Money Management

A savings account might be the best home for your $25,000, even if it means missing out on market gains. Learn when $25,000 is too much for a savings account. [[{“value”:”

First off, there’s nothing wrong with stashing large amounts of cash in a savings account, at least not from a financial perspective. If you’re saving money rather than spending it, you’re usually doing something positive for your financial health. That’s something to celebrate, especially at a time when inflation has made it more challenging to save.

The problem, however, can come with opportunity costs. Savings accounts can protect your deposit and earn interest, but rarely will they grow your money as meaningfully as other investments, like stocks. They’re relatively risk free, but are savings accounts the best place to keep $25,000? Let’s examine the question from a few angles.

When it’s prudent to keep $25,000 in your savings account

Two words: emergency savings.

If $25,000 equals three to six months of emergency expenses, a savings account is one of the best places for it. It doesn’t matter if the stock market is bullish or there are opportunities in real estate to grow it 10-fold. Putting this money into a rainy day fund ensures that it will be there when your regular paycheck can’t cover an unexpected expense.

Be that as it may, you can still earn decent interest on a $25,000 deposit when you put it in a high-yield savings account. At the very least, you can outpace inflation. Right now, the best high-yield savings account on our radar has a 5.36% APY. If you keep $25,000 in an account with a steady 5.36%, you would earn $1,340 on your savings in a year.

It’s worth noting that since savings accounts have variable APYs, you might not earn 5.36% for an entire year. Even so, for easy withdrawals, savings accounts are still better for emergency funds than other investments, like certificates of deposit.

It’s also fine to keep large lump sums for non-emergency reasons in a savings account, such as when you’re saving for a near-term goal. Buying a house, planning a large purchase, or gearing up for a cross-country relocation are all good reasons to keep large amounts of cash within easy reach.

When it might be wise to spread your savings across other investments

If $25,000 is more than enough to cover six months of expenses, it might be worth looking into other investment options for at least a portion of it. Likewise, if you have an emergency fund plus a savings account with $25,000 that isn’t designated for any immediate purpose (saving for a house, a dream vacation, a backyard patio), a savings account might not be the best place for it.

For example, if $2,500 is enough to cover one month of expenses, an emergency fund of $15,000 would be sufficient. You can then take that extra $10,000 and invest in stocks via a brokerage account.

To give an example, consider the S&P 500. This index’s average annual return over the last 50 years has been about 10%. If you invested $10,000 with that same return, your money would grow to roughly $25,900 after 10 years.

That sum would be more than what you started with — counting the $15,000 in your emergency fund — and could continue to grow if you left it undistributed.

Of course, outside the neat box of this example, there are several market risks to consider, like volatility. In 10 years, the stock market could take a turn for the worse, eliminating a large portion of your gains. Leaving your money invested for long periods can flatten these losses with substantial gains, but it’s never easy to stomach negative numbers while they’re happening.

That’s why it’s important for investors to have an emergency fund in the first place, as it can prevent them from having to sell out at the worst time to free up cash. If keeping $25,000 in a separate savings account prevents you from dipping into your brokerage account when you need it, then it’s worth it — even if it doesn’t have as much earning potential as the stock market.

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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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CDs can be a great place to park some cash temporarily. Read on to see why they’re a horrible choice for retirement savings. [[{“value”:”

Many people are excited about CD rates today. And that totally makes sense.

For many years, CD rates were so low it was barely worth giving up the flexibility of a savings account. These days, you can easily lock in a 5% return with a CD, and that’s basically risk-free money provided you bank somewhere that’s FDIC-insured and limit your deposit to $250,000 ($500,000 for joint accounts).

But while CDs are a great place to house your money for a limited period, they’re a poor choice for retirement savings. If you’re thinking of opening a CD as a means of saving for retirement, here’s why you should reconsider.

1. CD rates might fall over time

The CD rates savers are enjoying today aren’t the norm. And once the Federal Reserve begins to cut rates, which could happen later this year, CD rates are apt to fall.

Now, it’s one thing to invest your retirement savings in CDs at a 5% return. But in time, CD rates could fall to the point where they don’t even keep up with inflation. That’s a big problem for your retirement savings, because you need your money to grow faster than inflation. If that doesn’t happen, you risk not having enough money to live on down the line.

2. Even when CD rates are high, they pale in comparison to stock market returns

Although today’s CD rates are outstanding, the stock market has a long history of outpacing CD rates. Over the past 50 years, the stock market’s average annual return has been 10%, and that accounts for both good years and bad.

Here’s what might happen if you stick to CDs over a long period. Even if you’re able to score a 5% return on your CDs over the next 30 years, if you have $10,000 to set aside for retirement now, you’re going to end up with about $43,200.

On the other hand, let’s say you invest your $10,000 in an IRA or brokerage account and score a 10% return over the next 30 years. In that case, you’re looking at growing your money into about $174,500.

Even if we go a bit more conservative and assume you’ll get an 8% return in your investment portfolio over time, in 30 years, $10,000 could be worth about $100,600 if it’s in the stock market. You’re just not going to get close to that with CDs.

3. CDs create an immediate tax burden

The nice thing about saving for retirement in an IRA or 401(k) plan is that your money goes in tax-free (in the case of a traditional account) and grows tax-deferred over time. If your IRA or 401(k) gains value from one year to the next, you’re not automatically paying the IRS a portion of those gains. Rather, you can reinvest your gains to grow your money even more. You’ll pay the IRS its share at the time you take retirement plan withdrawals.

With a CD, the interest you earn is subject to taxes the year you earn it (unless the CD is in a retirement account). You can’t defer that tax obligation. If you open a CD today for retirement and earn $300 by the end of the year, you’ll owe a portion of that to the IRS, depending on your tax bracket and total income picture.

Even if you don’t save for retirement in an IRA or 401(k), but rather, a regular brokerage account, if you hold stocks in that account for at least a year and a day before selling shares at a profit, you’ll be looking at paying long-term capital gains taxes. The tax rate on long-term capital gains is generally much lower than the rate you’ll pay on interest income in a CD.

All told, CDs are a good choice when you want to earn some interest on your money on a short-term basis. But for these reasons, they’re really not a good option for building a retirement nest egg.

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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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A Costco membership has the potential to offer a lot of value. But read on to see why canceling yours might make sense this July. [[{“value”:”

As someone who shops at Costco weekly, I can’t imagine giving up my membership. Doing so could easily cost me hundreds of dollars a year in lost savings on groceries and household essentials like cleaning products and paper goods.

But you may be in a much different boat. And if these situations apply to you, then it may be time to part ways with Costco this July.

1. You’ve given up your car to save money

AAA reports that it now costs $12,182 a year to own a new car. That’s more than $1,000 a month.

If you’ve recently decided to give up your car and get by using public transportation, you may be saving a lot of money as a result. But not having a car could make Costco shopping very difficult.

Sure, you could always ask to borrow a car from a friend, or use a ride-hailing app. But are you going to do that often enough to make a Costco membership worth keeping?

Remember, shopping on Costco.com doesn’t offer quite the same value as going to an actual Costco store. Costco builds the cost of shipping and handling into its online prices so you’re generally paying more compared to buying the same item in a store. So if your plan is to turn to Costco.com after giving up your car and use Costco that way, you may want to rethink it.

2. You constantly overspend at Costco

Costco’s inventory extends well beyond bulk groceries and household essentials. You can buy everything from clothing to electronics to toys at Costco.

That’s a good thing in theory, since it’s convenient to have a nice selection of reasonably priced products all under the same roof. But that setup could also lead to a world of overspending on your part.

In fact, if you can admit that you pretty much always buy extra items when you do your Costco shopping, then it may be time to cancel your membership. The savings you get on your groceries may be wiped out completely by the extra purchases you make. In fact, if you only save $15 a week on food but typically spend $30 on unplanned buys, you’re making your financial situation worse.

3. The shopping experience just isn’t a pleasant one

The savings I get at Costco is enough to push me to endure the crowded parking lot, packing aisles, and always-long checkout lines. But if you’ve come to really hate shopping at Costco, then it may be time to cancel if your savings aren’t as substantial as mine.

Of course, the magic savings number that makes an unpleasant shopping experience worth it is up to you. But if you’re only saving about $15 to $20 per month, your well-being may be worth prioritizing. To put it another way, unless you’re really saving a large amount of money like I am, it may not be worth putting yourself through the torture of a weekly Costco run you dread.

A Costco membership has the potential to offer a lot of value. But if these scenarios apply to you, it may be time to stop paying for one.

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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.Maurie Backman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.

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It’s important to find the right checking account. Read on to see how. [[{“value”:”

A lot of people use a checking account daily, so it’s important to find the right account for you.

You’d think that would be a simple matter of waltzing into a bank and submitting an application. But actually, not all checking accounts are created equal. You need to find one that meets your needs. With that in mind, here are four steps to finding the best account for you.

Step One: Decide if you want an online account or one with a brick-and-mortar bank

Online banks are convenient since you can manage your account from your phone or laptop without having to leave the house. To be clear, you can usually access a checking account online with a brick-and-mortar bank. But online banks sometimes (though not always) have better interfaces than their brick-and-mortar counterparts. If you expect to mostly bank online, you may want to choose an online-only institution.

Also, you may decide to open a savings account and link it to your checking account at some point. Online banks tend to offer more favorable savings account interest rates because they don’t bear the same costs as physical banks. That could be a good reason to choose an online checking account.

However, brick-and-mortar banks offer the benefit of face-to-face interactions. If that’s important to you, then a physical bank could be a better choice for your next checking account.

Step Two: Decide which features are most important to you

Checking account features like debit cards and ATM access are pretty standard. But what about overdraft protection? That may not be something every account offers. Dig around to see which features different accounts offer, and read up on them so you know what they entail.

Step Three: Consider fees

Many checking accounts charge a maintenance fee if you don’t meet a minimum deposit requirement. It’s important to compare your options here, because if a given account imposes a minimum that’s hard for you to meet, you could be looking at a monthly fee that eats away at your hard-earned money.

There’s no such thing as a standard minimum deposit requirement, either. For one bank, it may be $50. For another, it may be $100.

Some checking accounts also waive that minimum deposit requirement if you’re linked to a savings account with a certain balance. Take a look at different options and make your choice based on a reasonable minimum for you.

Of course, maintenance fees aren’t the only way you might be charged for having a checking account. You might also face fees for wire transfers, using ATMs at other banks, and more. Look into the fee aspect carefully before applying.

Step Four: See if there are any bonuses available

Just as it’s common for credit cards to offer a sign-up bonus when you open an account, some checking accounts offer a welcome bonus. It’s a good idea to shop around for these offers, since they basically mean free money in your pocket. Keep in mind, though, that to snag a checking account bonus, you’ll generally need to meet a minimum deposit requirement, similar to how you have to spend a certain amount on a credit card to get the welcome offer.

You don’t want to open a checking account on a whim. Take the time to research your options so you’re more likely to wind up happy with your choice.

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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.Maurie Backman 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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