If one of your New Year's resolutions is to grow your savings, one smart strategy is to keep your money in an account earning the most interest.
The Federal Reserve has been slow to raise interest rates, and even recent hikes haven't trickled down to consumers in the form of better savings yields. The average savings account offers a paltry 0.19% annual return, only slightly better than a year ago, according to Deposit Accounts.
Some experts say that money could grow faster at online banks. Some CDs, or certificates of deposit, are also more generous than others.
"If you're not seeking out the best returns on savings accounts and CDs, you're leaving money on the table," said Greg McBride, chief financial analyst at Bankrate.com. "It's the only place in the investment universe where you can get extra returns without extra risks."
These accounts are protected by the Federal Deposit Insurance Corporation, a government agency that provides deposit insurance, for up to $250,000.
Online banks, McBride said, are currently in an "arms race" to lure people with the best rates.
Although current "best" rates of around 1.5% still seem low — one could find savings accounts with a 4% annual percentage yield in 2006 — experts say they make sense in the current environment.
"We had record low interest rates for nearly a decade, and inflation is still 1.6%," McBride said. "When banks are giving car loans for 3% and mortgages for 4%, no one is getting 10% on savings."
People are also less likely to look to the past than they are to compare today's rates against each other, said Patricia Seaman, senior director of marketing and communications at the National Endowment for Financial Education.
"People feel good about saving 5 cents a gallon on gas, so they feel better about getting another half a percentage [on their savings]," she said. "We may not be talking about very much, but psychologically, that looks amazing."
Here are some of the banks with the best savings yields:
1) Dollar Savings Direct, a division of Emigrant Bank, claims to have "America's highest rate." Saving accounts come with an annual interest rate of 1.60%.
"It's a smaller Internet bank, but it's still a legitimate, FDIC [Federal Deposit Insurance Corporation] insured bank," said Ken Tumin, founder of the website DepositAccounts.com.
2) Marcus by Goldman Sachs offers online savings accounts with an annual interest rate of 1.40%. "Goldman Sachs seems to be a little hungrier for deposits," McBride said. First National Bank of Omaha also offers an annual interest rate of 1.40% on a savers' online account. Neither requires a minimum deposit.
3) American Express's savings accounts accrue at 1.35% a year.
4) Discover online savings accounts come with a 1.30% annual interest rate. In this account, $15,000 would produce a return of $194.74 in a year. To compare, that same amount in a Chase savings account would earn just $1.50. Barclays, too, offers an online savings account with an interest rate of 1.30%.
5) Synchrony Bank offers a savings account with a 1.30% annual return — and its accounts come with an optional ATM card, although like with most online savings accounts, there is a limit of six withdrawals or transfers in a month. Although this restriction might feel like a nuisance, it's actually helpful to people, McBride said.
"Too easy access can defeat the purpose of saving," he said.
Certificates of deposit
For savers who won't need their money for an extended period of time, interest rates on CDs can be worth a look. The average 1-year CD returns 0.28%. Rates from online banks, however, are also higher.
People generally can withdraw their CD interest at any time throughout the term. There are penalties for withdrawing the original deposit.
"If it helps you to think, 'I can't get that money', it's worth it," said Seaman.
Here are some CDs with the best rates:
1) Online bank Ally has one-year CDs that range from 1.35% to 1.70%, depending on how much is deposited. Savers should look for CDs with the lowest penalties, said Allan Roth, founder of Wealth Logic. That way they can gain the benefit of a high interest savings account without the restrictions of a CD. "If you need the money, you break the CD," he said.
2) Marcus by Goldman Sachs also offers certificates of deposits with higher-than-average returns, although there is a $500 minimum deposit. A one-year CD comes with a 1.65% interest rate, and a six-year CD has a 2.55 percent annual rate.
3) Barclays offers a 1.65% return for one-year CDs; five-year CDs will deliver 2.40 percent and there is no minimum opening deposit.
Savers can also "ladder" their CDs, in which a person deposits money into, say, a one-, two- and three-year CD, so that they're not tying up too much of their money at once and can reinvest their savings should rates rise.
It can be hard for people to spend the time and energy to change their saving ways, Roth said. People need to "fight that inertia."
"I know so many people that will complain about a sandwich being $12 when it should be $10," he said. "And yet they lose thousands of dollars each year by having their money in a big-name checking account."
Keep in mind you'll pay ordinary income tax rates on earnings from savings accounts.
These six New Year's resolutions will give your investment portfolio a boost in 2018, deliver long-lasting rewards and require neither spandex nor excessive amounts of kale.
It’ll be nearly impossible to find an open treadmill at your local gym come January. By March? Everything’s back to normal again.
Welcome to the season of good intentions. Many people will start 2018 with a New Year’s resolution like exercising more or losing weight, only to abandon it within weeks.
Sound familiar? Even if you haven’t succeeded in the past, 2018 can be different. (No, really!) If you’re unsure where to begin and would like to start with some quick wins, how about your investment portfolio?
Investing resolutions can reap long-lasting rewards and require neither spandex nor excessive amounts of kale. Pick and choose from the following investing resolutions, or go ahead and tackle the entire list.
Save more (and invest it)
Spending less and saving more is a noble resolution, but here’s some bad news: Saving money won’t adequately prepare you for retirement unless you invest it.
First, some ground rules. Don’t invest in the market unless you’ve established a rainy-day fund with enough money to cover three to six months of expenses. Generally speaking, you shouldn’t invest money you’ll need within the next three years.
Once you have some short-term savings accumulated, work toward contributing 15% of your income to your retirement accounts. Everyone can make (and keep) this resolution, whether your nest egg has cracked the six-figure mark or it looks more like, well, an egg. Even an extra $20 each week will add up to nearly $40,000 in 30 years, thanks to compounding interest.
Exercise more (than just your 401(k))
Think of saving for retirement like exercising. A routine workout may get the job done, but your body (or nest egg) won’t radically transform until you switch things up.
If you’ve been contributing to your 401(k) — congratulations, by the way, as it’s an important first step — resolve to open an IRA in 2018. These accounts carry a maximum contribution of $5,500 for people under age 50 ($6,500 for those 50 and up) and offer a broader array of assets that often have lower fees than employer-sponsored plans.
First, decide whether you prefer the Roth or traditional variety. (The difference comes down to when you’ll be taxed, now with a Roth or later with a traditional when you take distributions.) Once that’s settled, you can open an IRA in a matter of minutes. You may not burn a lot of calories in the process, but you’ll appreciate this move someday — maybe even as soon as tax season if you open a traditional IRA.
Lose weight (from excess fees)
The U.S. stock market has had a tremendous year, but if your portfolio’s performance is a bit sluggish, it’s time to take action. Costly fees may be weighing down your portfolio and hampering its future potential. A NerdWallet study found that a millennial paying 1% more in investment fees than his peers will sacrifice nearly $600,000 in returns over 40 years.
Don’t be that person. Here’s how to trim the fat: Take note of the expense ratios for each investment in your portfolio and then research whether less costly alternatives will let you achieve the same goal. Have an account with an online broker or robo-advisor? Many of these providers offer access to financial advisors who can assist with this process. Or you can consult with one directly.
Eat healthier (in your portfolio)
This time of year, it’s easy to overindulge on sweets, whether at the dessert table or within your portfolio.
With U.S. stocks up about 20% in 2017, your once-healthy portfolio probably has gotten out of whack. It’s time to restore your intended allocations to stocks and bonds. Experts recommend at least 5% to 10% of your portfolio be allocated to bonds, but your strategy may vary depending on your risk tolerance or age.
In 2018, resolve to rebalance your portfolio and set up automatic rebalancing, a feature offered by many providers or inherent to target-date funds you may have in your 401(k). Sometimes that’s as simple as a click of a button.
Get (your accounts) organized
So you’ve packed up old clothes and donated them to charity. But that 401(k) from your first job? Somehow it’s still hanging around.
Let 2018 be the year you finally roll over your old 401(k) into an IRA. Why? You’ll most likely pay lower fees than with that old employer’s plan, plus you’ll gain access to a broader selection of investments and possibly more guidance from your new broker.
A rollover will require you to fill out some paperwork and funnel money into new investments, but it’s time well-spent. Lower fees, greater flexibility and more money at retirement? You can probably spare a couple of afternoons for that.
Learn a new (investing) skill
While your friends learn French, Parlez-vous investing? If you answered no, your burgeoning interest is calling. (We know it’s there; you’re reading this list.)
It’s easy, and often wise, to take the set-it-and-forget-it approach to investing. But that may not be enough to satisfy a curious mind. Becoming “invested” will make you more engaged in the lifelong pursuit of managing your finances. Gravitate to what interests you, be it reading an investing book, researching how options work (hint: they’re not as difficult as they seem) or trying your hand at trading stocks.
Just be sure to keep your newfound hobby in check. Reading a few books does not the next Warren Buffett make, nor should you overhaul your portfolio to chase the latest investment du jour.
Your 20s were all about setting up your financial foundation and establishing good habits. Your 30s were about life changes like getting married, having kids, and building your career.
In your 40s, everything is amplified even more. You've got growing kids and aging parents — and what you don't have is a ton of spare time.
There's a lot you can do in your 40s to protect your money and care for your family before you begin thinking about retirement in your 50s or 60s. Here's what you should avoid:
1. Buying more house than you can afford
With your growing family, that starter home in a bad school district isn't meeting your family's needs anymore. Suddenly, you want more space for your kids to run around, and you want them to grow up in a neighborhood with lots of friends their age.
It's tempting to opt for more square footage, a larger yard, and an upscale neighborhood. But this means a bigger home loan, increased maintenance costs, and high property taxes.
After spending the first two decades of adulthood in rental apartments or condos (possibly with roommates!), it's natural to want a big, beautiful home to hopefully live in for the rest of your life. But beware of buying more home than you can handle. Houses aren't great investments, so you should be realistic about your budget and avoid tying up all your savings in your home.
2. Not having the right mortgage
Mortgage rates remain quite low (often under 4%, depending on your credit score, loan terms, and other factors). Consider refinancing if you intend to remain in your home for at least a few more years.
I'm a fan of refinancing to a 15-year mortgage. While a 30-year mortgage offers a lower monthly payment, it means you'll have a mortgage well into your 60s or 70s, which isn't helpful in retirement. Plus, you'll pay a lot more in interest.
How much more? Let's say you have a $250,000 loan. You can get a 15-year mortgage with a 3.14% interest rate and a monthly payment of $1,743. A 30-year mortgage would have a 3.81% rate and a $1,166 monthly payment. Spending nearly $600 less per month is appealing, but you'll actually spend $106,073 more on interest payments over the life of the 30-year loan!
As your cash flow situation changes, make sure you have the right mortgage for you. You can compare 15- and 30-year mortgages side by side using this calculator.
3. Overspending on your kids
A big way to keep up with the Joneses in your 40s is to pour your resources into your kids: tutors, travel sports teams, competitive dance troupes, private school tuition, summer camp … the list is endless!
It hard to say no to everything your kids' heart’s desire and you really do want to provide those things — not just because you love your kids, but because their friends' parents are your friends and neighbors, and there's pressure for you to fit in.
This is a good time to reassess your money values and teach your kids about creating their own value system. That way, the whole family is spending money and time on what really matters to each of you, instead of what your neighbors are doing.
4. Not saving for retirement because you're saving for college
Many parents I work with want to prioritize funding their kids' college savings accounts. It's natural to put your kids first, before yourself. That's good parenting!
However, I get concerned when parents forgo saving for their own retirement in favor of contributing to a college savings account for their kids. The reality is that your kids can borrow money for college, but you can't borrow money for retirement. You're setting your kids up to have to support you in your old age, right when they have young children of their own.
This can become a huge burden for them in the future. A true gift to your kids is to prepare adequately for your own retirement first, and then save for their college educations second.
Once you're in a financial position to contribute to college savings, consider a 529 Plan, which offers multiple tax benefits. Some plans give you a state tax deduction or credit, your contributions will grow tax-free in the account, and withdrawals for qualified educational expenses are also tax-free.
If your state of residence doesn't offer a tax deduction or credit, you can choose a plan from a state that does. You can research different 529 Plans available at savingforcollege.com.
5. Not having a big enough emergency fund
That $1,000 you stashed away at 22 might have cut it when you were only supporting yourself, but now you've got a family. The potential for unexpected expenses is high.
The stakes are higher, too. For example, when you're young and lose your job, you can float by for a few months by breaking your lease and moving back home. Imagine losing your job when you have a $3,500 monthly mortgage payment, two car payments, grad school debt, a stay-at-home spouse, and three kids!
Give yourself peace of mind. Keep 3-6 months of living expenses in your emergency fund and invest the excess in a taxable brokerage account which you could pull from if you were out of work for an extended period of time.
6. Not maximizing credit card rewards
If you use credit responsibly (meaning you have an excellent credit score and pay your credit card bills in full and on time every month), you're missing out if you have a no-frills credit card that doesn't come with rewards.
A bigger family comes with increased spending, so make that spending work in your favor. Rewards cards can earn you cash back or points that you can use for free or discounted travel. Some cards even include perks like statement credits for airline purchases or the fee for Global Entry.
7. Not doing estate planning
I've witnessed friends have to wade through their parents' complicated estates while grieving their loss. It's essential to create a plan for supporting your family if you pass away or are incapacitated and can no longer works.
Doing the work now will spare your spouse and children a lot of pain. Work with an estate attorney to create a will, and consider the best ways to leave money to your heirs or charitable organizations to minimize the tax burden on your estate. A financial planner is a great ally to have on your side as you worked through this.
8. Not protecting your money in the event of divorce
Unfortunately, divorce is a reality for many families, and it can be financially devastating, especially for women. This is why I think it's important for both spouses to be active participants in their family's financial planning. Too often, one spouse handles all the money — and the other spouse is in for some nasty surprises if the marriage ends.
If your marriage is at risk, keep a detailed inventory of your family's assets and hire a lawyer to help you understand how state laws can affect which assets you'd be entitled to.
There are financial planners out there who specialize in working with clients who are going through a divorce, such as CDFAs (Certified Divorce Financial Analysts). They can help you navigate through this tricky time.
9. Not talking with your parents about their finances
Just like it's important for you to set up your estate for the benefit of your children, it's essential to talk to your parents about their own estate.
The elderly are vulnerable to financial scams because they have the confidence of having managed their money for years, but don't necessarily understand modern money management. They also might be experiencing some cognitive decline, so it helps to have you on their side as they make financial choices.
Some parents tell their adult children too late that they don't have enough saved for retirement, or that they expect their kids to support them. I work with a number of clients who help their parents financially, but it takes some planning and budgeting to be able to do this without sacrificing your own goals.
While a bad economy or an especially low-paying job can make saving money infinitely harder, the formula for saving has always been the same. To save money, you need to spend less than you earn.
Obviously, this task becomes a lot easier when you earn more than average – or if you live in a low-cost area. If you have a six-figure income and live in Arkansas, for example, you should absolutely be socking some money away. On the flip side, someone living on the same salary in an expensive city like New York City, Boston, or San Francisco might not have much if anything left over after covering basic expenses like housing, food, and childcare.
But, no matter your income or where you live, you have to find a way to spend less than you earn if you hope to save money to retire, have some fun, and avoid debt. You can get a side hustle or a part-time job if you want, but if you don't spend less than you bring home, you're always going to struggle.
That's why it's important to determine the difference between your "wants" and "needs" — and to understand why that differentiation matters. Without a grasp on why these terms matter, it's significantly harder to get on the right side of your financial ledger.
Wants vs. needs
What is a "want?" And what is a "need?" While everyone's wants and needs can vary, there's a big difference between these two terms when it comes to how you spend your money.
Generally speaking, a "need" is something you absolutely cannot live without. You need a roof over your head, for example. You need food and health insurance and transportation to get to work.
You need electricity in your house, you need food to eat, and you need a telephone. In this day and age, you probably even need internet access for your job or so your kids can do homework.
A "want," on the other hand, is something you'd like, but could probably live without if push comes to shove. You want to go out to dinner tonight so you don't have to cook. You want a shiny new iPhone X, even if you’re existing phone works just fine.
You want concert tickets and an annual beach vacation, but you wouldn't die if you couldn't have these things.
A want is something you very well may be able to afford, but don't actually need to get by.
When needs are actually wants
But, what happens when something you consider a need is actually a want? This happens all the time, and it really throws people off. Worse, it tricks people into justifying purchases they wouldn't make it they really thought it through.
For example, you need to eat, it's true. But, do you need to dine out at your favorite pub tonight? If you have food to eat at home, the answer is no. But if you're in the mood to justify the purchase, you could tell yourself you need to eat and do it anyway.
You also need a cellphone because it's 2017 and hardly anyone has just a landline anymore. But, you don't need to upgrade to the new $1,000 iPhone, and you may not even need a smartphone. Heck, you may not even need a data plan — but since you know you need a phone, you can convince yourself you need the best possible phone with the priciest talk, data, and text package money can buy.
New cars are another area where it's easy to confuse what you want with what you need. You may need a car to get to work. You probably don't need a brand-new car financed for 72 months with a $500 monthly payment. But, since you know you need to get to work, you can talk yourself into buying what you want on the premise that your shiny new ride is a need.
Well, guess what. It's not.
In all these instances, you absolutely need the item in question — food, phone, transportation — but you're choosing to spend more than you have to. In these cases, it's important to be honest with yourself about what you need, what you want, and the difference between the two.
Three steps to help you separate wants from needs
There's nothing wrong with spending money on wants. I would even argue that paying for wants is an important part of life. If life were only about working and paying bills, then it wouldn't be much fun.
The problem arises when people conflate their wants with their needs to the point where their spending stands in the way of their financial goals. When we spend money on wants without determining if they're really a priority, we often shortchange ourselves in the areas of our lives that really matter – things like saving money for college, emergencies, retirement savings, and vacations.
If you're struggling to separate wants from needs, here are three steps to help.
Step 1: Decide which wants truly add value to your life.
If you're spending more than you should and having trouble separating wants from needs, it's smart to take a step back and look at what you're actually buying. Do your wants add real value to your life, or are they made out of convenience? Are you making discretionary purchases because they're important to you, or simply out of habit?
While spending on wants is an important part of life, some wants are more important to us than others – and if you stop to examine you’re spending, you may find that many of the splurges you're making aren't really worth it. By deciding which wants add real value to your life, you can determine which ones to keep and which wants you can live without.
Step 2: Trade away some of your wants for a better deal.
Depending on the "want" in question, you may be able to come up with an alternative action that lets you save your money instead. This is a good strategy to try when you're spending on something out of habit or out of convenience.
· If you dine out a few times per week more out of convenience than pleasure, you may find you can cut your spending and still eat conveniently with some simple planning. If you can get in the habit of meal planning or using your crock pot to make easy dinners a few nights per week, for example, you may be able to avoid hasty, unfulfilling dinners out and pocket that money instead.
· If you have an expensive cable package out of habit but never watch all the channels, you may be able to choose a cheaper package and save money without really noticing. Heck, you may even be able to cancel your cable subscription together.
· If you're signed up for multiple subscriptions for magazines or any of those subscription boxes like FabFitFun but you rarely have time to enjoy what you receive, you might be able to cancel without any real impact to your happiness or fulfillment.
It's important to have wants in your life, but you should only splurge when you're truly benefiting. If a want isn't really making you happy, you'll get more out of your hard-earned dollars once you cut the fat and reallocate those dollars to make them count.
Step 3: Figure out how to afford what you really want.
Let's say you have a handful of wants that are really important to you. You love having a new car because you drive an hour to work each way, or you're a huge tech geek who can't wait to get your hands on every new phone or game console that comes out. Maybe you're a foodie who loves dining out so much you're willing to sacrifice elsewhere to be able to try all your favorite restaurants.
Working those wants into your budget is obviously important, but you need to make sure you can afford it. If you're not saving money already – or if you're spending all you earn and going into debt – then you probably need to analyze your spending in its entirety to find other places to cut.
The best way to determine whether you can afford everything you want – in addition to everything you need, of course – is to use a monthly budget and track your spending. While tracking your purchases can prevent you from spending more than you want, a monthly budget can help you prioritize your monthly obligations and your wants without sacrificing your savings goals.
My favorite type of budget is the zero-sum budget because all it takes is a pen and paper to get started. Zero-sum budgeting also makes prioritizing easy since it forces you to "spend" all your money on paper and "give each dollar a job."
In addition, zero-sum budgeting forces you to pay your savings and investments as if they were regular bills, then learn to live off the rest. In that sense, it may force you to reevaluate your wants and needs since you'll have less discretionary money over all.
The bottom line
If you're struggling with money and can't earn more of it right now, your best step is maximizing the money you have. Very often, the best way to do this is to take a close look at your monthly spending to see how much you're splurging. From there, you can decide if those “want" are truly worth it, or if you'd be better off taking a different approach.
At the end of the day, the best way to make sure you can afford what you want is to think ahead, be intentional with your spending, and most importantly, and be honest with yourself. We all want things in life, but those who get the most of what they want are the ones who plan.
I’ve been researching this topic extensively in the last few years in my quest to eliminate debt, increase my savings and increase financial security for my family.
I’ll talk more about these habits individually, but wanted to list them in a summary (I know, but I’m a compulsive list-maker).
Here they are, in no particular order:
1. Make savings automagical
This should be your top priority, especially if you don’t have a solid emergency fund yet. Make it the first bill you pay each payday, by having a set amount automatically transferred from your checking account to your savings (try an online savings account). Don’t even think about this transaction — just make sure it happens, each and every payday.
2. Control your impulse spending
The biggest problem for many of us. Impulse spending, on eating out and shopping and online purchases, is a big drain on our finances, the biggest budget breaker for many, and a sure way to be in dire financial straits. See Monitor Your Impulse Spending for more tips.
3. Evaluate your expenses, and live frugally
If you’ve never tracked your expenses, try the One Month Challenge. Then evaluate how you’re spending your money, and see what you can cut out or reduce. Decide if each expense is absolutely necessary, and then eliminate the unnecessary. See How I Save Money for more. Also read 30 ways to save $1 a day.
4. Invest in your future
If you’re young, you probably don’t think about retirement much. But it’s important. Even if you think you can always plan for retirement later, do it now. The growth of your investments over time will be amazing if you start in your 20s. Start by increasing your 401(k) to the maximum of your company’s match, if that’s available to you. After that, the best bet is probably a Roth IRA. Do a little research, but whatever you do, start now!
5. Keep your family secure
The first step is to save for an emergency fund, so that if anything happens, you’ve got the money. If you have a spouse and/or dependents, you should definitely get life insurance and make a will — as soon as possible! Also research other insurance, such as homeowner’s or renter’s insurance.
6. Eliminate and avoid debt
If you’ve got credit cards, personal loans, or other such debt, you need to start a debt elimination plan. List out your debts and arrange them in order from smallest balance at the top two largest at the bottom. Then focus on the debt at the top, putting as much as you can into it, even if it’s just $40-50 extra (more would be better). When that amount is paid off, celebrate! Then take the total amount you were paying (say $70 minimum payment plus the $50 extra for a total of $120) and add that to the minimum payment of the next largest debt. Continue this process, with your extra amount snowballing as you go along, until you pay off all your debts. This could take several years, but it’s a very rewarding process, and very necessary.
7. Use the envelope system
This is a simple system to keep track of how much money you have for spending. Let’s say you set aside three amounts in your budget each payday — one for gas, one for groceries, one for eating out. Withdraw those amounts on payday, and put them in three separate envelopes. That way, you can easily track how much you have left for each of these expenses, and when you run out of money, you know it immediately. You don’t overspend in these categories. If you regularly run out too fast, you may need to rethink your budget.
8. Pay bills immediately, or automagical
One good habit is to pay bills as soon as they come in. Also, as much as possible, try to get your bills to be paid through automatic deduction. For those that can’t, use your banks online check system to make regular automatic payments. This way, all of your regular expenses in your budget are taken care of.
9. Read about personal finances
The more you educate yourself, the better your finances will be.
10. Look to grow your net worth
Do whatever you can to improve your net worth, either by reducing your debt, increasing your savings, or increasing your income, or all of the above. Look for new ways to make money, or to get paid more for what you do. Over the course of months, if you calculate your net worth each month, you’ll see it grow. And that feels great.
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