Money Management

Having little to no emergency savings could cost you a lot of money over time. Read on to learn more. [[{“value”:”

You’ll often hear that it’s important to have money in a savings account at all times. The reason? You never know when an unplanned expense might arise, whether it’s a home repair, car-related issue, or medical episode. So it’s important to have an emergency fund to turn to in those situations.

You also need savings on hand in case you end up losing your job. Generally, workers who are let go through no fault of their own are entitled to receive unemployment benefits. But those might only replace a fraction of the paycheck you once relied on. So it’s important to have savings to fall back on in that scenario.

Unfortunately, data from the Federal Reserve reveals that only 68% of Americans could cover a $500 sudden expense using just savings. This tells us that 32% of U.S. adults may not have $500 in the bank. But if you’re part of the latter statistic, you should know that you’re taking a pretty big financial risk.

When you don’t have much or any savings to tap

When you own a home or vehicle, a single repair could easily reach or exceed the $500 mark. And if you end up needing medical care, your health insurance deductible might easily amount to $500.

That’s why it’s so important to have at least $500 in the bank. In fact, ideally, you should aim to have enough emergency savings to cover three full months of living expenses, which could make it possible to get through a period of unemployment. But as a starting point, it’s really important to try to get your savings up to the $500 mark at least.

What might happen if you don’t have $500 in savings and have to charge an expense that large on a credit card? Well, it depends on your credit card’s interest rate and how long it takes you to pay that debt off. But take a look at this table for a few different scenarios.

So in this example, the worst-case scenario has you accruing $135 of interest on a $500 balance — almost one-third of the cost of the initial expense you had to charge. You can run the numbers for yourself using a credit card interest calculator.

How to build savings quickly

If you don’t have at least $500 in savings, it’s important to try to get to that point fairly quickly for some financial protection. To that end, first, take inventory around the house and see if there are items you can unload for cash. If there’s a handbag in your closet in great condition you don’t use, see if you can get $50 for it, even if it originally cost $150. Don’t worry as much about recouping your initial purchase price, as that may not happen.

Next, try to cut your spending for a period of time. This doesn’t mean sentencing yourself to years of not being able to treat yourself. It could, however, mean implementing a three-month period where you truly follow a strict budget and bank the difference.

Finally, consider turning to the gig economy for an income boost. You can use your extra earnings to build savings, but keep in mind that if you’re paid on a freelance basis, you will need to set aside a portion of your income for tax purposes.

Not having at least $500 in emergency savings could cost you. So do your best to try to get to that point. However, don’t stop there.

Remember, ideally, you do want to aim for enough savings to pay for three months of essential expenses. So once you find a system for saving money that works for you, uphold it until you’re in a much better position to cope with financial surprises.

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Are you getting a big tax refund in 2024? The average tax refund is $3,011. See why it’s a good thing to get a tax refund — even if accountants may disagree. [[{“value”:”

Most people don’t love filing taxes, but lots of people love getting a tax refund! The average IRS tax refund for 2024 is $3,011 (as of April 15 data). For many Americans, a tax refund feels like a happy surprise — “free money” from the government.

Unfortunately, there are some stern, grim, joyless accounting nerds who would be eager to tell you that “getting a tax refund is bad, actually.” And on the one hand, yes, it’s technically correct to say that your tax refund is a sign you’ve overpaid your taxes throughout the year. Getting a tax refund means that you gave a months-long interest-free loan to the government. Ideally, you could’ve used that money for other financial goals throughout the year.

But on the other hand…meh. If people believe that their tax refund is a good thing, and it makes them happy, and it helps them feel some hard-won financial security, I’m not going to tell them they’re wrong.

Here are a few reasons why getting a tax refund is a good thing for millions of Americans.

1. Tax refunds give you “forced savings”

Many Americans don’t have $500 for an emergency, and the typical American savings account balance is only $1,200. This means that for many people, getting a $3,011 tax refund is the equivalent of almost tripling their savings account balance, all in one day. Getting a tax refund is like an extra emergency savings fund that many Americans build up with every paycheck, without trying or even fully realizing it.

Sure, instead of giving that $3,011 interest-free loan to the government (and then getting it back at tax time), you could’ve adjusted your tax withholdings to pay less tax on each paycheck, saved $250.92 per month ($3,011 divided by 12), and earned 5% APY from one of the best savings accounts. But how many people actually do that?

Many people struggle to save money. They get intimidated by opening a bank account, and feel helpless to confront their budget or control their monthly spending. For many Americans, an extra $250 per month might have just disappeared into the ongoing outflow of everyday spending. Sometimes a tax refund is the best real-world solution for people to save money.

2. Tax refunds can be fun windfall money

For many Americans, a tax refund serves as a free annual windfall of “fun money” that they can use for vacations, paying off debt, or investing for the future. Many Americans make big financial plans based on their tax refund; they look forward to booking travel or paying for their children’s braces or otherwise putting a dent in some big financial goals.

And tax refunds aren’t always just “fun money.” During the recent times of high inflation, many Americans have been feeling strapped for cash. Trustpilot survey data shows that large percentages of Americans are counting on their tax refunds as a financial lifeline for important bills and household expenses, like medical care and groceries. A $3,011 tax refund is a lot of money to most Americans, and they’re right to feel happy to get it.

It annoys me when personal finance gurus cluck their tongues disapprovingly at middle-class and working-class people for daring to feel happy about their personal finances. Not everyone makes enough money to enact clever tax-planning strategies. Not everyone is a high-income professional with performance bonuses and stock options. That $3,011 tax refund might be more “free” extra money than most Americans see all year. Go out for a nice dinner! Go on vacation! Buy something nice for your kids or your pets! Splurge a little! Be joyful and abundant!

3. It feels good to not owe money to the IRS

I’ve had times in my life where I ended up owing more tax on April 15 than I could comfortably afford, and it was not fun to write those checks. Getting money back from the IRS after filing taxes has psychological benefits. It’s a load off your shoulders, a burden off your mind. It feels like a victory.

Yes, in an ideal world, no one would get tax refunds, because everyone would calibrate their tax withholdings precisely and perfectly, and we’d all end up owing $0 to the IRS every year. But what fun would that be? We’re Americans, doggone it! Beating the system (or imagining that we are) is in our national DNA!

Bottom line

If you’re getting a big tax refund in 2024, don’t let some Ivory Tower intellectual tell you that it’s a bad thing. Yes, you might want to consider adjusting your tax withholdings so you can make more advantageous money moves throughout the year instead of giving Uncle Sam an interest-free loan. But for many Americans, tax refunds are a happy surprise, a source of forced savings, and a much-needed financial lifeline. If getting a big tax refund is the best way for your family to get an extra $3,011 (or more) of cash in the bank, there’s nothing wrong with that. Keep doing it.

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Roth IRAs give you a lot of flexibility with your money. Read on to see why you actually shouldn’t take advantage of it. [[{“value”:”

Many people like to save for retirement in a traditional IRA because it offers an immediate tax break in that your money goes in tax free. So if you put $3,000 into a traditional IRA, that’s $3,000 of income the IRS won’t tax you on that year.

With a Roth IRA, you don’t get that same immediate tax break, since your account is funded with after-tax dollars. However, Roth IRA investments grow tax free, and withdrawals are tax free as well. With a traditional IRA, your gains are tax deferred, but you pay taxes on them when you take withdrawals, which are a taxable source of income in retirement.

Another benefit of saving in a Roth IRA is that you can technically withdraw your principal contributions at any time. With a traditional IRA, withdrawals taken before age 59 1/2 are subject to a 10% penalty with limited exceptions, like buying a first-time home. But because you don’t get a tax break on your principal Roth IRA contributions, the IRS doesn’t penalize you for taking that money out of your account before age 59 1/2.

So here’s how that might work. Let’s say you contribute $15,000 to your Roth IRA and your balance grows to $25,000 because of your investments. As long as you don’t touch the $10,000 gains portion of your account prior to turning 59 1/2, there’s no penalty to worry about. But while you might appreciate this flexibility with your Roth IRA, you should know that it’s an option you should generally try to avoid at all costs.

The problem with raiding your Roth IRA

When you’ve worked hard to save for retirement, the last thing you want is to be penalized for taking out the money that’s yours. With a Roth IRA, that may not be an issue. But just because you can take an early withdrawal penalty free doesn’t mean that you should.

When you remove funds from a retirement account early, you have that much less money waiting for you once retirement begins. But you’re not just losing out on the principal amount you remove — you’re also forgoing potential gains.

Over the past 50 years, the stock market has averaged an annual 10% return. So let’s say your Roth IRA does similarly, and you take a $15,000 withdrawal at age 40 to buy yourself a used car.

You may not be penalized on that withdrawal as long as it comes from principal contributions only. But if you don’t retire until age 65, missing out on 25 years of gains on that $15,000 could actually leave you short about $162,500. That’s a lot of potential retirement income to give up.

Don’t turn your Roth IRA into your savings account or emergency fund

Because you can access Roth IRA funds penalty free before age 59 1/2, you may be inclined to tap that account when you need money. But if you treat your Roth IRA like your personal ATM, you’re going to negate the whole benefit of funding that account in the first place.

So don’t look at your Roth IRA as your backup savings account. You should have a separate emergency fund in the bank for unplanned bills.

Also, don’t tap your Roth IRA when you’re tempted to spend money on things you want. Instead, save up for them. Or if you really have to, find ways to borrow for them affordably. If you boost your credit score, you may be eligible for some relatively competitive rates on different loan products.

The whole purpose of funding a Roth IRA is to set yourself up for a secure retirement. So even though you can take money out penalty free ahead of time, remind yourself that every withdrawal you take puts you one step further away from that goal.

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Budgeting skills can be helpful for digital nomads. Developing money management skills is wise if you’re working while traveling the world. Find out why. [[{“value”:”

Budgeting is an important personal finance skill. Understanding how much money you can afford to spend each month and setting spending limits can help you avoid debt and keep you on track as you work to reach your financial goals.

Budgeting is vital, especially for those who live non-traditional lifestyles, like digital nomads. Since many digital nomads continuously travel to new locations while working, having good budgeting skills is beneficial. If you’re a digital nomad without this skill, you may be doing yourself a disservice. Here are a few downsides to not planning a budget as a digital nomad.

You may have to move to a different location

Many digital nomads value the flexibility that comes with their lifestyle. Moving to a new location at any time can be freeing and exciting. But if you don’t budget well and you’re struggling to afford your everyday living expenses, you may be forced to move to a location with a much lower cost of living if you can no longer afford where you’re staying now.

Alternatively, you may have to move back home. This may differ from what you initially had in mind and may require you to plan your next move sooner than expected. You can avoid a surprise last-minute move by assessing your finances and keeping your spending in check.

You may be unprepared for emergencies

One surprise expense can change your financial situation if you’re not budgeting while being a digital nomad. Many people who budget, whether they have one home base and work a traditional job or are digital nomads who work while traveling, budget some of their earnings toward emergency savings.

If you encounter a snag along your journey, you may face financial difficulties. An emergency fund can make a challenging, costly situation less stressful. One unexpected financial stress digital nomads may encounter is travel disruptions, which can result in additional transit or accommodation costs.

It’s wise to budget for emergency savings contributions to have savings available when needed. If you struggle to remember to save, you can stay on track by automating your savings contributions through your bank’s mobile app.

You can set up automatic transfers to move money regularly from your checking account to your savings account. Consider keeping your extra savings in a high-yield savings account so you earn interest. Any extra money earned is a win for your wallet.

It can be challenging to weather job changes

Many digital nomads work full-time remotely or freelance. Your job situation can change anytime, whether your work is tied to one employer or multiple companies. The income you count on now may not exist forever. If you don’t budget and keep your finances in order, it can be challenging to weather job changes.

You may be forced to make impulsive decisions because you have meager savings or need money quickly to continue paying your bills. Learning budgeting skills and managing your finances well is beneficial so you can bounce back more quickly if you experience job loss or go through career changes.

This tool can help you learn to budget

If you’re new to budgeting and need help setting spending limits, technology can help. Using one of the best budgeting apps is an excellent way to keep your finances in check while you live out your digital nomad dreams. This tool can help you better understand your current spending habits, set spending limits, and free up money for other life goals. Boosting your financial knowledge can benefit you throughout your entire lifetime.

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It’s getting less likely we’ll see significant rate cuts in 2024. And this could have implications for CDs. Keep reading to learn more. [[{“value”:”

Recent inflation data has been a little higher than expected. In March, the Consumer Price Index, or CPI, grew by 3.5% over the past year, which was higher than the expectation of 3.4%. Core CPI, which excludes certain volatile items, was higher, as well.

Not only has inflation been hotter than anticipated, but it is still significantly higher than the Federal Reserve’s 2% target. And until inflation is clearly trending down toward that level, especially while the unemployment rate is low, it will be difficult for the Fed to justify lowering interest rates.

While CD interest rates aren’t directly linked to CD rates, they tend to move in the same direction. So, here’s what the most recent expectations are for Federal Reserve interest rate cuts, and what it could mean for CD rates.

Rate cut expectations have come down considerably

At the start of 2024, the median expectation among investors was for six quarter percentage-point rate cuts, according to CME Group’s FedWatch tool, which analyzes derivatives markets to evaluate expectations. In other words, investors were expecting the benchmark federal funds rate to fall by 1.50% by the end of this year.

Now, expectations are far lower. As of April 24, the market is pricing in a 67% probability of just one or two rate cuts this year. And there’s a significant chance (13%) of no rate cuts at all before the end of 2024. Of course, these are just predictions by investors, and nobody knows for sure. But this is what the expectations are right now.

What it could mean for CD rates

CD interest rates are not directly tied to the federal funds rate, or to any other benchmark interest rate. But they certainly tend to move in the same direction.

CD rates are currently at their highest level since prior to the 2008 financial crisis. They have risen significantly over the past two years as the Fed aggressively raised the federal funds rate from near-zero levels to a target range of 5.25%-5.50%. It wasn’t long ago that a 1-year CD with an APY greater than 1% was tough to find – now some of our favorite banks have 1-year CD rates of 5% or higher.

So, the short answer is that fewer rate cuts would likely keep CDs at their elevated levels for longer. The same can be said for savings account interest rates.

Having said that, there’s one important concept to keep in mind. I won’t turn this into too much of an economics lesson, but one rule of thumb is that shorter-term CD rates are generally governed by current benchmark interest rates, while longer-term CD rates are more heavily influenced by expectations of future interest rates. This is the main reason why 1-year CDs generally have higher yields than 5-year CDs right now. Historically, it is the other way around. But the expectation is that over the next few years, rates will come down substantially.

So, when the Fed finally ends up cutting rates, you’re likely to see a more immediate impact to shorter-term CDs. As rate expectations start to change, that’s when you’re likely to see longer-term CD yields start to fall.

No way to know for sure

A final point is that nobody knows for sure what the Fed will end up doing. At the start of 2022, virtually nobody (including the Federal Reserve members themselves) were predicting interest rate increases anywhere near what ended up happening. It’s entirely possible that the actual trajectory of Fed rate cuts will be significantly higher or lower than the current expectations, so keep this in mind when deciding on the best money moves for you.

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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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Tempted by an FHA loan? Read on to see why you may want to go another route. [[{“value”:”

Many people need a mortgage of some sort to pull off a home purchase. But that mortgage doesn’t have to be a conventional one.

If you feel that that won’t work for you, or that you won’t qualify, then you may be inclined to explore your options for an FHA loan instead. But if these signs apply to you, an FHA loan may not be the right fit.

1. You want to buy a separate investment property

Some people can barely pull off a single home purchase. But you may be interested in buying a second home you don’t occupy to use as an income-generating property. That’s not necessarily a bad idea — but you can’t use an FHA loan to finance that purchase.

With an FHA loan, you’re required to use the home you buy as your primary residence for at least one year. If that’s not what you want to do, then you’ll need a different type of financing.

Another thing you should know is that you can use an FHA loan to purchase a multi-unit property. So if you’re willing to reside under the same roof as tenants, then what you could do is buy, say, a duplex, rent out one unit, and live in the other. But if that’s not an arrangement that appeals to you, then you may want to look at a different type of mortgage.

2. You have a good credit score

The nice thing about FHA loans is that you can qualify with a credit score as low as 500, provided you make at least a 10% down payment. You can also qualify for a 3.5% down payment on an FHA loan if you have a credit score of 580.

But if you have good credit — say, a score in the upper 600 or 700 range — then you may be better off getting a conventional loan. That could result in a lower interest rate. And also, it could help you avoid some of the costs associated with FHA loans (such as MIP — more on that below).

3. You have decent down payment funds

Making a 20% down payment on a conventional home loan will help you avoid private mortgage insurance, or PMI. If you can’t put down 20%, you might assume that getting an FHA loan is a better choice. But that’s not necessarily the case.

Many conventional mortgage lenders will accept a down payment as low as 3%. And while you’ll get stuck with PMI in that case, eventually, once you pay down enough of your mortgage, you can shed the added expense of PMI.

With an FHA loan, you pay a mortgage insurance premium (MIP) at the time of your closing, as well as on an ongoing basis. But those ongoing premiums can be tough to get rid of. Often, the only way to do so is to refinance into a new loan. So if you have enough down payment funds to qualify for a conventional mortgage, that type of loan might cost you less in the long run.

There are definitely some good reasons to sign an FHA loan. These loans, for example, could be a great way to become a homeowner when your main impediment is a lack of down payment funds, but you’re confident you can swing your ongoing payments based on your income. However, if these specific factors apply to you, then you may want to think twice before signing an FHA loan.

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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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