Tag: Saving

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3 Investing Strategies to Save for a New Home

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3 Investing Strategies to Save for a New Home

Buying a home is one of the most significant financial decisions you will make in your lifetime. For many Americans, saving for a purchase of that magnitude can feel impossible. The good news is there is no shortage of strategies you can choose from. The number one factor to consider (apart from your income) is how much time you have to save. Depending on when you plan on buying, some options may be better than others.

Here’s a guide to saving for a new home with various timelines in mind.

If you want to buy a home in the next 3 years…

Every investment option comes with a degree of risk, and with only a few short years to save, it’s likely not a wise idea to take big risks with your savings. The last thing you want is for the money to lose value without enough time to recover.

In this case, you should be looking for savings options that offer safety rather than growth, like a high-yield savings account and certificates of deposit (CDs). These are very low risk and, best of all, come with guaranteed returns on investment. If you’re looking for the highest paying savings accounts in your area, you can use our free comparison tool. We also have a list of the best CDs for the month.

If you want to buy a new home in 4 to 7 years…

The longer you have to save for a home, the more creative you can be with your investing strategy. The key is to strike the right mix between safety and growth. You want your money to grow at a comfortable enough pace to beat inflation but maintain enough conservative investments to offset any potential losses you might experience in the market.

You may be able to achieve this with a 25/75 portfolio.

The 25/75 portfolio strategy is pretty simple — no more than 25% of your money is invested in stocks, and the remaining 75% are in bonds. This blend of stocks and bonds should allow your money to grow modestly while keeping safety top of mind. You can start this process by opening a brokerage account and choosing your own mutual funds to reach the right mix. But do your research first. For example, U.S. News & World Report maintains a list of funds that are ranked for their allocation, fees, and performance. 

If you want to buy a home in 8 to 10 years…

Time is certainly on your side if you’ve got nearly a decade to save for your dream home. The key is taking on the right amount of risk. Because you have so much time to save, you can afford to take riskier investment bets, which can potentially reap much higher rewards in the long run.

Consider a 50/50 investment strategy: You’ll invest 50% of your savings in stocks and 50% in bonds. You should have just enough risk to ensure you’ll beat inflation and then some, but still be conservative enough to be able to weather any downturns in the market. To achieve the perfect 50/50 mix, you could split your money evenly between your own selection of stocks and bonds. For those who like a more hands-off approach, U.S. News & World Report has a ranking of mutual funds that are preset to give you the 50/50 allocation. There you can select the fund you feel suits you best. 

Deciding where to invest 

Where you invest your money matters. Save your money in the wrong place and taxes could eat up a portion of your gains each year. You could also be in a situation where taking the money out to buy a home could cause a penalty as well.

If you plan on buying a home in five years or more, strategically using a Roth IRA could be your best option. With a Roth IRA you can withdraw all of your contributions without penalty; additionally, you can withdraw $10,000 of the earnings without tax or penalty for a first-time home purchase. 

Lastly, a plain brokerage account may suit you. There are no tax advantages to investing here, but if you’re using the account to buy a home in the future, there may be more benefits in other areas. You can only contribute $5,500 ($6,500 after age 50) in a Traditional IRA or Roth IRA, and withdrawals are subject to strict rules. A regular brokerage account, on the other hand, has no limits to what you can put in or take out for home purchases or any other purchases. Take a look at your situation and see which options fit you best.

What about my 401(k)?

A common question most people ask is whether they should use their 401(k) to grow the money and then use it to buy a home. This is usually a bad idea. If you withdraw the money before age 59½, you would be subject to a 10% penalty, plus income taxes on top of that amount. In addition, the amount that you withdraw could severely alter your retirement goals. This is called an opportunity cost.

A better idea, though still not one we recommend, is taking a loan from your 401(k). You are allowed to take a loan of up to $50,000 or half the value of the account balance, whichever amount is less. This is still a loan, however, meaning it could affect your ability to qualify for a mortgage. You also have to pay this loan back. Depending on your company’s 401(k) rules, if you leave the company, the entire balance of the loan might come due within 60 to 90 days after you leave. If you stay with the company, you could be required to pay the loan back within five years.

Thankfully, your 401(k) isn’t your only option. Taking money from a Traditional IRA is a bit better. You are allowed to withdraw $10,000 without penalty for a first-time home purchase. This may change your tax situation as any withdrawal would have to be counted as part of your regular income. For most people this still isn’t the best option but certainly better than dipping into your 401(k).

Making a clear goal

Do some research to see what home prices are like in your desired area. Then make a clear savings goal. An easy way to do this is to take 10 to 20% of the average home value in your area to estimate your downpayment. Use this calculator to see how long it will take you to reach your goal.

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Reviews, Strategies to Save

Review: You Need a Budget (YNAB) — The Budgeting Tool That Makes Every Dollar Count

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The Budgeting Tool That Makes Every Dollar Count

You Need a Budget (YNAB) is subscription-based budgeting software available both on desktop and mobile devices. Its trademark mantra is, “Give every dollar a job.” That means as you have money coming in, you assign it a budget category. Once you have one month’s worth of expenses fully funded, you can start budgeting funds for future months.

How Does ‘You Need a Budget’ Work?

When you first sign up for You Need a Budget, you will be asked to link your checking, savings, and credit card accounts. This allows the app to see exactly how much money you have at this very moment.

Next, you’ll add upcoming transactions like rent, utilities, and groceries. As you add these expenses, you’ll also be prioritizing them. The ones that are most important (generally rent or mortgage payments) will go on top, and the ones that are a little more frivolous like entertainment spending will go at the bottom.

After you’ve set up transactions you know are coming, you’ll be able to establish goals. You can set up goals by a date, in which case the app will tell you how much you have to save per month to meet your objective. You can also set them up by how many dollars you’d like to allocate toward them per month, in which case the app will tell you how long it will be until they are fully funded (or in the case of debt repayment goals, paid off).

6  January screen shot 1

You’ve linked accounts. You’ve accounted for bills and upcoming spending. You’ve set goals. Now it’s time to fund all of those things! You start with the money you have, and not a penny more. You assign each dollar to a certain line item, again, starting with the most important items at the top. Once you reach the end of your current funds, you won’t be able to budget any more until you get more cash in your hands.

If you are able to fully fund one whole month, then you can use any excess funds on hand to start funding the next month. The more you do this, the happier the founders of YNAB get. Their entire philosophy is that you should “age your dollars,” meaning the further in advance you can fund a transaction or goal, the more financial stability you will have.

How Much Does ‘You Need a Budget’ Cost?

Currently, You Need a Budget offers a 34-day free trial — no credit card required. After that, you will have to pay either $5 per month or $50 per year. Students get twelve months free, after which they’ll be eligible for a 10% discount for one year. If you have a previous version of YNAB, you’ll be able to score a 10% lifetime discount on the latest version.

Fine Print

Fine PrintYNAB is extremely transparent and seemingly ethical in their practices. They do not sell information to third parties, but may give others access to it in the course of business as they work to facilitate the software through companies such as Amazon Web Services and Finicity, which are two trusted names in the Fintech industry as far as security is concerned. Your data is always encrypted, and will be completely and irreversibly deleted upon request should you ever choose to close your account.

Pros and Cons

You Need a Budget is commonly recognized as one of the best budgeting apps around. That doesn’t mean that it’s perfect for everyone, though. Think through the pros and cons before downloading.

Pros

  • Transparent company.
  • Committed to security and positive user experience.
  • Helps you change your financial habits through a simple, yet revolutionary, process.
  • Prioritizes your expenses each month.
  • Forces you to address overspending.
  • Allows you to set goals.
  • Can be used by those who get paid regularly and receive W-2s or by freelancers.
  • There are user guides and lessons accessible to members to deepen your understanding of common personal finance principles and concepts.
  • There is a community where you can get support.

Cons

  • There is a price for your subscription.
  • This won’t be good software for you if you’re a percentage budgeter as the interface makes no allowance for that method.
  • At this point in time, there are no reports or analyses to help you disseminate your habits. They are promised on the horizon, though.

How Does ‘You Need a Budget’ Stack Up against the Competition?

YNAB is an extremely useful and user-friendly app. However, it does come with a fee and is far from the only budgeting software on the market. Here are some other options you may want to check out if the YNAB $50 annual subscription is getting you down:

Mint.com

While it may not use the “give every dollar a job” philosophy, Mint.com solves very similar budgeting problems in a very free way. It allows you to link accounts, plan for upcoming expenses, and set goals. It also provides charts and graphs to analyze your past behavior and provides your FICO score at no charge — two things YNAB doesn’t do. The biggest con to this no-cost application is that it is laden with ads.

Wally

If you don’t like the idea of your financial accounts being linked to a third-party app, another free option is Wally. When you use this app, you’ll have to be a lot more diligent at inputting your income and expense as none of it will be automated, but that’s the price you pay for keeping your bank account info completely separate.

Level Money

Level Money is a free app that allows you to link accounts, gives you insights into how much you have left to spend in any given category on any given day, and comes 100% ad-free. This app isn’t the best for the self-employed or those with variable income, and also isn’t as useful for those who make a lot of cash purchases.

Who Should Use You Need a Budget?

You Need a Budget is great for anyone who wants to get a hold on their money today, but doesn’t necessarily want to analyze their past spending. It’s developed for people who prefer budgeting by dollars rather than percentages, and comes with extra savings for students who are trying to establish good money habits at a younger age. It is time-tested, and is created by a company that has continually shown it cares for its customers.

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5 Things Millionaires Understand About Investing

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retirement retire millionaire happy couple on the beach

The idea of investing like a millionaire can seem complex — and, for some, a little intimidating. But let’s bust some myths about becoming a millionaire. There are no top-secret ingredients needed. When you figure out their investing recipe, you’ll find out the habits that helped millionaires achieve seven-figure status are remarkably simple.

And no, you don’t need a finance degree, access to a Bloomberg Terminal, or even much investing knowledge at all to invest your way to a million bucks. According to a 2014 Spectrem Group survey, 20% of millionaires said they did not consider themselves knowledgeable about investing, and 60% of those who consider themselves fairly knowledgeable admit they still have a lot to learn.

Here are a few ways you can invest like a millionaire right now.

Millionaires know how to tune out the noise and stay focused

Millionaires know how to tune out the noise and stay focused

Millionaire investors know that when it comes to money, perception is not always reality. No matter what the headlines on cable news networks or social media say, you should never let those messages sway your investing strategy.

Take Twitter (TWTR), for example. When the social media site went public in November 2013, the media covered the event obsessively. And when Twitter debuted on the stock exchange, its stock value shot up 73% the first day, making it the most traded stock of the day. But what happened since then? Twitter has lost more than 55% of its share price. A $1,000 investment in Twitter back in 2013 would be worth less than $400 today. CNBC’s Jim Cramer was still singing Twitter’s praises back in June 2015. Had you invested then, however, you would have lost 13% of your money.

The same knowledge works in reverse. When the market is performing poorly, it feels logical to get your money and run. But you could actually lose money in the long-term. Smart millionaires develop an investment strategy, and they stick to it (for the most part) come what may. Checking up on investments and reading too much into headlines can actually be harmful. It is best to set up recurring dates to check your investment strategy in advance instead of being reactionary and checking only when you see good or bad news.

Millionaires know success doesn’t have to be complicated

Millionaires know success doesn’t have to be complicated

Your investment strategy does not have to be complex in order to be effective. There is nothing wrong with a simple investing strategy; in fact, the most successful strategies can be explained to children.

For example, famous investors like Warren Buffett and Jack Bogle have long championed the merits of investing in index funds. While a regular mutual fund attempts to pick a select group of the best companies, an index fund on the other hand allows investors to own a share of every company. The strategy behind index funds is that you are able to invest in many companies at once, without putting all of your eggs in just a few baskets.

Or, look at it this way: Instead of trying to find all the best-selling books individually, you can just buy a piece of every book in the bookstore. Barnes & Noble doesn’t shut down every time one book fails to sell well, because it has thousands of others on the shelf to balance out its risk.

Not only do index funds often beat their more complex (and expensive) counterparts, they’re actually the most common investment choice for millionaires.

Millionaires know when to act their age

Millionaires know when to act their age

Your investment portfolio is a living, breathing organism that will change over time and need to be adjusted accordingly. Asset allocation — the amount of money you have in stocks and bonds — will be responsible for the bulk of your investing success.

If you’re in your 20s or 30s, keeping 80% to 90% of your portfolio in stocks may be fine depending on how you feel about risk. But your allocations should shift over time, becoming increasingly more conservative with age. It’s generally considered unwise to have so much of your investment funds invested in stocks when you are five to 10 years away from retirement. Millions of people during the Great Recession were hurt tremendously by the market crash because they were too heavily allocated in stocks.

One rule of thumb to check your allocation is to subtract your age from 110. Doing so should give you the percentage you should be investing in stocks. Someone who is 35 years old, for example, should have about 75% of their money in stocks and 25% in bonds. Though it isn’t a perfect rule of thumb, it does give you a general idea of whether you’re going in the right direction.

Again, your risk tolerance is almost as important as your allocation. If you are 90% allocated in stocks and you wake up in a cold sweat each night because you’re worried about the market, you might be better off allocating more into bonds. Of course, you might miss out on big gains when the stock market does well, but at least you’ll be able to sleep at night. An easy way to invest your age is to invest in target date funds. These funds are tied to your estimated retirement date and their allocations will automatically adjust as you age.

The key is staying invested even during the down times. Don’t panic because of a drop in the market. In most cases if you’re properly allocated, you should have nothing to worry about in the long term.

Millionaires probably didn’t wait until they were millionaires to start investing

Millionaires probably didn’t wait until they were millionaires to start investing

You don’t have to wait until you have a lot of money to get started in the market.

If a worker were to save just $5,000 a year between ages 25 and 65, it would be possible to become a millionaire. That breaks down to about $417 per month. If you’re putting this in a 401(k), you could be getting a match, meaning you wouldn’t have to put in the full $417. If $417 still feels like a lot of money, you can invest less, but you’d likely have to do it for a longer period of time. There is nothing wrong with starting small, but no matter what you have, it is imperative that you start.

Most workers would do well to open a 401(k) and set aside a percentage of their paycheck each month. If your job offers a matching 401(k), you should at least max out your contribution to capture the full match. That match is like a guaranteed return on your money, something the stock market can’t offer. If you aren’t quite ready to explore 401(k) or IRA options, consider saving a small amount of your pay each month.

Millionaires know cash isn’t always king

money

As stated earlier, we have a natural aversion to risk. There are many people who feel it is in their best interest to wait until it’s the “right time” to invest or would rather just invest in something with a much lower return because it feels safer.

In their latest guide to retirement, the folks at J.P. Morgan show how investing in cash can seriously limit your ability to grow your wealth.

Let’s start with Noah: He is very conservative. He invests in no individual stocks and no mutual funds. He’s just afraid of losing his money. From ages 25 to 65 Noah invests $10,000 every year in very safe investments like money market accounts and CDs. Assuming he gets a generous average return of 2.25%, Noah would have $652,214; he put in $400,000 of that amount on his own.

Quincy on the other hand also starts investing $10,000 at age 25 each year and stops at age 35. Quincy decides to take on more risk by investing his money in mutual funds. With an average return of 6.5%, he would have $950,588 by age 65!

Though Noah invested four times the amount of money, he’s still nearly $300,000 behind Quincy. Millionaires know the key to investing isn’t to avoid all risk, but instead to take the right amount of risk given the situation.

Ready to make your first million? Check out our tips on how to buy your first stock and kickstart your 401(k).

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What Happened When I Used a Credit Card for the First Time in 7 Years

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Credit card fraud

The following story is an excerpt from “The Recovering Spender: How to Live a Happy, Fulfilled, Debt-Free Life” by Lauren Greutman.

I decided to do a little experiment. I took myself off a budget for three months and made myself start using a credit card again. I’d been successfully budgeting for more than seven years, and had successfully paid off over $40,000 in debt and half of our mortgage.

People around me consider me very good with money, and I agree with them; I am very good with sticking to a budget. I know my boundaries and how to stay within the fence. (Remember, I wasn’t always this way.) But I wanted to see what would happen if I took myself off a budget, stopped using cash, and used a credit card instead. I haven’t owned a single credit card in years, ever since we put ours through a paper shredder. I’ve been using cash for most of the past seven years, so using a credit card again was way outside of my comfort zone.

The first thing I did was to sign up for a card that would give me a certain amount of points if I spent $3,000 in the first three months of using it. I then stopped using cash and decided to only use the credit card for those three months. My goal was to earn enough points for a free stay at a hotel for a fun vacation for my family. I wanted to see how quickly my money rules would go out the window and I would turn back into a Spender.

How bad could it be?

In the first week I did pretty well. I didn’t spend too much unnecessary money. I did try to find different ways to spend money using the credit card so that I could earn extra points. I paid a few of my bills with the card and paid them o right away online. I figured this couldn’t be bad. Two nights that week I had nightmares in which I woke up in a panic attack.

The nightmares were about moving back into our old house in South Carolina, and they were both the same: We decided to return to our old home and found it was back on the market, so we bought it again. I saw my family of six living in the same house where we had lived in during those stressful years. Not only were we back in that house, but we were also again in $40,000 worth of debt. Those dreams felt so real. They were the kind where you wake up and your heart is beating fast and you aren’t sure if you are awake or asleep. I woke up in my current house, thankful that it was only a dream. There was no way I wanted to go back to that old way of life.

Looking back, I see those dreams as a warning. Both times I woke up mid-dream in a panic attack that we were going to go back into debt. I was terrified of using the credit card again. It literally was giving me nightmares, and I found myself hating what I was doing. I could see myself going down the same path again, and I was terrified. I never want to go back to that place of no self-control, transferring balances to zero percent credit cards to stay afloat, and constantly stressed because we didn’t have the money for basic essentials.

Sticking it out

At this point, I wanted to quit my experiment; it was just too hard for me to go back to old habits. Ultimately, I decided to stick it out, because the question of whether I would fall back into my old spending habits had not been answered yet.

One day I was having a rough time with the kids. I looked at my husband, Mark, and said, “Can I just go somewhere by myself for an hour?” Being the great husband that he is, he put the kids to bed and I left the house to find something to do. I live in a small town and there isn’t much open in the evening, so I did what most people do and headed to Walmart (it would have been Target if I had one nearby). I found myself walking around the store, sick to my stomach and anxious, looking around for something to “do” and something to buy.

I picked up a York Peppermint Patty, a new curling iron, and some fake eyelashes (a total impulse purchase). I was sad, depressed, and feeling totally lost. I found myself wandering around the brightly lit store without a plan or goal. It was a very lonely feeling, but I realized that living without a budget made me depressed. I had no idea how much money was in our checking account. It felt horrible! Ironically, that feeling of depression over not knowing what was going on led to more spending because of boredom.

Three months later

At the end of my experiment, three months later, I was a complete mess. I had spent $3,000 on the credit card but paid it off in full every month. Yet I had somehow managed to spend an extra $2,000 on that card and didn’t know where the money had gone or what I had spent it on. I was anxious because I had no idea what we had in our bank account, and I was stressed out to the max. Here I was, seven years later, sitting on that same bed in our much smaller master bedroom. I knew that if I continued to use credit cards this way, I could end up dead broke again.

This was a huge milestone for me in my journey to financial independence. I realized that I will never “arrive” at being good with money. I will forever be in “recovery” as a Spender, and one of the things that I need to continue to do to keep myself in recovery is to stay within my fence.

I know that staying inside the fence works for me. I know that if I use cash and set a budget with Mark, I stick to it and feel safe. I don’t know why I always try to play with fire, but whenever I do, I certainly get burned! As a well-known expert in the field of frugal living, it’s hard to admit that I still have the ability to overspend. But how helpful would I be if I said I was perfect?

A common reason that Spenders continue to spend is that you lie to yourself—you tell yourself that you can stop spending, but the spending continues. You feel out of control, and that feeling leads you to spend more, and you continue to feel out of control.

If I were to tell you that I have it all figured out, I would be defeating the entire purpose and message of this book. I know that I will always be a Spender, but after seven years of successful budgeting and not owning a credit card, I thought I was strong enough to have one.

The reality is that I am not, and I’m not sure I ever will be. But what I do know is that if I set a budget and make sure I am safe within my fence—I do amazingly well! I got us into over $40,000 worth of debt, and I got us out of over $40,000 worth of debt. I got us in debt by using credit cards, and I got us out by not using credit cards.

Life inside the fence

I decided to run this experiment on myself to see if I am strong enough to live outside the fence, to see if so many years of good financial habits had changed me. Unfortunately, the conclusion is that despite my excellent financial habits and new ways, it’s dangerous to reintroduce some of my old temptations, because I fall right back into my old ways.

This is why this book is called The Recovering Spender and not The Recovered Spender. To be in recovery, you must constantly be trying to better yourself. If I were recovered, I would be able to use a credit card and not overspend.

I am in recovery, which means that I am in a constant state of trying to better myself and improve my spending habits. I realize that one bad turn can lead me down a road that I do not want to travel. One bad financial move can turn into a financial disaster for anyone who is a Recovering Spender like I am.

If you find something that works and helps you stay inside your fence, by all means continue doing it! Despite how much time you’ve been inside your fence, there is always danger on the other side. I much prefer to stay within my fence, stay out of debt, be happy and financially fulfilled by keeping a budget, and live the rest of my life as a Spender in recovery.

Lauren

Lauren Greutman is the frugal living expert behind the popular money saving blog laurengreutman.com (formerly iamthatlady.com).

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Life Events

10 Things I Wish I Knew about Money in My 20s

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The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

millennials

For all you 20-somethings out there, know this: We 30-somethings, we get it. We get what it’s like to be a 20-something struggling to find your way and make ends meet financially. We get that your baby-boomer parents don’t always seem to understand the social and financial pressures 20-somethings face nowadays. We get that times have changed, and that financial advice from folks 30 years your senior – folks who themselves grew up in a dramatically different era – doesn’t always seem relevant. We get what it’s like to be you because we so recently were you. In many ways, we still are you.

That said, while the gap in years between your 20s and your 30s isn’t all that large, the life changes that often occur in that time period tend to be dramatic. And whether it’s marriage, children, or the fact that some of us are now closer to 50 than we are to 20, most 30-somethings, myself included, suddenly find themselves looking back at a long list of financial moves we’re either glad we made or wish we made when we were in our 20s.

So, without further ado, here are 10 pieces of financial advice I wish I had known in my 20s.

1. Live at home for as long as you can.

If the offer to live at home is on the table, then consider yourself lucky and take it. Even if only for a year or two, the savings are significant. I know living with your parents might not seem hip, but take it from a 30-something, there’s nothing hip about paying thousands of dollars in rent unnecessarily. If you do live at home, be mature about it. Help out around the house when and where you can, and don’t be surprised or offended if you’re asked to chip in financially.

2. Pursue a postgraduate degree only if you’re sure you’ll need it and use it.

The world is littered with 30-somethings who piled on additional student loan debt to pursue an expensive postgraduate degree they’ve never put to use. Not knowing what you want to do is fine. Paying for graduate school on account of it is not.

3. Don’t make money-driven career decisions … yet.

Now, I’m not saying money shouldn’t be a consideration when weighing job offers and career paths. But I am saying that for a 20-something, it shouldn’t be the only consideration. There will come a day when, out of necessity, financial considerations guide your career decisions. Your 20s shouldn’t be that time. Instead, use your 20s to explore, learn, and find a career you find fulfilling and, hopefully, enjoyable.

4. Keep credit card debt out of your life.

By the time your 30s roll around, you will regret every penny you spent paying interest on a credit card. Use your credit cards to build your credit history and earn rewards, but be sure to pay them off in full every month.

5. A 401(k) match is your best friend.

Regardless of what decade of life you’re in, free money is free money, and it’s never to be passed up. If you’re lucky enough to work for a company that offers a 401(k) match, then be sure to sign up and start contributing from day one.

6. A Roth IRA is your second best friend.

One of the best ways for 20-somethings to put themselves in a great financial position come their 30s is to start investing in a Roth IRA as soon as possible. If you’re not familiar with a Roth IRA, there are many great resources available to help you learn. But it really is pretty simple. You contribute after-tax money, and your investments grow tax free and cannot be taxed as ordinary income if withdrawn during retirement.

7. Automate everything.

One of the major advantages you have as a 20-something is your comfort and familiarity with modern online tools and technology, a growing segment of which is being built specifically to help you get a head start financially. Perhaps the best thing modern technology does is help you automate everything. Automation is the easy button for managing your finances as a 20-something. So, whether you’re talking about credit card payments, bill paying, 401(k) contributions, investments in your Roth IRA, or anything in between, automate it and know it’s done.

8. Skip the wedding of the century.

Yes, I know, easy for us to say. We 30-somethings all spent a fortune having grand weddings. But that’s exactly the point. We spent a fortune. And trust us, your wedding day will fly by, and you won’t remember every last detail about place settings and flower arrangements. What you will remember is how much you spent on it. There’s no limit to the good use to which 30-somethings could put all that money spent (or should I say, blown) in one day.

9. Spend on experiences, not things.

As we 30-somethings can attest, you’ll never look back and regret the things you didn’t buy (they go out of style fast anyway), but you will regret the experiences you never had. Which is why it’s no surprise so many millennials prefer to spend money on memorable experiences, like traveling the world, over things, like the hottest smartwatch. 

10. Understand that time is on your side now, but it won’t be forever.

The biggest financial advantage you have as a 20-something is also the most fleeting – time. Hard as it may be to believe now, your 30s aren’t that far off. Whether it’s planning, saving, or investing, the sooner you start, the better off you’ll be. 

If there’s one thing you take away from this long list of advice, make it that last point. There are few absolute truths in the world of finance, but in all aspects of money management, if you get started as a 20-something, you’ll be glad you did once you’re a 30-something. Trust us on that one.

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Strategies to Save

3 Reasons You Earn More But Still Feel Broke

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3 Reasons to Earn More

If you’re earning more but still feel like you’re living paycheck to paycheck, there’s a likely culprit: lifestyle inflation. Lifestyle inflation is the ultimate budget-killer — a widespread phenomenon that occurs when people spend more as their income increases. Before they know it, that raise or bonus they earned slowly but surely disappears … right into that cell phone upgrade, a bigger apartment, or those few extra takeout orders each week.

Any financial planner can offer sound, reasonable methods for avoiding this problem: Stick to a budget. Automate your savings. Bump up your 401(k) contribution. The solutions seem easy enough, but no matter how much more you earn, you still feel like you’re living paycheck to paycheck.

We’ve come up with three simple reasons why you might still feel broke — even though you’re earning more — along with strategies on how to overcome them.

You don’t know what you want from life.

One reason many people struggle to keep their spending in check as their income increases is that they aren’t intentional about how they spend their money, says Meg Bartelt, founder and president of Flow Financial Planning. Bartelt encounters this problem every day with her clients, who are mostly women working in the tech industry who earn healthy paychecks but live in expensive cities.

When people are clear about their reasons for earning money and the goals they hope to achieve with those earnings, it becomes easier to avoid the kinds of incremental spending increases that can quickly consume their budget.

“Ask yourself why you worked hard for a raise,” says Bartelt. “Was it so that you could eat out more or buy fancier clothing or have a better streaming subscription … or was it so that you could make a meaningful change in your life?”

Goals — whether it’s being able to retire at 45 instead of 65, sending your child to college, or buying a home — give workers a reason to keep an eye on their spending from paycheck to paycheck.

To help figure out your financial goals, Bartelt suggests asking yourself a specific set of questions:

What do you want out of life?
What do you want to do, have, or accomplish?
How much money is it going to take to get you there?
And how are you going to get that money?

Taking this approach may also make the concept of budgeting more palatable. Saying “no” to a few upgrades in your life will feel less like deprivation, and more like a positive step toward the future you imagine for yourself.

You compare yourself to others.

Nothing can threaten a healthy budget like a serious case of “FOMO” — fear of missing out.

It can be hard to keep long-term, big-picture goals in mind amid the constant stream of filtered photos of international trips and nights out posted on social media. “It’s a huge contributor [to lifestyle inflation], especially for younger generations,” says Stephen Alred Jr., founder of Atlanta, Ga.-based financial planning firm Ignite Financial. Constant, real-time coverage of internet acquaintances’ adventures can make people feel worse about the state of their own lives and distract them from what they really want or need. Then, when a raise or a bonus comes into play, they are more likely to spend it on something that fits into that picture of what they think they should be doing, rather than what works best for their future goals.

It’s important to remember that you won’t get the full picture of someone’s life by looking at their social media profile — for example, you won’t know that the friend who took the tour of Italy last summer is still paying off the resulting credit card bill a year later, and you won’t see that a person only ordered appetizers at that fancy restaurant she went to last week, says Alred. Focusing on your own needs and goals, separate from those of the people in your life and in your social network, is critical to being happy with the state of your finances and your life, now and in the future.

You haven’t addressed negative spending patterns.

Once your financial goals begin to take shape, the hard part isn’t quite over. If you have a pattern of spending money as soon as it’s in hand, it’s going to take a while to change that behavior. Alred calls this a “behavioral barrier” — something people do every day with money that prevents them from reaching their financial goals.

It’s calling Uber every time you’re at the office later than 5 o’clock. It’s using your credit card to pay for even the smallest purchases. It’s grabbing a $15 salad for lunch every day.

These behaviors can crush financial goals, whether a person earns $30,000 or $300,000. Getting the right habits in place now will not only help combat lifestyle inflation this year — it will help down the road as income (hopefully) continues to grow.

Come up with strategies to help break those negative spending habits. For example, we’ve written about a simple $20 rule that can help break your credit card addiction.

But don’t be too tough on yourself. You shouldn’t deprive yourself of simple pleasures or pinch pennies to the point that you’re putting your mental or physical health at risk. Budget for the things that you know will bring you happiness, like the weekly dinner with friends you can’t miss or your daily $5 latte.

“Be clear about what’s important to you,” says Mary Beth Storjohann, financial planner and founder of Workable Wealth. “You can do it all, you just can’t do it all at once.” Once debts and savings goals are taken care of, “20% should go toward something fun,” says Storjohann. Building in some flexibility will help you avoid stress and self-loathing down the road — and will allow the occasional indulgence without throwing savings goals off track.

The bottom line:

Rigid financial rules may work for some, but will be hard to implement without a solid reason for following them.

“It’s like a diet. If you restrict your calories significantly, maybe you can last for a week or a month,” says Bartelt. “But most likely, you’ll revert to your old habits in the long run.”

 

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Strategies to Save

Is it Possible to Save too Much?

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Is it possible to save too much?

A recent survey from the Federal Reserve found that nearly half of Americans—including those who are, by other metrics, financially comfortable—would not be able to come up with $400 in an emergency. For many, putting aside extra money at the end of every month is near impossible, or at best a chore.

But there’s another (perhaps less common) group of people who get a thrill from watching the numbers in their savings accounts climb—and who will go to great lengths to make it happen. For these people, the act of saving is its own reward.

“It’s the person who will go to a certain gas station to save two cents on gas, but drive further than two cents’ worth of gas to get there,” explains Dr. Clifton Green, associate professor of finance at Emory University in Atlanta. “Getting those savings is a form of happiness for people, just like anything else.”

Driving that urge to save could be an attempt to quell financial anxieties that developed in childhood. “If a person grew up in a home where money was scarce, and experienced parental disagreements around money, there may be a fearful or negative feeling around money,” says Nancy Curtin, a certified financial planner at New York-based KBK Wealth Management.

“The point of money is to provide safety, but also to allow you to do things with your life,” says Dr. Green.

Anxiety around money can be both beneficial and harmful, depending on how it manifests itself in a person’s daily habits. “This can cause a person to become either extremely frugal…or to develop the attitude that they need to spend it all before it runs out,” Curtin says. “Another person may have grown up with abundance, but if they are not taught from an early age that someone had to work hard to attain that abundance, they may become a spendthrift.”

Financial psychologist and certified financial planner Brad Klontz has been studying these learned attitudes that drive our financial behavior for years. “We all have money scripts—beliefs that are passed on from our parents, our grandparents, our culture,” he says.

The Dark Side of Over-saving

Compulsive savers “look good on paper,” says Dr. Klontz, explaining that their commitment to saving and frugality make them better-positioned to handle financial hurdles down the road. But even these healthy behaviors can become a burden if taken too far.

Ironically, they can even be detrimental to a person’s financial health. For example, someone too concerned with building up a trove of cash for emergencies may be missing out on bigger returns in the stock market, and efforts at frugality—like hours spent clipping coupons or meticulously tracking spending—may cost someone more of their (valuable) time than they realize.

There’s a darker side to the drawbacks, too: an obsession with saving can even eclipse health and happiness. “In the extreme, I’ve seen clients neglect medical care,” says Klontz. “It’s the millionaire that won’t visit the dentist because he’s too afraid to spend money.”

Once they are set, financial habits are difficult to change. There’s a good chance that spending will always feel like pulling teeth for those with deep-rooted anxieties about money and that saving will always be a challenge for others. But even if our belief systems are cemented in childhood, there are ways to break the bad habits that have formed alongside them.

Find the source of your relationship with money. According to Klontz, the first step to fixing your financial shortcomings is taking a good, hard look at your feelings about money. “Ask yourself some questions,” he recommends. “What did your mother or father teach you about money? What are your biggest fears about money? What are your most painful financial memories?” Only once you understand the source of your assumptions about money—whether you compulsively save or like to live large—will you be able to challenge them.

Know when to get a second opinion. For those who often let money anxieties get the best of them, talking to an unbiased expert like a fee-only financial planner can provide a much-needed dose of reality. The same strategies that help people who have a hard time saving may be beneficial to compulsive savers, too. The trick is knowing when you have saved enough and should begin diversifying your assets.

“I have my clients set a savings goal so that they will have enough cash to live for at least six months if they were to lose a job. Then I have them add another 10% for good measure,” says Curtin. Once that goal is met, that cash should be allocated toward specific investment goals, like retirement. There’s an exception here: if you have short-term savings goals like saving up for a house or a vacation, it’s wiser to keep those savings in cash, where the money easiest to access.

Hold yourself accountable. Checking in with yourself regularly about your account balances to make sure that you aren’t hoarding cash in a low-yield savings account (or under the mattress) is critical. And while it may not come naturally to compulsive savers, prioritizing personal fulfillment is critical.
“The point of money is to provide safety, but also to allow you to do things with your life,” says Dr. Green.

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Featured, Investing

These Books Will Teach You Everything You Need to Know About Money

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The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

We’d all love to have our own personal financial expert at our beck and call, but not everyone can afford to keep a Certified Financial Planner on the payroll. Books, on the other hand, can be an excellent — and affordable — alternative if you’re looking for ways to improve your wealth, find success, and learn how to invest. Lucky for you, we’ve reached out to the experts themselves to find out which personal finance books they always keep handy.

The Expert: Kevin Smith, founding partner of wealth advisory group Smith, Mayor & Liddle

His favorite books: The Millionaire Next Door: The Surprising Secrets of America’s Wealthy by Thomas J. Stanley and The Richest Man in Babylon by George S. Clason

babylon millionairenextdoor

Why he recommends them:

“Understanding investments and having a quality portfolio are of little benefit to investors if it’s not accompanied by wise investment practices and disciplined financial habits. Both of these recommended books emphasize the latter, and avoid the technical descriptions and potentially confusing explanations that most financial books entail.”

The Richest Man in Babylon covers the perks of thriftiness, financial planning and personal wealth, offering timeless principles that can benefit readers for years to come. “I’d recommend it to anyone,” says Smith,” but particularly those of a younger age who have time on their side and can more easily benefit from compounding [interest].”

The Millionaire Next Door, on the other hand, emphasizes the ease with which anyone can become wealthy, and discusses how the typical millionaire is often much different than perceived.

“Those who have become millionaires are generally not those who own the biggest homes or drive the fanciest cars, but rather they’re common, everyday citizens who saved regularly, invested wisely, lived within their means and developed sound spending and investment habits at an early age,” he says. “It gives hope to anyone who might otherwise believe that the rich are only those with the highest paying jobs or beneficiaries of good fortune.”

The Expert: Jim Adkins, founder and CEO of Strategic Financial Associates, LLC

His recommendations: The Presentation Secrets of Steve Jobs: How to Be Insanely Great in Front of Any Audience by Carmine Gallo

jobs

Why he recommends it: Let’s face it. One of they key components of building wealth is doing well in your career. That’s why The Presentation Secrets of Steve Jobs is at the top of Adkins’ list. The book focuses on teaching people and public speaking skills anyone can use to achieve personal success. “The message of this book is that Jobs’ extraordinary impact is based on his authenticity and his passion for his company’s people and products,” says Adkins. “Everyone with a product or service that improves people’s lives has a story to tell and can learn from Jobs.”

The Expert: Molly Stanifer, CFP®, Old Peak Finance

commonsenseinvestmentanswer

Her recommendations: The Investment Answer by Daniel C. Goldie and Gordon S. Murray and The Little Book of Common Sense Investing by John C. Bogle

Why she recommends them: For budding investors, Stanifer says there are no better books to help explain the ins and outs of the stock market. Both books caution against pure stock picking in favor of investing in a broad array of assets. Bogle’s The Little Book of Common Sense Investing is practically mandatory reading for anyone wanting to learn more about the power of a diversified portfolio.

The Expert: Jeff Jones, CFP®, MS

habits9thhabite

His recommendations: The 7 Habits of Highly Effective People by Stephen R. Covey and The 8th Habit: From Effectiveness to Greatness by Stephen R. Covey

Why he recommends them: For books that focus on personal growth, Jones says it doesn’t get much better than these two Covey classics. “These books have stood the test of time and offer great re-readability factors,” he said.

The Expert: John Bohnsack, CFP ®, Briaud Financial Advisors

valueinvestor

His recommendations: The Education of a Value Investor: My Transformative Quest for Wealth, Wisdom, and Enlightenment by Guy Spier

Why he recommends them: “Spier’s lessons — many of them learned the hard way — teach the reader about gratitude, surrounding yourself with the right environment and modeling the right people, his own hero being Warren Buffett,” says Bohnsack. “The book challenges the reader to become a better investor, but so much importantly to be a better version of yourself.”

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College Students and Recent Grads, Life Events

Top 6 Options for a Custodial Account

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The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

How Much Baby’s First Year Will Cost You

If you want to invest on behalf of your child, one way to do it is through a UGMA or UTMA. These custodial accounts are taxable investments that function like any other taxable account once you have the beneficiary and custodian established.

What to consider first

Before committing to a custodial account, you should take some time to reflect on both the goal of the account and your financial goals when saving for your child. Custodial accounts, by law, will be handed over to your child when he or she reaches the age of majority as defined by your state, probably 18 to 21. Your child will be able to determine how and when the money is spent, which could be reason enough for you to to choose other investment vehicles. You also will only be able to use the funds in the account for the benefit of the child while he or she is a minor. There are no take backs with custodial accounts.

These accounts no longer provide a tax advantage, so opening a UGMA or UTMA should no longer be considered a way to dodge a tax obligation. A 529 Savings Plan for college may provide more of an advantage if you’re looking for tax breaks.

A UGMA or UTMA will also be counted towards your child’s federal financial aid for college. The money in the account will be counted towards your child’s assets and must be included on FAFSA forms. This could be restricting the amount of financial aid your child gets if your household income doesn’t already preclude him or her from being eligible. 529 Plans on the other hand have minimal impact on financial aid eligibility.

Once you decide to use a custodial account

As the custodian, you will want to pick the best brokerage when opening the account, and as with any other investment account, that means finding the one with the lowest fees.

Vanguard

When it comes to low fees, Vanguard is the cream of the crop. Its funds have notoriously low expense ratios, and its accounts boast zero transfer, advisor or enrollment fees.

Fees:

Minimums:

  • The minimum investment options will depend on the mutual fund in which you are interested.

Schwab

Schwab makes a concerted effort to stay competitive with Vanguard. Its funds also carry low expense ratios. It also includes some other outside ETFs in this no-fee category regardless of the size of your account, but the trades you do have to pay for are slightly more expensive than Vanguard.

Fees:

  • Trading fees on Schwab funds from within a Schwab investment account are zero. $8.95 per online trade; $0 per Schwab ETF online trade in your Schwab account
  • No account service, transfer or advisor fees unless you start moving into managed portfolios.

Minimums:

  • There is a $100 minimum required to open an account.

Fidelity

Fidelity’s custodial account tends to have higher expense ratios, but you can trade Fidelity funds at zero cost like the previously mentioned options.  It does have some other options in the no-trade-fee category, and the funds that do require fees carry a slightly lower fee schedule than Schwab.

Fees:

  • No annual account fees
  • No trading fees for most Fidelity mutual funds
  • Trading fee on non-Fidelity accounts is $7.95, which is lower than Schwab and TD Ameritrade

Minimums:

  • $2,500 minimum investment

TD Ameritrade

TD Ameritrade’s custodial account is largely not as cost-effective as Vanguard, Schwab and Fidelity, but fees are few, and when they exist they are still low compared to some other options on the market.

Fees:

  • No annual account, enrollment or advisor fees
  • No trading fees for most TD Ameritrade mutual funds
  • $75 fee to transfer away from TD Ameritrade
  • 100+ ETFs with no trading fee, but $9.99 per trade fee on other investments

Minimums:

  • No minimums to open an account

TradeKing

TradeKing comes in strong with an offer to lure you away from other brokerages, but once you get there, it doesn’t really stack up.

Special Offer:

  • TradeKing covers up to $150 in transfer fees if you want to move from another brokerage.

Fees:

  • No annual account fees
  • No trading fees for TradeKing mutual funds
  • $50 fee to transfer away from TradeKing
  • $4.95 per trade fee on the lowest ETFs or $9.95 for the lowest mutual funds. While both are cheaper than TD Ameritrade, it and others offers some zero trade fee options on other investments

Minimums:

  • No minimums to open an account

USAA

USAA’s custodial account and brokerage services don’t compare to the big three at the top of this list, and the expense ratios on its own funds are much higher. It does have low fees, though.

Fees:

  • No annual account fees or maintenance fees
  • No trading fees for TradeKing mutual funds
  • $20 to $70 fee to transfer away from USAA depending on whether or not it’s a partial transfer or leaving entirely
  • Trade commissions for the lowest-level members are $8.95 for ETFs and can be as low as $0 on mutual funds for “No-Load No Transaction Fee Funds”, though the next tier of “No-Load Transaction Fee Funds” jumps up to $45.

Investment Options by State

The vast majority of states have implemented UTMA, the law that says custodial accounts can include investments in physical assets such as real estate or fine art. If you live in any state except for South Carolina, you will be able to open a UTMA account. Residents of Washington, D.C. can also open this type of account.

Those in South Carolina can still open a custodial account. They will just have to do so under the older law: UGMA. The UGMA allows for investments in securities only. While South Carolina is the only state still operating under the UGMA, the territories of Guam and the Virgin Islands also operate under their own versions of the older statute.

When you sign up for a custodial account with your brokerage, they will be able to confirm which statute you fall under based on your residence, along with the state-specific age that your child will take control of account funds.

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Earning Interest, News

Goldman Sachs Enters Consumer Deposit Market With GE Acquisition

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The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Magnify News

Updated May 6, 2016: Goldman Sachs has launched its savings account

1.05% Interest Rate with No Minimum Balance

GS BankGoldman Sachs has launched its long awaited online savings account. The bank, long known for serving the wealthiest individuals and corporations, is now offering a high yield savings account that requires only $1 to open. Here are the details of the product:

  • 1.05% Annual Percentage Yield (APY)
  • No minimum deposit – you can open the account with just $1
  • There is a deposit limit – you can only deposit a maximum of $250,000
  • You can access your money by electronic transfer, wire transfer or by check.
  • Note: Synchrony Bank pays 1.05% but also provides an ATM card for easier access to your funds. The minimum deposit is $30 (instead of $1), but we think the ATM card makes it a superior offer.

Apply Now

You should shop around. Interest rates as high as 1.20% are available for people with big balances. MagnifyMoney has a list of the best savings accounts here.

Goldman Sachs Purchased GE’s Savings Accounts

Goldman Sachs purchased $16 billion of GE Capital Bank’s consumer deposits. $8 billion of the deposits are online savings accounts and CDs, and the other $8 billion are brokered certificates of deposit. In addition to the deposits, the employees of GE Capital responsible for the deposit business have been transitioned to Goldman Sachs.

The acquisition accelerates two big trends in consumer banking. General Electric has decided to exit the consumer financial services market, and has been rapidly shedding businesses all over the world. Goldman Sachs is building out a consumer banking strategy as it diversifies its business. Earlier this year, it announced that it will be entering consumer lending. And now, with a meaningful consumer deposit business, it will be active on both sides of the balance sheet.

Without the cost of a branch network, Goldman Sachs is able to pay higher interest rates to consumers while still obtaining funding advantages. Goldman Sachs is looking to diversity its funding, and sticky consumer deposits can be attractive. As interest rates increase, consumer deposits, due to their inertia, are typically not as responsive to increases in interest rates.

Goldman Sachs: Building The Consumer Bank Of The Future

FinTech companies, largely in the Silicon Valley, have started to change the way financial services are delivered to consumers. Marketplace lending has brought a better product and experience to consumers, a higher return to investors and more advanced credit risk analytics to lending decisions. Internet banks, by avoiding branch networks, are providing savers with higher interest rates and banks with low-cost funding sources. Goldman Sachs is out to prove that even a large, existing bank can take advantage of these trends.

Goldman Sachs will be launching a digital lending business. It has hired a former senior executive at Discover to lead the expansion. With the acquisition of the GE deposit franchise, Goldman Sachs will be a formidable competitor to the large incumbent banks. Why receive 0.01% on your savings account from Bank of America, and pay 19% interest on your credit card to Citibank, when you can get 1% on savings and pay 12% on loans to Goldman Sachs? Because Goldman does not have a legacy business to defend or cost structure to rationalize, it is uniquely positioned to challenge the large consumer banks in America.

At the moment, the marketplace lenders are taking advantage of ultra-low interest rates to grow. Investors are pouring money into any investment that offers yield. However, as interest rates increase, having access to low-cost consumer deposits will become a competitive advantage. Deposit rates for consumers do not increase as rapidly as interest rates in general. Goldman Sachs could end up with a funding cost advantage in a rising rate environment. Not only would the large consumer banks suffer, but the Silicon Valley start-ups may find it harder to compete.

Good News For Consumers

Many people have an immediate, negative reaction when they hear the name Goldman Sachs. However, in the consumer deposit and lending space, Goldman Sachs will be a challenger brand. In order to win as a challenger, you need a better product, experience, or both. Consumer loans and savings accounts remain entrenched with four big lenders who became even bigger after the financial crisis. Consumers will benefit by having well-funded new entrants looking to steal market share. Goldman Sachs is both large and well-funded. Consumer should expect better rates on savings accounts and loans in the years to come, as competition intensifies.

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