Money Management

CD rates aren’t directly tied to the Fed’s actions, but they tend to move in the same direction. Learn what it means for you. [[{“value”:”

The Federal Reserve recently cut its benchmark interest rate for the first time since early 2020, and in many cases, banks have lowered their interest rates on high-yield savings accounts, money market accounts, and CDs. However, it’s important to note that while CD rates tend to move in the same direction as the Fed’s interest rate decisions, they aren’t directly linked, and some banks have clearly chosen not to lower their CD rates just yet.

Although the yield you can earn from a CD ladder is generally lower than it was before the Fed started cutting rates, it is still rather high on a historical basis. In this article, we’ll compare some of the top CD interest rates on our radar from before the Fed’s rate cut with the currently available rates.

If you’re looking to start a CD ladder, there’s no time like the present, as the Fed is set to cut rates several times in the next few years. Check out the best CD rates right now.

CD ladders: Then and now

Shortly before the Fed announced its interest rate cut, I wrote an article about how much one could make with a hypothetical CD ladder by simply using the CD rates available from some of our favorite online banks at the time.

Here’s how the top CD rates before the rate cut compare to what is currently available:

To be sure, there are plenty of banks you can use to construct a CD ladder, and if you’re willing to hunt for the best possible rate, you might be able to do significantly better than the rates in the chart. But the point is that after the Fed cut its benchmark rate, CD interest rates certainly moved downward. However, an overall yield of nearly 4% from a newly-constructed CD ladder is still rather high when compared with recent historical CD yields.

Is it still a good time to start a CD ladder?

The short answer is yes. You can still set yourself up with an excellent income stream with a CD ladder, especially if you have enough money to take advantage of CDs with high minimum deposit requirements.

To be sure, the charts above only show a sampling of CD rates available from some of the most well-known online banks. Some have minimum deposit requirements, and some may have other drawbacks, such as limited ways to deposit and withdraw money, poor customer service ratings, and more. In many cases, the best fit for you might not be the absolute highest-yielding CDs.

However, the bottom line is that a CD ladder is a strategy that is designed to produce a strong level of income in any climate by rolling all your money into longer-maturity CDs over time. And there are some excellent opportunities to do so, while still taking advantage of elevated short-term interest rates.

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Housing, transport, and groceries eat up a large chunk of people’s paychecks. Find out how your spending stacks up against the average American. [[{“value”:”

On average, American families spent $6,440 a month — $77,280 a year — in 2023. Housing is the largest expenditure, followed by transportation and food. Together they account for almost two-thirds of household spending, according to The Motley Fool Ascent’s analysis of data from the U.S. Bureau of Labor Statistics (BLS).

If you’re wondering how your spending stacks up, first use a budgeting app or spreadsheet to track where your money goes. Then you can compare yourself with the average U.S. household.

Housing: $2,120 a month

You’ve likely heard the rule of thumb that says to spend no more than 30% on housing. However, skyrocketing costs mean that number is now outdated, particularly if you live in a more expensive part of the country. Housing accounts for 33% of the average American household’s total spending.

According to The Motley Fool Ascent’s breakdown of average monthly expenses, that $2,120 a month includes $385 on utility bills and over $200 on household furnishings and equipment. Our analysis of BLS data shows that monthly housing expenses in 2023 were up 5% over the year before.

How you can save: If housing eats up a large portion of your budget, there are no easy answers. Consider moving to a lower-cost neighborhood or taking on a roommate. Now that interest rates are falling, if you have a high mortgage rate, you may be able to lower your costs by refinancing.

Transportation: $1,100 a month

Transportation sets people back by about $1,100 a month, about 17% of their total. That includes the cost of buying, running, insuring, and maintaining a car. People spend $225 a month on gas and almost $150 on auto insurance. Interestingly, spending on public transport was over $90 a month in 2023 — up 30% from the year before.

How you can save: Public transport and carpooling are two common ways you can reduce your transport spending. You might also shop around to find the best auto insurance deals and consider signing up for a telematics program that monitors your driving in exchange for a lower rate.

Food: $830 a month

Higher food costs have been one of the most painful aspects of inflation. Overall, food costs came to over $830 a month last year — 13% of people’s spending. That’s around $500 on groceries and $330 on takeout and restaurants.

How you can save: If you’re struggling to stay afloat financially, cutting food costs can make a significant difference. It accounts for a big chunk of people’s budgets, and there’s more leeway than with transport or housing costs — especially if you’re able to reduce spending by dining out less often.

Switch to a budget grocery store and see if you can replace pricier ingredients such as meat with lower-cost veggies, grains, and beans. Using cash back apps and rewards credit cards can be a good way to get more value from your spending.

Wondering how to earn more cash back every time you spend? Check out our list of top cash back credit cards to learn more.

Insurance, healthcare, pensions, and Social Security: $1,309 a month

American households spend around $750 a month on pensions and Social Security, which equals 12% of their overall spending.

Healthcare comes to over $510 each month. That includes health insurance, medical services, supplies, and medicines.Life insurance and personal liability insurance costs almost $50.

How you can save: It’s hard to reduce a lot of this spending. You might cut costs on medicines by buying generic and comparing prices at different pharmacies. If you have a high-deductible health plan, make sure you understand the tax benefits of a health savings account.

Entertainment, clothes, education, and more: $1,013 a month

We all need to have a little fun sometimes, whether that’s going places, hanging out with friends, snuggling with pets, or watching a series at home. Pure entertainment accounts for just over $300 a month, which is about 5% of people’s total spend.

Other notable spending categories include $170 for clothes, $140 for education, and $200 for cash purchases. Throw in around almost $85 on alcohol and tobacco-related products and we’ve accounted for most of the ways Americans spend their money.

How you can save: It’s important to keep space in your budget for the things you love. The trick is to prioritize what you really enjoy and fit it into your budget. Knowing you’re not breaking the bank makes for guilt-free relaxation time.

Bottom line

It’s interesting to see how you compare with the average American. Just bear in mind that people’s salaries and financial situations can vary widely. What matters is not how you line up with others. It’s how you’re progressing in terms of your own spending, saving, and investing goals.

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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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Consumer interest rates are coming down, but so are CD rates. Here’s how much one writer predicts 5-year CD rates will drop in 2024. [[{“value”:”

If you’ve been watching certificates of deposit (CDs), post-pandemic rates may have come as a pleasant surprise. With many financial institutions offering APYs of 4%, 5%, and even more, CDs quickly became an easy and safe place to grow money. After several years of rising interest rates, the Federal Reserve recently announced it’s easing monetary policy. While most of us are grateful for lower rates on consumer loans, we must accept the sour with the sweet.

I’ve never been known for mystical predictive abilities, but as someone who tends to notice details, I’m confident in saying that I expect 5-year CD rates to drop below 3.25% by the end of 2024. Here’s why.

CDs are a forward-looking financial product

The market for CDs is forward-looking. That means financial institutions set rates based on what’s most likely to happen, making educated guesses based on information released by the Fed. Take, purely for example purposes, the current CD rate offerings from one big bank.

According to CBS News, banks have historically offered higher rates on long-term CDs because they wanted customers to leave their money with them for an extended period.

However, given the topsy-turvy nature of the market since the pandemic began in 2020, banks are naturally cautious about making long-term predictions. While they may be reasonably confident about what the Fed will do with the federal funds rate in the next three months, they’re less confident about what will happen over a longer period.

If you were to ask me where I think 3-month CD rates will be by the end of 2024, I’d say they may be slightly lower than they are today, but not by much. However, we’re talking about where 5-year CD rates are likely to be by the end of this year.

Because so much can happen over five years, I predict banks will set their 5-year CD rates low enough to protect their profits, even if the Fed drops its rate more than expected.

Ready to lock in a 5-year CD or another term today before rates fall further? Check out a selection of the best CD rates to find one that works for you!

How the federal funds rate impacts us all — indirectly

We’re all indirectly impacted when the Fed raises or lowers the federal funds rate. That’s because the federal funds rate isn’t the interest rate we’re charged when we take out a loan. It’s the rate banks charge other banks when they lend them money. Here’s how it works:

Banks are required by law to keep a percentage of their deposits in cash overnight. This rule is designed to prevent “bank runs,” which occur when a large group of depositors withdraw their money at the same time.If a bank realizes that it will not have enough cash overnight to meet its legal obligation, it borrows the funds it needs from another bank.The federal funds rate is the interest rate one bank is allowed to charge another bank to borrow the needed funds.

Let’s say the federal funds rate is set at 4%. That’s the amount Bank A must pay Bank B to borrow money. However, Bank A is in the business of earning money, so when customers come in for an auto loan, mortgage, or any other consumer loan, the bank builds a profit into the interest it charges. For example, if the federal funds rate is 4%, they might set their consumer loan interest rate at 5% or 5.5% to ensure a profit.

Have you ever noticed how much interest rates vary depending on the lender? Banks may have no say in how much they pay when they borrow money from other banks, but they do get to set their interest rates.

The trick for a bank is to set the rate low enough to attract loan applications but high enough to guarantee a profit will be made. On the investment side, they must set rates high enough to entice customers to invest but low enough to ensure a profit.

The other side of the coin

When the federal funds rate drops, a bank can no longer charge other banks the same (higher) rate of interest. Because this cuts into their interest earnings, banks lower the amount they pay on deposit accounts, such as CDs, money market accounts (MMAs), and high-interest savings accounts.

This is where being forward-looking comes into play. Banks take the Federal Reserve at its word, and rather than wait for an actual rate cut to take place, they begin lowering their rates, keeping one eye on their profits and another on what the Fed may do next.

Two additional rate cuts are expected before the end of 2024, which leads me to believe that 5-year CD rates will be around or under 3.25% by the time we ring in the new year. As a bonus prediction, I suspect 5-year CD rates will drop below 3% by summer 2025.

If you still want to take advantage of higher rates, now is an excellent time to lock in a rate above 4% on a shorter-term CD. Although they’re not as high as they were this time last year, CD APYs remain attractive.

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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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Discover the magic of compound interest and why starting in your 20s can lead to substantial wealth down the road. Learn how to make it work for you. [[{“value”:”

Superhero movies are all the rage of course, and the characters’ range of superpowers seemingly knows no bounds. From X-ray vision to towering strength, people love superpowers.

Well, if you’re in your 20s, you, too, have a superpower that you might not know about yet. It’s called “time.” And no, I’m not kidding.

When it comes to growing wealth, time is the most important factor, and if you’re in your 20s, time can have an almost magical effect on your finances thanks to compound interest. Compound interest is like a magic money trick that, if you harness it early by saving or investing with a brokerage, can make you rich later in life with minimal effort.

Truly, if I could go back and tell my younger self one financial tip, this would be it.

What is compound interest?

Compound interest is basically interest earned on interest. Here’s how it works: Let’s say you put $1,000 into a savings account, and that $1,000 earns you $40 in interest in a year. Now you have $1,040 that is earning interest instead of just the $1,000 you originally put in. Interest keeps building on top of the higher amount.

When you save or invest money, and you leave the interest to grow inside the account, that money is not just calculated on the initial amount you put in (the principal) but also on the interest that money earns over time. It’s like a snowball rolling down a hill, getting bigger and bigger the longer it rolls.

Why does it matter if you start in your 20s?

The earlier you start making compound interest work for you, the longer you give it to work its superpower magic. Starting to save and invest in your 20s gives your money a much longer runway to grow. If you wait until your 30s or 40s, you’ll miss out on years of compound super growth.

Say you invest $200 a month from age 25 to 65 at an average 7% annual return. By the time you’re 65, you’d have over $482,000. However, if you wait until age 35 to start, even with the same $200 a month and 7% annual return, you’d end up with only about $228,000 — less than half. Why? Because you’d miss out on an extra decade of compound growth.

It’s easier than you think

Compound interest over time really is a money superpower. And you don’t need to be a financial expert to get started. Simply setting up an automatic contribution to a retirement account like a 401(k) or individual retirement account (IRA) can put you on the right track. Even better — many employers offer matching contributions to 401(k) accounts, which is essentially free money. In that case, you have a Robin to your Batman.

Looking for a broker to help get you started? Check out our list of the best online brokers for beginners.

Play the long game

The key to reaping the full benefits of compound interest is consistency and patience. This is a long-term strategy, not a get-rich-quick scheme. The stock market will go up and down in the short term, but over time, it has historically delivered solid returns. The earlier you start and the longer you leave your money invested and allow the returns and interest to compound, the more powerful the compounding effect becomes.

If you’re in your 20s, the best thing you can do for your future self is to start saving, investing, and compounding now. Compound interest might seem like a boring financial term, but it’s the closest thing to magic when it comes to growing wealth.

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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 no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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You don’t need a ton of cash to become a small business owner. Learn how aspiring entrepreneurs can buy a business without any upfront money. [[{“value”:”

Many aspiring entrepreneurs would be interested in buying a business that’s already up and running because it seems safer. And that is true and makes sense.

Starting a business from scratch is tough. You need to wear many hats, potentially take out a small business loan to grow your business, and manage day-to-day operations. But when you buy an existing business, the kinks are usually worked out. Given that half of all small businesses fail, if you found one that has been around a while, that alone is a good sign.

That said, buying a business takes money, right?

No, not always.

Here are ways to buy an existing business with no money out of your own pocket.

1. Seller financing

One of the most common ways to buy a business with no money is through seller financing. This is akin to when someone buys a home and the current owner “carries the papers,” meaning the homeowner acts as the bank. The home buyer in this case simply pays the owner directly for a certain length of time until the home is paid off.

In this case, it’s a business you are buying without any money, rather than a house. In this arrangement, the owner/seller agrees to finance part or all of the purchase price. Instead of paying the small business owner upfront, the buyer agrees to make payments over time.

This type of deal can benefit both parties. The seller can receive a steady stream of income for a few months or years and the buyer gets a business without the need for large cash reserves.

To secure seller financing, two things are needed. First, you need a motivated seller willing to enter into such an arrangement, and second, you will need to demonstrate your ability to run the business and show that your business bank account will support ongoing payments to a seller (or that you can obtain financing to cover them).

2. Leverage the business’s assets

Another way to buy a business with no money is by using the business’s own assets to finance the purchase. This is often referred to as asset-based lending. The idea here is that you borrow money against the business’s assets, such as its inventory, equipment, or accounts receivable, to fund the acquisition.

Banks or private lenders may offer asset-based loans. Why? Because the assets secure the loan. The loan is much less risky that way; if you don’t repay, the lender just forecloses on the asset(s).

So yes, if the business you want to buy has enough valuable assets, you can use them to secure a loan, making it easier to acquire the company with little to no money out of your own pocket.

Nice, right?

3. Partner with an investor

Finally, if you do not have the money to buy a business, finding a partner or investor who does is another viable strategy. You could partner with someone who has the financial resources that you lack. They offer the actual equity, and you offer what is called “sweat equity.” You do the work and run the business, and they provide the funding.

Of course, in exchange for putting up the funds, the investor will want a share of ownership or a portion of the profits.

The good news is that this approach again allows you to avoid using your own money to buy the business. And an added bonus is that you also get the benefit of having a financially savvy business partner who can help you successfully run the business.

So yes, as they say, there is more than one way to buy a business with no out-of-pocket funds. Just make sure it is a viable and profitable business you are buying, so you will definitely be able to pay the piper when the time comes.

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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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