Money Management

It’s by nature that the stock market fluctuates. 

The stock market is like a roller coaster. The ups and downs make some people feel sicker than others. As tempting as it may be to lose your cool when the stock market takes a hit and drags your portfolio down with it, it does you no good. What helps is looking to history to learn how the stock market has reacted in the past and to remind yourself of the following.

1. I have a long-term plan

Did you get into the market with a plan to cash out immediately or even in a few years? Probably not. Investing for the future is just that — allowing your money to grow over the long term. Like any long-term relationship, you’re sometimes going to be disappointed with the market, and on occasion, you’re going to think it’s the most brilliant thing ever.

If you’re anxious about how much the market dropped last year, use this as a learning opportunity. Unless you’re retired and need to make withdrawals from your investments to get by, you can afford to sit on your hands and wait. If you have years before retirement, use this time to save enough cash to carry you through a year or two if the market drops when you need the most funds.

2. History is on my side

Experience is a great teacher, and the longer you’ve invested in the stock market, the more familiar you are with the bears and bulls of it all.

The S&P 500 Index must drop by 20% or more to be considered a bear market. According to Hartford Funds, There were 26 bear markets between 1929 and 2021, each lasting an average of 289 days. Now, consider this: Between 1929 and 2021, there were 27 bull markets, lasting an average of 991 days each.

That’s not to say that market hits don’t hurt, but rather to illustrate that following each bear market has been a bull.

If a part of you believes this downturn is different, here’s another interesting fact. According to Fidelity, the average 401(k) balance fell by 22.9% between 2021 and 2022. Yes, that feels awful, but when you consider that historically, stocks have lost an average of 36% in bear markets, it puts things in perspective. This drop is not unprecedented.

As mentioned, stocks lose an average of 36% in a bear market. However, stocks gain 114% on average during a bull market. And remember, bull markets last longer.

To sum it up, stocks are on the rise 78% of the time. That may be what makes the downturns seem so terrible.

3. I don’t weigh myself 12 times a day

Obsessively checking your portfolio is about as constructive as weighing yourself every couple hours when you’re on a diet. Just as it takes time to lose weight, it takes time for the stock market to work its way back up.

If you log into your brokerage account more often than usual these days, it’s time to back away from the computer. You’re doing yourself no favors.

4. I know better than to try and time the market

Plenty of people have convinced themselves that they know the right time to buy and sell. Many who panic and sell as the market falls believe they’re doing the right thing.

However, when Merrill Lynch studied model portfolios, it found that over 30 years, portfolios based on trying to time the market routinely underperformed.

5. I understand that for some, it’s all about selling ads

Those “experts” who spend most of their time warning that the sky is falling are accomplishing what they’ve set out to do: Capture as much attention as possible. The more viewers, listeners, and readers they can catch, the more money they can earn from advertisers.

Has the market dropped? Yes, but the sky is not falling. Buying into that hyperbole is one of the reasons investors get nervous and sell before the market has time to recover.

It pays to block out noisemakers.

Your internal monologue matters, especially during times of stress. The more you can counteract fear with evidence-based facts, the less likely you are to lose sight of your goals or to do anything you’ll regret.

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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.Dana George 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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The fun part’s over — now it’s time to deal with the bills. 

The holidays are behind us, but the effect they have on your wallet can stretch far into the new year. Unfortunately for a lot of people, that means holiday debt. If you’re carrying any, you probably know it can affect your ability to pay your bills and save for your long-term goals, including this year’s holiday gifts.

Getting out of holiday debt isn’t always easy, but here are three tips you can try to get your finances back under control.

1. Take stock of your situation

You need to know what kind of debt you have if you want to pay it off as efficiently as possible. If you charged holiday expenses to credit cards, make note of the balance on each card, the annual percentage rate (APR), the minimum payment, and the payment due date.

If you used a Buy Now, Pay Later (BNPL) service, make note of how much you still owe, the minimum payment, the payment due date(s), and any interest or extra charges you could incur.

2. Make a debt repayment plan

Once you know what you’re dealing with, you can craft a plan of attack. The simplest way to tackle debt repayment is to set aside extra cash every week or month until it’s paid off. If you’re going this route, you’ll need to make a budget for 2023 so you know how much you can put toward debt repayment each month. This might not be your best move, though, particularly if you have a credit card with a high interest rate.

You may make better progress with a balance transfer card or a personal loan. Balance transfer cards offer 0% introductory APRs for a number of months. During this time, your credit card balance won’t grow, so any payments you make go toward reducing your principal. However, it’s worth noting that there are one-time fees associated with balance transfers. And if you fail to pay off the full balance by the end of the 0% APR period, the remainder will begin accruing interest again.

Personal loans enable you to avoid the race against time by setting you up with a predictable monthly payment. These loans don’t require collateral, but because of this, interest rates are typically higher than what you see with other types of loans, like auto loans. But if you keep up with your payments, you won’t have to worry about additional charges.

3. Put extra cash received toward your debt

Throughout the year, take any windfalls you receive and put them toward your debt repayment first. If you received any cash as a gift for the holidays, you could start with that. You could also use birthday money and pay raises, if you get them.

In addition, tax season is just gearing up, and you could receive a tax refund this year. Sometimes, these can be worth thousands of dollars and might be enough to wipe out your holiday debt entirely. But getting your refund takes time. That’s why it’s best to file your taxes as soon as possible. Doing this will also help reduce the risk of a thief filing a fraudulent tax return on your behalf.

It might take some time to get out of holiday debt, but don’t give up. Track your progress to keep yourself motivated and begin planning for this year’s holidays so you don’t fall into the same trap. If you have any extra cash left after paying off your debt, put it in a savings account so it’ll be waiting for you at the end of the year.

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Some filers may end up unhappy with their refunds. 

Some people are used to filing a tax return and seeing a refund hit their bank accounts weeks later. And if you’ve consistently gotten a refund from the IRS year after year, then you may be anticipating a nice payday this filing season, too.

But Mark Steber, Chief Tax Information Officer at Jackson Hewitt, warns that tax refunds may be smaller this year than they were last year. In fact, he cautions that 2023 could be the year of “refund shock.” Here’s why.

No more enhanced credits to fall back on

In 2021, the Child Tax Credit got a major boost. Its maximum value rose from $2,000 to $3,000 for children aged 6 to 17 and $3,600 for children under age 6.

Plus, the credit became fully refundable instead of only being partially refundable. With a fully refundable credit, you can get paid its entire value, even if you owe the IRS no money. That helped boost refunds for a lot of tax-filers last year (keeping in mind that 2021 taxes were filed in 2022).

But in 2022, the Child Tax Credit didn’t get a boost. Its maximum value didn’t increase and its full value wasn’t refundable. And that’s just one reason why tax refunds may be lower this year.

Another reason? Many people picked up side hustles in 2022 to cope with inflation. But many people may also not have known to pay estimated taxes on that income if it was paid on a freelance basis. So that, too, could result in lower refunds in 2023. Worse yet, it may even result in more tax-filers owing money to the IRS.

Now to be clear, owing money isn’t actually a bad thing in theory. It means you didn’t overpay your taxes but rather, got to keep more of your earnings as you went along.

But owing money becomes a problem when you don’t have the means to pay. And since inflation cost a lot of people extra money last year, many filers may not have the cash in savings to pay their tax bills.

How to cope with a smaller tax refund or IRS bill

The average tax refund in 2022 was $3,121. If you received a payday along those lines last year, you may be in line for a similar refund this year. Or, your refund might come in a lot lower. You may even end up having to write the IRS a check.

If you owe money on your taxes you can’t pay in full right away, don’t panic. Steber says the IRS tends to be pretty flexible about getting its money, so you’ll most likely be able to get on some type of installment plan that allows you to pay your tax bill over time.

Meanwhile, if your refund ends up being lower than expected, you may have to adjust some habits or plans to cope. If, for example, you were counting on a refund in the ballpark of $3,000 and were planning to use it to pay off your holiday credit card debt, you may have to come up with another strategy if your refund only amounts to $1,500. Similarly, you may have to swap your island vacation for a less expensive getaway.

That’s why you may want to file your taxes as early as possible this year. The sooner you do, the sooner you’ll know how much of a refund to expect — or how much money you owe the IRS. And from there, you can at least formulate a game plan.

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If you aren’t happy with your progress on your financial goals, could this Ramsey advice help? 

Most people have financial goals, whether those goals involve paying down credit card debt or bulking up your savings account. And there are a bunch of different ways to try to achieve the money objectives you have set for yourself.

However, there’s one approach that finance expert Dave Ramsey doesn’t believe is a very effective one.

Ramsey isn’t a fan of this approach to accomplishing financial goals

Ramsey has warned that one particular approach to budgeting is not likely to help you succeed in accomplishing your financial objectives. It’s called the 50/30/20 budget and it’s a common method of allocating money because it’s simple and less constraining than other techniques.

With the 50/30/20 budget, you devote 50% of your money to needs; 30% to wants; and 20% to savings. This seems on the surface like it would be a good allocation of your cash, but Ramsey is not a fan of it.

“The biggest problem with the 50/30/20 rule is that it leaves only 20% of your income for savings, retirement and extra debt payments,” Ramsey warned. “That kind of thinking makes for very slow progress toward your money goals. Like snail-like kind of progress.”

As Ramsey explained, when you use a 50/30/20 budget, minimum debt payments would come out of the 50% set aside for essential spending and extra debt payments would come out of the 20% that is supposed to be for savings.

He advised instead using an approach called “zero-based” budgeting that allocates every dollar. He believes this method is better because it enables you to put more cash toward becoming debt free.

“Remember, when you use the zero-based method, any money left over after you budget for all your expenses goes toward your current Baby Step,” he explained. Baby Steps are the steps in Ramsey’s path toward financial freedom and they include things like saving an emergency fund and repaying debt.

If you assign every dollar a job using the zero-based budgeting method Ramsey recommends, he believes you can be more focused and intense in your approach toward accomplishing your objectives. “You aren’t stuck at only 20%. And you aren’t throwing money at three goals at once. You’re tackling your money goals one at a time and focusing all your intensity on getting them done.”

Is Ramsey right?

Although Ramsey’s position has merit, the reality is that a 50/30/20 budget doesn’t have to work quite like he said — and it can be a great method of budgeting.

When you make a 50/30/20 budget, the hard-and-fast rule is that 50% goes to essential expenses. But you get to decide what those expenses are.

If you want to pay an extra $100 or $200 or whatever amount on your debt or you want to put $100 or $200 extra toward your emergency savings beyond the 20% allocated to saving, you can treat that as an essential expense if you want and factor it in as part of your 50%. You aren’t restricted to only saving 20%.

The big benefit of a 50/30/20 budget is its simplicity. Many people won’t spend the time creating a zero-based budget and allocating every dollar because doing so is kind of a hassle. And many people find living that way to be too constricting, so they don’t stick to their plan.

If being looser with yourself and making a 50/30/20 budget works where a zero-based budget doesn’t, you’re far better off doing that. Because the bottom line is, having a budget you can actually live with over the long term is actually the surest way to succeed with your money.

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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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Don’t forget expenses beyond a down payment and closing costs. 

When you’re buying a home, many expenses will come up. Most people think about closing costs, down payments, home insurance, and property taxes. But in addition, it’s worth it to consider the costs that may come your way after you move into your home. Here’s what I wished I had saved up for before buying a home for the first time.

1. Lawn care equipment

If you’re going from renting to buying, you may not have been responsible for handling yard maintenance at your previous properties. No landlord is there to help when you own a house. Instead, you’re accountable for taking care of your property, including keeping your yard in order.

Since my husband and I only ever rented properties where the landlord handled the lawn care, we didn’t own a lawn mower, weed whacker, leaf blower, or any other piece of equipment that we’d need at our new house.

That meant that we needed to invest in these tools and equipment. We bought these items slowly over time since we hadn’t set aside money for these costs before we bought our house. If I could do it over, I would have budgeted for and saved up for these costs first.

2. Appliances

Many homes have all the appliances you need to live a comfortable life. You may later decide to upgrade them but can get by without doing so right away. But sometimes, your new home may not have all the necessary appliances that you prefer to have. Our home had washer and dryer hookups, but the previous owners had taken their washer and dryer to their new home.

Luckily, this is one expense that we did plan for in advance. We spent a little over $1,400 on a brand-new set, with delivery included. I shopped around and got the best deal on what we wanted, but it was still an extra expense. New appliances can be pricey, and if you need to buy them soon after you move in, you’ll want to budget for these costs in advance.

3. Outdoor furniture and decor

If you’re planning to buy a home with a patio, deck, or another area that you want to turn into an outdoor entertainment space, you should consider how you will furnish it. If you don’t own outdoor furniture and decor, that’s another expense you may want to plan for before you close on your home. When we started making our patio space a comfortable place to spend time with friends and family, we quickly realized it wouldn’t be cheap.

4. Repairs and maintenance costs

Before buying, we had our home inspected. While our furnace was older, it operated during the inspection process. A couple of months after closing, we needed to replace it, and as you can imagine, that came with an expensive bill and impacted our personal finance situation.

We knew that repairs and maintenance costs would pop up — but we didn’t think we would need to replace our heating system so soon. Setting aside extra money for potential repair and maintenance costs before buying a home is best. If an unexpected issue occurs, you’ll have the cash you need and won’t be at risk of going into credit card debt.

Save now to reduce your stress later

If you’re saving up to buy a home, keep your money in a bank account that earns interest so you can boost your savings without extra work. Most checking accounts don’t earn interest. Don’t have a savings account? These are the best high-yield savings accounts.

As you plan to buy a home for the first time, don’t overlook additional expenses that may come your way. You want to ensure that your home is comfortable and ready to enjoy once you get settled into the space. Are you starting to explore the mortgage lending process? Here’s a list of the best mortgage lenders.

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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.
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This new rule could save Americans $9 billion a year in late fees. 

Paying your credit card late can not only hurt your credit score and increase your interest rates, but it also costs American families $12 billion a year. Even though Congress banned excessive credit card late fees in 2009, credit card companies have been able to use a loophole to continue charging what is known as “junk fees.” The Consumer Financial Protection Bureau (CFPB) is proposing a new rule that can save consumers as much as $9 billion a year in late fees, but how will it impact credit card late fees? Let’s take a closer look.

The impact of junk fee prevention

The CFPB’s proposed rule is intended to prevent lenders from charging excessive late fees on credit cards. Currently, most late fee charges are around $30 per month, with some companies charging as much as $41 for each missed payment. However, if this rule goes into effect, the typical charge for a single late fee will be reduced to $8 per month. The CFPB states that $8 is enough to cover collection costs by the card company. This reduction in fees could save consumers significant amounts of money in the long run.

In addition to reducing the amount of money charged for each individual late fee, this proposed rule would cap late fees at 25% of the required minimum payment. Currently, a cardholder can potentially pay up to 100% of the minimum payment in late fees. Lastly, the rule would end the automatic annual inflation adjustment and would base any late fee increases on market conditions.

The future of credit card late fees

If implemented as written, this proposed rule could potentially revolutionize how lenders handle late payments by eliminating many of the costly junk fees associated with them. By capping the amount of money lenders can collect from each late payment and limiting future fee increases, it should make it easier for people who struggle with managing their finances to stay current on their bills. They won’t have to worry about excessive or multiple charges eating away at their already strained personal budgets.

For years, consumers have had to deal with costly late fees. These fees can add up quickly, leaving consumers with little recourse against them. The CFPB has proposed a rule that would drastically reduce credit card late fees and make debt more manageable for everyone involved. The CFPB’s proposal is still in its early stages so it may take some time before we see any real changes in how lenders handle late payments. However, if enacted into law as currently written, it could potentially revolutionize how much money in late fees cardholders will have to pay!

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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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