job.

After you’ve done that, here are a few steps you can take to make immediate progress with your finances:

Pay yourself first. Set up an automatic transfer to your savings account to ensure that you’re putting away money every month. Make sure you have a high-yield savings account, since this type of account offers the most generous interest rates. Don’t let limited disposable income stop you. Even $10 or $20 per month is a good start, because it gets you into the habit of saving.Get better deals on monthly bills. Some bills, like your rent or mortgage, may be nonnegotiable. But with many others, including car insurance, internet service, and cellphone service, you could get a better deal by shopping around.Find financial products that can help you save. For example, if you have debt, see if debt consolidation is an option. If you aren’t earning credit card rewards yet, check out cash back credit cards so you can save on everyday purchases.

Just these small changes could be enough to start building your savings. Here’s an example of how this could work for you. Let’s say you:

Use a budgeting app and realize you can save $50 per month by cutting out the occasional food delivery.Go rate shopping and save a combined $40 per month on your auto and homeowners insurance.Get a cash back credit card and earn $30 per month back on your regular purchases.Take that $120 per month and send it to your savings account.

Stick with it for a year, and you’ll save $1,440. And that’s just from small steps that you can put into practice immediately.

Those are the short-term moves, but to really put the paycheck-to-paycheck life behind you, there are also two more long-term goals to work towards.

Take all that money you’re saving and set it aside for an emergency fund. Keep at it until you’ve saved at least three months of living expenses. Emergency savings is so important, because if you don’t have it, any unexpected bill could send you back to square one.

In addition, look for opportunities to boost your income. Financial habits play a large role in whether you live paycheck to paycheck, but there’s no denying that your income matters, too. If you can negotiate a raise, change jobs to secure a higher salary, or start earning money on the side, that can be a gamechanger for you financially. Just make sure you plan how you’ll use any additional income so that you get the most out of it.

It takes work to stop living paycheck to paycheck and develop new habits. While it’s not easy, you will end up in a much more secure financial position.

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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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Is there reason to hope for another direct payment into your bank account? 

In 2022, the federal government did not authorize a fourth stimulus check on the national level, despite many calls to do so as a result of surging inflation. A number of states did step up to the plate, though, providing direct payments into the bank accounts of millions of Americans. These stimulus checks took many forms, including tax rebates and inflation-relief checks.

Most of the state stimulus payments that were authorized last year have already been distributed, which means most people typically won’t be in line for more state funds from the 2022 bills that passed. But is it possible states will pass more legislation providing additional funds in 2023? Here’s what you need to know to answer that question.

State stimulus relief may not be off the table

Although it is unlikely the federal government will offer a fourth stimulus check this year due to a divided Congress and the coming end of the COVID-19 state of emergency in May, there’s a greater chance that states will take action.

There’s a simple reason for that. Many states have large budget surpluses right now. This is the case both as a result of unspent COVID-19 relief funds from the federal government, as well as because of a surge in state tax revenue resulting from inflation that has occurred over the past months.

While there are many different priorities that governors and legislatures could use these funds for, direct aid to the public has proven to be very popular in the recent past on both the federal and state level.

Lawmakers hoping to shore up support among constituents may decide another stimulus payment is in order and may thus move forward with passing additional bills in 2023 that result in more money being delivered. This is especially likely if inflation continues to persist or if the country enters a recession and people end up needing some extra help that states feel they can use their excess funds to provide.

Will your state issue a 2023 stimulus check?

At this time, there’s no way to tell which states will decide to move forward with using their budget surplus funds to put money into residents’ bank accounts. But, as the legislative season moves forward, it will be important to keep up with local news to learn whether more payments are forthcoming.

It’s far more likely that states will take action on stimulus relief than the federal government, so anyone hoping for more money this year should pay special attention to what their local lawmakers do — and perhaps even consider contacting their representatives to voice support for another check if they feel one is necessary.

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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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