Monthly Archives: April 2017

Some Things You’re Embarrassed to Ask About Saving

Saving, in theory, seems simple: You put some money away and keep your hands off it for a while. But when you have so many other competing real-world demands on your money—from student loans to a desperately needed car repair, exactly how you apply the principles of saving gets more complicated.

We’ve put together a list of some of the most common savings-related questions you’ll need to understand to start saving responsibly.

1. What should I be saving for?

Separate your savings into three main categories: emergency fund, retirement, and goals.

  • Your emergency fund will help you handle unexpected situations, like a hospital bill or a pink slip, without going into debt. To figure out how big your financial safety net should be, multiply your monthly take-home pay by six; if you save that amount, you’ll be able to cover your expenses for six months.
  • Retirement can seem far away, but you’ll probably need enough money saved up to pay yourself somewhere between 70% to 90% of your current annual income for each year that you’re retired. Calculate how much you’ll need for retirement with the ING Retirement Needs Calculator, but don’t be intimidated by the number. Investing your money should help it grow over time—and the earlier you start saving, the better, because time is one of the most crucial ingredients to building up retirement savings. (See how time can increase your nest egg here. And read more about retirement here.)
  • Your short-term savings goals are up to you. Saving isn’t about stockpiling cash—it’s about making sure that you’re spending in a way that reflects the things you really value. It’s the difference between an armful of flea market finds you’ll love for two weeks, and finally buying your dream home. Create savings accounts for tangible goals like travel or home renovation, and put money toward them each month.

2. How much of my paycheck should I be saving every month?

Use the 50/20/30 rule for designing your monthly budget. Your living expenses, like housing, food and transportation, shouldn’t exceed half of your income—that’s the 50%.

The next 20% should go toward your money priorities, like paying back debt and building up savings. How you break it down is up to you and your financial situation. Are you desperate to get rid of credit card debt? Or are you debt-free but lacking an emergency fund? Either way, you should allocate at least a fifth of your paycheck to financial obligations.

RELATED: How Much of My Paycheck Should I Save Each Month?

Then, consider that last 30% discretionary spending—that is, fun stuff, like going out with your friends. (Learn more about how to set up a budget here.)

3. But how can I save when I can barely afford rent?

Between your sky-high rent or mortgage payment and your student loan payments, it may feel like you can’t spare a cent for your savings account. A solution could be in your spending habits.

Take a closer look at your monthly expenses, which you can easily see at a glance using the My Money Center. Look for ways to spend leaner, whether it’s by downsizing your apartment or house or cutting down on restaurant dining. Planning your purchases and spending more mindfully will help you free up funds for your savings. Take our Cut Your Costs Bootcamp for ideas on how to trim expenses in every area of your life. If that still doesn’t free up enough money, look for ways to increase your income, by picking up freelance gigs or working toward a raise. Make saving a priority and you can find—or create—a place for it in your monthly budget.

4. I’m still working on a car loan and student loans. How should I balance saving and paying off debt?

You might feel tempted to cash out your savings to get out of debt. After all, it can be frustrating to hold onto a few hundred bucks a month when you could be shoveling it toward your high-interest payments. How you choose to allocate your funds between savings and debt payments is up to you, but it’s important to do both at the same time, even if that means you start small with the savings. That way, if you encounter an unexpected expense, you’ll have money in the bank to protect you from sliding back into debt.

5. What should I do first: build up an emergency fund or start contributing to retirement?

Your emergency fund and your retirement savings are equally important to your financial security. Your emergency fund will protect you if something unexpected comes up in the immediate future, so start building it as soon as you can. Even if retirement seems far away, it’s also important to begin saving now, because the sooner you start, the easier it will be to amass the amount of money you need.

Start saving for these two major goals now, and increase your savings rate as you’re able. Then, once you’ve built up an emergency fund, you can start contributing even more to guaranteeing your stress-free, hobby-filled retirement in the Caribbean.

6. Why can’t I keep my savings in my checking account with my other money?

It might seem easier to just keep all your cash in your checking account, where you can use it as you need to. But besides missing out on potentially higher interest rates, you’ll be making it harder to maintain and protect your savings.

Your checking is where you hold money that you intend to use in the next month or so. Keep savings elsewhere so it is protected from everyday temptations. LearnVest also recommends you go with an online savings account that allows you to create separate sub-accounts for each of your savings goals, including your emergency fund. That will help you keep track of how much money you have for each goal and prevent you from fuzzy mental accounting that allocates one sum of money for two purposes. Sub-accounts will keep you from having to loot your emergency fund to pay for your vacation.

7. What does APY mean? Is it the same as an interest rate?

An APY, or annual percentage yield, tells you how much you’ll earn from your savings account in a year. Your account’s APY takes your interest rate and factors in compounding over time, so it’ll be higher than the interest rate itself.

Here’s how compounding works. If your bank offers an interest rate of 10%, compounded annually, and you have $5,000 in your account, you can expect it to grow to $5,500 in one year. If interest is compounded semiannually, though, you’ll have $5,250 halfway through the year. For the next half of the year, interest will be calculated on that higher balance, which will leave you with $5,512.50 at the end of the year–about $12 more. So your APY, with 10% interest compounded twice a year, is 10.25%. But at today’s ultra-low rates, where 10% is a dream, they look pretty similar.

8. What are all the different types of savings accounts, and how are they different?

When it comes to stashing your savings, a piggybank won’t cut it. Your bank or credit union offers three options when it comes to savings accounts.

  • A traditional savings account is just an account that lets you regularly deposit money. You’ll typically earn more interest than you would in a checking account, but it’s not a whole lot.
  • CDs, or certificates of deposit, promise greater returns, but there’s a catch—by putting your money in a CD, you’re pledging to lock it away for a set term. Terms can vary from three months to five years, with interest rates rising the longer you commit. Withdrawing funds before your CD matures can result in a penalty.
  • Money market accounts offer a compromise: high interest rates and greater flexibility. But they often require a high minimum balance and limit your withdrawals.

9. When is it okay to use my emergency fund?

It’s called an emergency fund for a reason, but an emergency can mean a lot of things. Do you use it when you need a new computer or when your best college friends suddenly decide to take a trip to Mexico next month?

Unfortunately, not the latter. Your financial safety net is for real crises: situations where your health, living situation, or financial security is at risk. For instance, if you lose your job or your car (which you need for work) breaks down, you’ll need to rely on these funds. Don’t even think of dipping into it for some quick cash or an “emergency” massage. But keep in mind that emergencies differ from person to person: A broken computer could be a legitimate financial emergency for a freelancer who doesn’t have a work computer, but a non-emergency for someone who only uses their home computer to watch YouTube videos. No matter what you use it for, remember to replace any money you’ve taken out of your emergency fund as soon as you can.

10. Is it possible to have too much money in my savings account?

If you’re comfortable with your emergency fund, and you’ve already met all your other savings goals, you might be wondering what to do with that extra dough.

By leaving it in your savings account, you’re missing out on opportunities to make your money grow. What’s worse, in a typical savings account, your money could even be losing value because of inflation, which raises average prices over time. Keep just as much as you need for emergencies and goals in your savings accounts, but put the extra dollars to work in investments.

Know More About The Biology Behind Our Investing Decisions

You may not go around grunting in a loincloth, but when it comes to managing your money, your behavior may not be much more advanced than a caveman’s.

At least that’s the implication of new research, which suggests that humans have evolved to be more tolerant of risk at certain times of the year. Specifically, we tend to be relatively risk averse during the fall and winter and more risk tolerant in the spring and summer.

In the study, researchers observed that people are more likely to invest in money market and government bond mutual funds in the fall and equity funds in the spring. (Money market and bond funds are typically considered safer because they provide regular monthly returns, while equity funds invest in public stocks and have more long-term growth potential.)

That means the market is much more volatile during the spring and summer, which is why investors are often advised to “sell in May and go away”—or get rid of their stock holdings and avoid the market until it calms down around October.

So what’s the caveman connection? Writing on PsychologyToday.com, study co-author Lisa Kramer explains that variations in investing behavior are actually based on our ancestors’ survival strategy. Millions of years ago, it made sense for people to stock up on resources like food during the warmer months so they’d have something to eat during the cold seasons. Those who neglected to save up in the spring and summer were unlikely to make it through the winter.

The choice to sell your stock holdings may not be a life-or-death situation like foraging for food, but this research still has some important takeaways for modern-day investors. For one, it’s a good idea to simply be aware of how your preference for risk (and, consequently, your investing habits) varies throughout the year.

Some Financial Terms Everyone Should Know

Do you know your AGI from your ARM from your PMI? Or does the mere mention of those acronyms make you go, “Huh?”

If you don’t speak personal finance, don’t worry—we’re here to help.

We know that managing your money can sometimes make you feel like you’re learning a foreign language. So we compiled a handy glossary of must-know money terms that affect all aspects of your financial life.

Whether you’re confused about amortization or not sure what escrow, exactly, is good for, this primer will help you get up to financial speed.

Handy Banking and Credit Terms

1. Compound interest When you’re investing or saving, this is the interest that you earn on the amount you deposit, plus any interest you’ve accumulated over time. When you’re borrowing, it’s the interest that is charged on the original amount you are loaned, as well as the interest charges that are added to your outstanding balance over time.

Think of it as “interest on interest.” It will make your savings or debt grow at a faster rate than simple interest, which is calculated on the principal amount alone.

2. FICO score A number used by banks and other financial institutions to measure a borrower’s credit worthiness. FICO is an acronym for the Fair Isaac Corporation, a company that came up with the methodology for calculating a credit score based on several factors, including payment history, length of credit history and total amount owed.

FICO scores range from 300 to 850, and the higher the score, the better the terms you may receive on your next loan or credit card. People with scores below 620 may have a harder time securing credit at a favorable interest rate.

3. Net worth The difference between your assets and liabilities. You can calculate yours by adding up all of the money or investments you have, including the current market value of your home and car, as well as the balances in any checking, savings, retirement or other investment accounts. Then subtract all of your debt, including your mortgage balance, credit card balances and any other loans or obligations. The resulting net worth number helps you take the pulse on your overall financial health.

RELATED: Net Worth: Why You Need to Know It—and Grow It

Handy Investing Terms

4. Asset allocation The process by which you choose what proportion of your portfolio you’d like to dedicate to various asset classes, based on your goals, personal risk tolerance and time horizon. Stocks, bonds, and cash or cash equivalents (like certificates of deposit) make up the three major types of asset classes, and each of these reacts differently to market cycles and economic conditions.

Stocks, for instance, have the potential to provide strong growth over time, but may also be more volatile. Bonds tend to have slower growth, but are generally perceived to have less risk. A common investment strategy is to diversify your portfolio across multiple asset classes in order to spread out risk while taking advantage of growth.

5. Bonds Commonly referred to as fixed-income securities, bonds are essentially debt investments. When you buy a bond, you lend money to an entity, typically the government or a corporation, for a specified period of time at a fixed interest rate (also called a coupon). You then receive periodic interest payments over time, and get back the loaned amount at the bond’s maturity date.

6. Capital gains The increase in the value of an asset or investment—like a stock or real estate—above its original purchase price. The gain, however, is only on paper until the asset is actually sold. A capital loss, by contrast, is a decrease in the asset’s or investment’s value.

You pay taxes on both short-term capital gains (a year or less) and long-term capital gains (more than a year) when you sell an investment. By contrast, a capital loss could help reduce your taxes.