Should You Invest Your Money in a CD?

If you’ve been researching different avenues for saving and investing your money, you’ve likely come across the term “CD.” Let’s discuss what a CD is, how it can be used, and if it’s a worthwhile investment. We’ll also look at alternatives if you decide a CD isn’t for you.

INVEST CD

What Is a CD?

A certificate of deposit, or CD, is an FDIC-insured savings product that offers a fixed interest rate for a specific term length. It’s an attractive option because of the guaranteed return. But if you withdraw your money before the end of the term length, you’ll have to pay an early withdrawal penalty.

Learn More: What Are “No Penalty” CDs?

CD interest rates vary widely depending on the term length, the bank, and the amount deposited. For example, Bank of America offers a CD interest rate of 0.07% for a $10,000 deposit on a 12-month term. Ally, an online bank, offers a CD interest rate of 1.05% for the same deposit on the same term length. You can visit ValuePenguin for average CD interest rates across the nation’s largest banks.

CD Ladders

If you’re concerned about locking your money away for long periods of time or just want more flexibility in terms of being able to catch an increased rate, a CD ladder could be a good method for you. A CD ladder involves depositing money into smaller CDs with staggered term lengths, rather than depositing all your money into one long-term CD.

Here’s an example of a how to set up a CD ladder with $10,000 in total funds. You need to put:

  • $2,000 in a 12-month (1-year) CD
  • $2,000 in a 24-month (2-year) CD
  • $2,000 in a 36-month (3-year) CD
  • $2,000 in a 48-month (4-year) CD
  • $2,000 in a 60-month (5-year) CD

After your 1-year CD has matured, you can reinvest your withdrawal into a 5-year CD. Repeat this process as each shorter-term CD matures, and you’ll eventually end up with a portfolio of 5-year CDs with one maturing each year. This CD ladder is an attractive method because long-term CDs typically offer higher interest rates than short-term CDs. So, you’ll be getting the benefits of the best interest rates while still maintaining flexibility (and liquidity), because you will have one CD maturing every year.

Resource: Building a Reverse CD Ladder

Are CDs a Worthwhile Investment?

CDs have multiple benefits that make them attractive for investing your money. Since CDs are offered by banks and are FDIC-insured up to at least $250,000, they are considered safe. You don’t risk losing money. Another advantage is the guaranteed interest rate. You’ll receive a fixed, predictable return on your money.

Despite these benefits, CDs have several disadvantages that can be deal breakers to some. One of the major drawbacks of CDs is the lack of liquidity. Once you deposit your money into a CD, you’ll have to pay an early withdrawal penalty to get access to your money before the end of the term length. The early withdrawal penalty can be several months’ worth of accrued interest.

Related: Buying Non-Laddered CDs With Your Emergency Fund

Another disadvantage is that your money may not keep up with inflation during its time in the CD. Especially if you have a long-term CD, the interest rate provided may not be high enough to maintain the purchasing power of your money over time.

One instance in which a CD would be a worthwhile investment is saving for a home down payment. If you have the money already saved up and just want it to earn a little interest until you’re ready to buy the home in a few years, a CD would be a good place to park the money. In most other instances, though, you can find a more lucrative financial product to achieve your savings goals.

CD Alternatives

I’ve personally never invested in a CD. The drawbacks have always outweighed the benefits in my mind. Instead, here are two other financial products I’ve used to earn a return on my money:

High-yield online savings accounts: I have several savings accounts with Capital One 360, an online bank. Capital One 360 offers a 0.75% interest rate on its savings accounts (as of February 3, 2017) — just 0.15% less than what the online bank offers for CDs. So I get the advantage of having continuous access to my money, while still receiving a notable amount of interest.

Learn More: The Best High-Yield Online Banks

Stock market investing: I have invested money in the stock market through mutual funds with T. Rowe Price and stock portfolios with Motif Investing. In both instances, the value of my money has increased more than it ever would have had it been in a CD. Although my money in mutual funds and stock portfolios isn’t FDIC-insured and the returns aren’t guaranteed, the potential for growth is much higher than that of a CD.

If you want to save money and earn interest on it but know that you may need access to the money in the near future, a high-yield online savings account is a good option. If you know that you won’t need to touch the money in over five years, consider investing in the stock market to potentially earn a greater return than you would with a CD.

Final Thoughts

CDs are attractive because of their security and guaranteed returns. However, in most instances, you can find a better financial product that meets your needs — such as a high-yield online savings account or a stock market investment. One situation in which it makes sense to invest in a CD, though, is saving for a home down payment.

At the end of the day, it comes down to how liquid you need your money to be and your level of tolerance for risk.

Have you invested in CDs in the past? Would you do it again?


4 Questions to Ask When Picking Your First (or Next) Bank

Do you remember when you opened your first bank account? I do.

I remember the time my mom helped me open my very first savings account at Wells Fargo. My initial deposit was around $100, which I had saved up from my eighth birthday. I was always so excited to receive the bank statements and, even though it was only a few cents, I enjoyed watching my money slowly grow each month.

As I got older, I began using different banks and credit unions. My father served in the U.S. Navy; while I was a dependent, he insisted I open accounts with financial institutions that most civilians are not able to access. When I went to college, I closed out my Wells Fargo account and transferred everything into another big bank checking account. This was simply a matter of convenience — they had several ATMs on campus and a branch within walking distance of my apartment.

Resource: Best Savings Accounts for Children

Most people that I know have done the same thing. They have either chosen to use a bank (or credit union) that a family member or friend recommended, or chosen one solely on convenience. But, I have seen the transformation of the banking experience shift from the teller, to the ATM, and now to the online experience. With these advances in technology, selecting a bank that will work for you should be about more than recommendations or convenience. Do your research!

Four questions to ask before choosing your first (or next) bank

1. Do you prefer a physical branch location?

Take a look at your comfort with technology and your banking habits. Chances are, you won’t need to visit or haven’t been to a local branch in the past year. That’s because these days, most people do their banking online or at an ATM. But choosing a bank with a local branch does have some benefits.

Local branches offer other financial services such as auto loans, home loans, check cashing, CDs, credit cards, and more. On top of that, you get to talk to an actual person! Opening an account or applying for a loan can be a bit confusing, especially if you’ve never done it before. Having an actual banker guide you through the process can make it a little easier.

If you prefer a local branch, you can use Google Maps to find your local banks, compare available services on each bank’s website, and you can ask more questions at your local branch.

For those of you who don’t need a physical branch, check out this list of the Best Online Banks of 2017. Be sure to find out what you’ll need to open your account online.

2. How often do you use the ATM, and where do you prefer to access your cash?

Withdrawing cash. If you have an account at a big bank, you can usually use any of their ATMs to withdraw cash at no charge. Bigger banks have more ATM locations available, so they typically charge fees to use out of network ATMs. Alternatively, some local banks and credit unions use Co-op Network ATMs that allow you to pull out cash at no charge at any in-network ATM.

Before choosing a bank, I would take a look at the local, in-network ATMs to see how convenient they are to your home or work. Next, I would then check to see how safe the area is surrounding the ATM, by actually visiting the location.

  • Added bonus: Some banks will reimburse you the fees for withdrawing at an out-of-network ATM. Check your terms & conditions to see if this benefit is available to you.

biggest bankCourtesy of GoBankingRates.com

Depositing cash or checks. If you will be depositing your funds at an ATM, you’ll need to use an in-network ATM in order to do so. Keep in mind, if you are using a Co-op ATM for your online bank or credit union, it may take additional business days for your check deposits to clear.

Related: Bank on the Advantages of Credit Unions

3. & 4. Does your employer offer direct deposit? How much do you intend to deposit and keep in your bank account at all times?

Waived Monthly Fees. These two questions are not directly related, but will usually determine whether you are qualified for a waiver of your monthly service fees. The minimums vary from bank to bank, but the magic number is usually around $1,500 average balance OR a minimum monthly deposit of $500.

wells fargo

A screenshot from the Wells Fargo website

Higher Tier Checking or Savings Accounts. A higher average monthly balance will usually qualify you for additional checking and/or savings account benefits like free checks, high-interest checking accounts, and more.

Sign up Bonuses. There are several bonuses out there, such as this Chase promotion for up to $300 when you open an account. These bonuses usually require a larger minimum of $10,000 or more.

See More: 20 of the Best Bank Promotions and Bonuses

Other things to consider

    • Be sure that the potential banks you look into are FDIC insured (most banks are). Read more about this on FDIC.gov.
    • Know your fees. Do you tend to keep a low balance? Do you sometimes overdraft? Your fees can pile up if you don’t keep enough cash in your account. As a college student, I was guilty of overdrafting several times a year. In fact, I had over $300 in fees in one year alone! Do your research, and know which fees you could incur.
    • Are you planning on financing a car or home in the near future? Selecting an institution with competitive loan rates might make it easier to manage if your loan and bank are consolidated at the same location.
    • You are not restricted to one bank! You can use a combination of brick and mortar banks, credit unions, and/or high-yield online savings accounts.

In my case, I found that there is an advantage to having multiple bank accounts. I have taken advantage of low auto loan rates at one bank; I get reimbursed for ATM withdrawal fees from my online bank; I have a different high yield online savings account for my emergency fund, and I have the option to speak to an actual banker, in person, at another institution.

No matter how many accounts you have, it is important that you ask these kind of questions when choosing your next bank. That way, you will know exactly what services you are getting and how well a bank will fit your needs.

When did you open your first bank account? What’s the biggest learning lesson you’ve come across since then?


What Is Compound Interest and How Can It Impact Your Finances?

Whether you’re heavily involved in your personal finances or take a more hands-off approach, you’ve likely heard about the term “interest.” If you’ve ever used a credit card, you see it on your monthly statement. If you have a savings account, you see it there as well.

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Interest is everywhere in the financial world. More specifically, compound interest is what most financial products use. In this article, we discuss what exactly compound interest is and how it can work for you — or against you.

What Is Compound Interest?

Interest can be calculated in one of two ways: simple interest or compound interest. To calculate simple interest, just multiply the rate by the principal. Since simple interest is so straightforward, it’s easy to determine exactly how much interest will ultimately be charged.

For example, let’s say you have an auto loan of $20,000 with an annual 6% simple interest rate. You’ll pay $1,200 per year in interest.

Resource: Refinancing Your Auto Loan to Save Money

Compound interest, on the other hand, is more variable. Compound interest is calculated on both the initial principal as well as the accumulated interest. In this way, the amount of interest you pay per year, or even per payment cycle, can vary. Each payment cycle, the accumulated interest is combined with the principal to calculate the next payment cycle’s interest.

Let’s look at the same loan amount mentioned above ($20,000), but with compound interest. Instead of a simple 6% rate, you’ll be paying interest on your interest… resulting in an average of $1,395.06 per year in interest. Over the life of the loan, you’ll be paying $1,170.38 more with compound interest versus simple.

Related: Compound Interest Is More Powerful Than You Know

While simple interest is the easier to calculate out of the two methods, it’s rarely used by financial institutions. Credit card issuers, banks, and other financial institutions tend to use compound interest for their financial products — and by looking at how much more you owe with compound, it’s easy to understand why.

How Compound Interest Works in Your Favor

One notable way that compound interest works in your favor is in investing. In particular, if you have a large initial balance and a lot of time to let it grow, compound interest can work wonders for your money. Your money will grow exponentially as you earn interest on not only on your initial balance but also on the accumulated interest. Just as you pay interest on your interest when talking about a compounding loan, you will also earn interest on your interest when talking about a compounded investment.

A good way to explain how compound interest works in your favor is to take a look at how the Rule of 72 works. The Rule of 72 is used to determine how long it’ll take to double your money, given a fixed return rate. You simply divide the number 72 by the annual rate of return. The result is how many years it’ll take to double your money.

Let’s see the Rule of 72 in action:

  • You have $10,000 to invest in an index fund
  • You’re assuming an average annual return rate of 7.25% based on historical data
  • 72 / 7.25 = 9.9 years to double your money
Year Balance at beginning of year Return rate Balance at year end
1 $10,000 7.25% $10,725
2 $10,725 7.25% $11,502.56
3 $11,502.56 7.25% $12,336.50
4 $12,336.50 7.25% $13,230.90
5 $13,230.90 7.25% $14,190.14
6 $14,190.14 7.25% $15,218.93
7 $15,218.93 7.25% $16,322.30
8 $16,322.30 7.25% $17,505.67
9 $17,505.67 7.25% $18,774.83
10 $18,774.83 7.25% $20,136.01

As demonstrated in the table, your initial investment of $10,000 has increased by another $10,000 in just 10 years with the power of compound interest! Of course, stock market fluctuations are unpredictable, and you won’t get exactly 7.25% in annual returns every year. But this gives you an idea of how quickly your money can grow with compound interest.

How Compound Interest Works Against You

Compound interest works against you primarily in situations when you borrow money. Take most loans, for example. The interest that builds on the initial principal can be surprising! The reason you end up paying much more than you initially borrowed is because of compound interest. When you have a loan (or some other form of debt), you continue paying interest until the loan, plus all the interest, is paid.

As you make payments, more interest is compounded onto the remaining balance. Your remaining balance is now composed of both the loan amount and the previous interest added. As mentioned, new interest is then calculated on top of the old interest! If you are making only the minimum payments, you’ll find that you’ll end up paying a lot more than you originally borrowed.

Resource: Power Over Plastic: Seven Tips for Paying Off Credit Card Debt

To avoid letting the negative effects of compound interest put you further into debt, it’s wise to pay off as much as possible each month. For credit card bills, try to get into the habit of paying them off in full each month to avoid interest completely. As for larger debts like student loans or a mortgage, paying even just a little more than the minimum payment each month can result in substantial savings down the road.

Final Thoughts

Compound interest is a powerful concept. Knowing how it works can help you build wealth and manage your debt better. Once you understand how compound interest can work both for and against you, you can take your finances into your own hands and make more informed decisions. The key here is to minimize the amount of interest you pay on your debts and maximize the amount of interest you earn on your investments.

How has compound interest affected your finances in a surprising way?


Tips From a Recovering Procrastinator

Tips from a recovering procrastinator

Co-workers tend to look at me as someone who dives head-first into projects and generally meets deadlines ahead of schedule, so they don’t realize my hidden secret.

I’m a recovering procrastinator.

When I was a student, I did everything at the last minute. I suppose the blessing is that it taught me to work fast. However, the stress made me miserable, and often the results were not my best work. Once I started my career, with so much more at stake, I made a conscious change.

I’m not sure that the natural tendency to procrastinate every really left me, which is why I refer to myself as a recovering procrastinator. I now force myself to jump on every project as soon as it comes up. I know that the longer I delay, the harder it will be to get started. The result is much better productivity, but that’s not why I do it. The truth is that it just makes me happier. There’s an awful lot of stress and misery in being a procrastinator, and once I realized that, I chose to avoid it.

Anyway, I bring all this up because procrastination has a terrible effect on personal finance. The more you neglect your responsibilities or put off saving, the worse your finances will be. So, here are four tips from a procrastinator’s point of view for overcoming the tendency to delay financial decisions:

1. Use automatic deductions to take the effort out of savings

Saving money effectively relies on starting early and being consistent — two things that procrastinators are not good at.

If you find you often don’t get around to putting money into savings, set it up to happen automatically. If your employer sponsors a retirement plan, you can generally have contributions automatically deducted from your payroll.

Check It Out: Today’s Best High-Yield Savings Rates

Even without a retirement plan, you can save money out of your paycheck by having a little more than you need for taxes withheld every week. Financial advisers don’t generally recommend that, but with interest rates so low these days, you aren’t losing much by getting your money a little later. Plus, having a lump sum accumulate automatically is simply a more effective saving method for many people. This saves them fromhaving to make a regular effort throughout the year, and maybe even talking themselves out of saving one month because things are tight.

Finally, check with your bank to see if you can have money regularly transferred from your checking account into a savings vehicle, so you can put more savings on autopilot.

2. You can start saving for retirement before you do any actual retirement planning

Most people realize more savings accumulate if you start early, but when you are young,  retirement planning seems like a big chore that is best put off until you are a little older. Here’s the thing though — you don’t really need to go through a detailed planning process before you start setting aside some retirement money. You know you’ll need that money later, even if you haven’t yet set specific goals.

Related: The Power of Compounding Interest… Even Math Geeks Will Be Amazed

Don’t get me wrong — the planning process is important and you should get to it eventually. It’s just that for most people, setting up payroll deductions or some other savings mechanism is a much smaller barrier than going through detailed retirement planning, so get the money flowing first if you find that easier.

3. Learn to love IRA contributions

IRA contributions have tremendous tax advantages, but they can also be a procrastinator’s dream. First, they extend the official end of the prior year until the April 15th tax deadline (that is, you’ll be able to make a 2017 contribution until April 15, 2018). Then, special “catch-up” contributions are available to older taxpayers who may be a little behind in their retirement savings.

4. Honor the pleasure principle

In psychology, the pleasure principle is simply the idea that a lot of human behavior is motivated by seeking pleasure. Overcoming procrastination does not have to be based completely on puritanical concepts like self-denial and discipline. You can honor the pleasure principle by looking for enjoyable aspects of the task at hand.

Seemingly thankless tasks like retirement planning and saving can be leavened by fantasies about the vacations you’ll take or the things you’ll have time for when you meet your retirement goals. And, of course, work itself goes by much more effortlessly — and often with better results — when you decide to enjoy it. You won’t like everything about your job, but focus on the parts you do like. Then, get as much satisfaction as you can out of that.

Learn More: Balancing Career Satisfaction with Financial Security

I hope some of this is helpful to my fellow procrastinators. Acknowledging and confronting my tendency to put things off has helped in my career and in my personal finances. I’m semi-retired now, so you could say I’ve taken the approach of being a little lazy on the back end of life, rather than on the front end. Still, I got this blog written ahead of schedule — and that feels great.

Any fellow procrastinators out there? What are your favorite management tools and how have you had to work harder at your finances because of this trait?


How to Build Your First Resume

Whether you’re embarking on your first big job, looking for a career change, or getting back into the workforce after an extended period of time, you’re going to need a stellar resume to get your foot in the door. However, a blank page is pretty intimidating, and it can be hard to know where to start.

resumeThe hardest part is getting the ball rolling, though. Don’t put it off for too long, as it’s far better to just bite the bullet and get started. Treat the process as a gradual drafting, ensuring that you don’t miss out on any pertinent selling points or end up with a page that looks thrown together. Remember, this is a potential employer’s very first impression of you — make it a great one!

Learn More: Are You Looking for a New Job?

Chances are that you won’t produce the perfect document the very first time. But by following these steps, and being prepared to do some polishing at the end, you can create a resume to be proud of. Here’s how to get started.

Choose a Template for Structure

An important first step is to understand the commonly-used styles of resumes, and figure out which will serve you best.

A chronological resume is commonly used by those presenting a continuous work history. In it,  different roles and their responsibilities are set out one by one, up to the present. If you have little or no employment to-date, though, this might not be the best choice for you.

An alternative is a skills-based resume, which focuses on the talents and abilities you will use in your new role. These skills might be gathered from vocational school or college, voluntary work, or even places like sports or activity groups. That makes this a good option if you haven’t held a paid position just yet.

The third commonly used format is a ‘mixed’ resume, which includes both a skills section and a short employment summary. If you have done voluntary or part-time roles, or have taken a long break from your professional activities, this style might work best for you.

Using a template is the best way to get a sense of the different structures, and some guidance on the layout and detail expected for each. Luckily, getting your hands on a template is easy. There are free resources out there — such as this one — as well as those you can buy through online marketplaces like Etsy.

Browse the options, and simply download the one you like best (in a format that you can easily download, such as Word). You’re now well on the way to nailing your resume.

Consider the Skills Employers Want

Once you have a resume structure you are comfortable with, you need to put yourself in the shoes of the employers you’re targeting. What are they looking for in a new employee?

The outputs of this exercise will vary wildly depending on the type of role and industry you’re seeking. The skills and attributes needed to become a veterinary assistant will be quite different than those needed when applying for a role as a financial analyst. Knowing your audience is crucial.

The best way to come up with a list of skills, competencies, experiences, or personal attributes that are relevant to employers in your sector, is to look at job ads. Collect a few current or lapsed online ads for the type of role you want to find. What are the key skills described?

Most likely, you will come up with a pool of skills which overlap between similar jobs for different employers. Look for things like organizational skills, teamwork, a passion for customer service, detail orientation, personal drive, and an ability to communicate with colleagues and customers. You may also spot technical requirements such as IT literacy, or familiarity with certain processes.

Resource: 10 Steps on the Career Ladder

Become familiar with the type of thing the employers in your field are asking for. That way, you can be sure to present your personal skills and experiences in a way that matches the need.

Brainstorm

This is the place where most people begin their resume writing process. But by doing the preparation described above, this stage will be far more productive and focused for you.

First, you’re going to brainstorm the experiences, skills, and attributes that you have acquired to date. Then, begin to fit together how these will ‘sell’ you to the employer.

Start with a large sheet of paper. Trust me, this exercise is one place where pen and paper has an advantage over working online. You will want to ‘join the dots’ as you go. Being able to annotate, group, and link experiences with a simple stroke of the pen will make life much easier.

If you have work experience, write this down first. This could be part time, voluntary, or freelance work… it all counts! Now briefly elaborate on the tasks you assumed within these roles, and the skills you needed to carry them out. By thinking in this way, you will create a far more professional listing.

For example, you could simply say, “Helped out my local Girl Scout troop as a volunteer.” A far better statement using this structure, though, would be, “Accompanied my local Girl Scout troop on a week-long adventure trip. This included raising $500 to fund the trip, before leading and supporting groups of 8 girls through challenging activities to help them develop teamwork and survival skills.”

One Story: How I Cut My Spending in Half to Take a Job I Loved

Similarly, “Held a charity car wash event to support the American Red Cross” can become, “Mobilized 10 students to plan, advertise, and implement a charity car wash event for the American Red Cross. We raised $750 after expenses, which was significantly ahead of our target, thanks to using social media to recruit record numbers of customers.”

Carry on the exercise to include the skills and experiences you have gathered through school and college activities. Also consider other areas of life, such as caring for your family, traveling, or taking part in sports, drama, or other clubs. As you go, think about which of these experiences are most valuable to your prospective employers. These will be your priorities in the next step.

Drop in the Details

Now it’s time to build your draft resume. Using the template you have chosen, start with the basics, such as your personal details and educational record.

If you have chosen a chronological style resume, add in the job roles you have held and their corresponding dates (starting with the most recent). Select three or four bullet points that are the most relevant from the exercise above. Include these under the position details, as they will illustrate the responsibilities you took on.

Make sure you include quantifiable data, such as the size of the team you led, the amount of budget you managed, or how you improved efficiency, customer satisfaction, or profitability. Saying, “I implemented new processes which resulted in a 15% drop in customer complaints” helps the reader understand the impact of the actions you describe.

Read More: The Biggest Mistake I Made at My First Job — and How I Learned From It

If you’re using a skills-based resume, then you need to approach the outline differently. You’ll need to group the skills and experiences you have collected in the exercise above. Then, you’ll use these to build your document.

For example, say you identified Teamwork as one attribute that all employers in your field were looking for. You should highlight your skills in this area by grouping three or four relevant examples in bullet point format. Then, add them into your resume. Prioritize the skills you believe employers are really looking for. Then, use quantifiable details to make the examples come to life.

A mixed resume uses a skills section followed by an (often short) employment history summary. Focus on the skills that employers want and build your resume around these. Then, fill out the employment history with a couple of key successes for each role, from your brainstorm list created above.

Whichever style you have chosen, the template is likely to include a more personal section up top. This is often called something like “Personal Statement, ” “Personal Profile, ” or “Career Objective.” This is the absolute first thing that the recruiter will read, and is ideally the hook that will keep them reading further.

Make sure your statement briefly introduces you, highlights what you will bring to the role, and says what you’re looking for in a new position. You should have all the detail you need to write a great personal statement now, from your previous exercises. However, you can check out more about it here.

Check, Edit, Check Again

Well done — you’re nearly finished now!

The last step when writing your resume is to check it over, make changes, and check again. It is helpful to have someone else look over your document to spot any mistakes you might miss. You can even hire a freelance proofreader through a site like Fiverr.com.

Going back over your resume might feel like a drag, but this is the most important stage of all. Typos, grammatical errors, and silly mistakes are the sort of thing that stop a recruiter from reading. They most likely have a large pile of resumes to get through. One that’s rife with poor use of language or simple mistakes will end up in the trash.

Be Careful of These Common Job Interview Mistakes

Once you’re happy with your final document, give yourself a pat on the back. Then, get ready to start sending in applications. If you’re asked for a cover letter, make sure you tailor this to each application to get your foot in the door. You can also check out this guide to writing a great cover — it’s not as hard as you think!

With your eye-catching cover letter, backed up by a knockout resume, you’re well on the way to landing that dream job.


How Much Life Insurance Do You Need?

No one wants to think about death — but ignoring the possibility doesn’t change the fact that you still need to prepare for the worst. A big part of this planning process is buying a life insurance policy.

In writing about how to save money on life insurance, I mentioned that you shouldn’t buy too much coverage. After all, if you buy more insurance than you need, you’re just throwing money away. But that begs the question…

life insurance

How much life insurance do you need?

Unfortunately, there are no easy answers. In fact, my wife and I have bought and re-bought new life insurance policies several times in the past 5-10 years as we tried to get it right. The real challenge for us has been that the “right” answer has been a bit of a moving target. As our income has increased and our responsibilities have grown, we’ve outgrown our coverage.

Given our past experiences, I thought I take some time to share what we’ve learned. Note that I’m talking specifically about term life insurance policies here. I’m a big proponent of the view that you should keep your insurance and investment needs separate — in other words, buy term and invest the difference!

Do you even need life insurance?

Depending on where you’re at in life, it’s possible that you don’t need life insurance at all. For example, if you’re single and have no dependents, you might be able to get away without buying a policy (though it might be a good idea to have enough to cover your funeral expenses). But if others depend on you for your income, then you’ll likely want at least enough coverage to replace your earning potential, at least temporarily.

Related: When Should Millennials Buy Life Insurance?

Life insurance rules of thumb

If you poke around online, you’ll find a number of websites that claim that the ‘best’ approach to determining your life insurance needs is to simply buy a policy that corresponds to a certain multiple of your annual salary. The problem here is determining the correct multiple.

Should you buy a policy for 8x your annual salary? 10x? Why not 12-15x? In the end, this really boils down to what you want your life insurance to do. If you’d want your life insurance policy to provide support for your family for an extended period, you’ll obviously need more. If you’re comfortable with your insurance policy being a short-term stopgap, you can get away with less.

An alternative approach to buying an arbitrary multiple of your salary would be to use an online life insurance calculator. In this case, you enter data on anticipated one-time expenses, ongoing living expenses, timeframe, and so on. Then, the calculator will spit out an answer.

Don’t forget employer-provided coverage

Another factor to consider when determining how much life insurance to buy is whether or not you have coverage from work (and how much). In many cases, as valuable as this sort of coverage can be, it’s important to not become too dependent on it. After all, if you lose your job, you’ll also lose your life insurance coverage.

What about a non-working spouse?

Another important thing to consider is whether or not you have a non-working spouse. On the one hand, you’ll have to decide whether or not to purchase coverage for them (we did, more below). On the other hand, you also have to worry about your spouse incurring expenses that aren’t directly reflected in your salary.

Learn More: How Much Life Insurance Does a Stay-At-Home Parent Need?

Perhaps the most troublesome point in this context is health insurance. In our case, we have great health insurance coverage. Unfortunately, it’s tied to my job. Since my wife stays home with the kids, and since we’d want her to continue doing so at least for awhile, we need to plan for private health insurance.

Other factors to consider

Are you relatively early along in your career path? Do you plan on expanding your family? Do you anticipate any other major changes in the future? If so, then it’s likely that your life insurance needs will change (perhaps dramatically) in the years ahead.

There are two main ways for dealing with these sorts of things. One is to try and project your needs and size your life insurance policy accordingly. The other is to buy the right policy for today, and then simply replace it at some point in the future.

Did You Know? Four Types of Life Insurance That Are a Complete Waste of Money

Both of these approaches have their downsides. Overbuying now means that you’ll spend more than necessary in the short term. However, if you wait to buy more coverage, you run the risk that you’ll fall ill in the interim, and your rates will increase dramatically.

How we approached it

In the end, determining your life insurance needs is a very personal matter, and broad rules of thumb are unlikely to provide you with the right answer. This last time around, my wife and I sat down and outlined exactly what it is that we want from our life insurance policies if something happened to one of us.

In short, we’d both want for our family’s lifestyle to change as little as possible. We have four young kids, and my wife stays home with them during the day. If she were to pass away, we’d need to replace her efforts at home with someone to watch the kids while I’m at work, help around the house, etc. Thus, even though she doesn’t generate any outside income, she provides significant value to the family and we need for her to be insured.

Likewise, if I were to die, we wouldn’t want for her to suddenly have to go back to work. Therefore, we’d need to completely replace my income for the foreseeable future. We’d also need for the payout to be large enough to cover new expenses like private health insurance since our health insurance is currently tied to my job.

How much life insurance do we have?

In the end, we bought a pair of twenty year term life insurance policies to cover us. We selected twenty years because that roughly corresponds to the time at which our kids will be out of the house and completely on their own. At that point, our day-to-day responsibilities, as well as our need for life insurance coverage, will drop off dramatically.

In terms of amounts, my policy is worth roughly 20x the income from my day job. That might sound like a lot, but I also make a decent amount of self-employment income, so it’s a much smaller multiple of my total annual income. On top of this, I also have a limited amount of coverage — 3x my annual salary — through my day job. The nice thing about the employer coverage is that it rises with my salary, such that our total coverage will grow slightly over time.

In my wife’s case, we bought a smaller policy, corresponding to roughly one-third of my coverage. As noted above, it’s important for us to have coverage for her, as we’d want to maintain a very similar way of life for our family even if one of us were out of the picture. We’d need to hire someone to help with the kids, help keep the house in order, etc. However, since my wife doesn’t currently generate any outside income, we can get away with less coverage for her.

Deciding how much life insurance you (or your spouse) need is a very individual process. But thinking about what you want your insurance policy to be able to provide, and the expenses you’d need to be able to cover, is a great starting point.


How to Save Money on Food

Food is an unavoidable expense. We all have to eat and none of us really want to skimp on the food we buy. So, how do we realistically trim that area of our budget?

save food

Luckily, there are many ways to save money on food — whether that’s groceries, restaurant meals, or eating while traveling. It all comes down to planning ahead, looking for good deals, and being resourceful. Here are some tips for saving in each category:

How to Save Money on Groceries

Groceries are something we all buy on a regular basis. In fact, according to a Gallup poll, the average young adult American spends almost $9, 000 in groceries each year! So, saving in this area can make a real difference.

There are many ways to save money on groceries. First, create a shopping list before you go to the grocery store and stick with it. This will help you avoid impulse spending on items you don’t need.

Resource: Save Money at the Grocery Store

Second, buy produce that’s in season to get the best prices. When fruits and vegetables are in season, they are more abundant and cost less. For example, it’s best to buy eggplant in the summer and brussels sprouts in the winter. Here’s a seasonality chart to guide your produce buying.

Third, base your shopping on your grocery store’s weekly sales cycle. When your favorite cereal is on sale, buy it in bulk so it’ll last until the next time it’s on sale. Also take a look at the weekly flyer before making your shopping list. You can meal plan based on ingredients that are discounted so that your pantry is full with discounted items.

Couponing can often be a time-consuming task, but there are apps that make it easier. Go ahead and sign up for your local grocery store’s rewards card — they are almost always free, and you’ll get to take advantage of extra savings on items. Apps like Ibotta will give you rebates on items you may have already planned to buy. You only need to take a few pictures (of the receipt) and scan the item’s barcode, then withdraw your earnings via Paypal.

Related: 5 Ways to Save Big on Things You’re Already Buying

Lastly, shop whenever the last day of your grocery store’s sale cycle is (mine is on a Wednesday). This day is when store managers are likely to apply further discounts on items that haven’t been selling well. That way, they can clear out the shelves before the next weekly sales cycle.

One extra tip: Take advantage of after-holiday sales. For example, stock up on candy after Halloween or buy stuffing after Thanksgiving.

How to Save Money at Restaurants

Even if you don’t go out to restaurants often, it’s still worth learning ways to save money in this area for those special occasions. The first way to save is to skip the drinks, soda and alcoholic. Opt for water instead. Not only is it a lot less calories, it’s usually free!

Another way to save money at restaurants (if you have children) is to go on “kids eat free” nights. Some restaurants offer special days on which kids meals are free — MoneySavingMom.com has a great master list of these restaurants and which days they offer deals. This can save you a good amount of money, especially if you have multiple children.

Third, go out for lunch instead of dinner. Restaurant menus tend to be similar between lunch and dinner, so you can get the same entree. The main differences are portion size and price. Lunch entrees tend to be a bit smaller and cost less. You can have the same restaurant service experience at a fraction of the price if you go at lunchtime instead of in the evening.

Lastly, buy discounted restaurant gift cards. You can find gift cards online to your favorite restaurants and land great deals. CardPool.com is one website that offers such deals. You can find $25 restaurant gift cards for as little as $10! That’s a savings of $15 off the bat, just for buying the card instead of paying with cash. Many rewards credit cards also offer discounted gift cards, where you can get more bang for your cashback buck. For example, Discover often offers $25-for-$20 or even $50-for-$25 cards through their rewards portal. Not only are you using cashback rewards (ie: free money), but you’re getting extra free money on top of that!

One extra tip: Take full advantage of restaurants that offer free appetizers. For example, some Mexican restaurants serve free tortilla chips and salsa before meals, and Italian restaurants often offer bread. Eating the free appetizers may satiate you enough so that you can order a smaller, cheaper entree.

How to Save Money on Food While Traveling

When traveling, choose your hotel wisely to save money on food costs. If the price is comparable to that of other hotels, opt for one with continental breakfast. Having this free meal each day can save you a lot, especially if you have a long stay. If you can, choose a hotel room that has a kitchen in it — or at least a mini fridge and microwave. This will help you prepare meals at your hotel and not have to eat out all the time.

Here You Go: Frugal Travel Tip: Rebook Your Hotel to Save More Money

While you’re traveling, you may be on the run a lot. To fuel yourself, make sure you pack snacks. These on-the-go mini meals will keep you going throughout the day. They will prevent you from getting hungry to the point where you want to make an unplanned stop at a food spot.

Third, buy groceries at a local grocery store. Just because you’re traveling, it doesn’t mean you have to eat out for every meal. You can experience your destination’s culture by buying local groceries that people in that area enjoy.

Learn More: How to Save Money on Airline Fees

Lastly, just plan ahead. If you know there are certain restaurants you want to go to, make a schedule and budget, and stick with it. Knowing where you want to go and how much you want to spend will save you money by helping you avoid any impulse buys.

One extra tip: Bring a reusable water bottle. Bottled water can be expensive, especially at airports. Keep your reusable water bottle and fill it up whenever there’s an available drinking water fountain. (Be sure to empty it before you go through TSA, though, or they’ll make you either toss the bottle or go back through the often-lengthy line. I learned this the hard way when I had to toss my brand new, pricey bottle, as I didn’t have time to go through the line again.)

Final Thoughts

Food is something we all have to buy, whether it’s groceries, restaurant meals, or food on the go. Finding savings in this category can really add up and help with your budget. Hopefully, you are able to trim your expenses both at home and while traveling using these tips.

Do you have other money-saving tips that our readers would find helpful? Share them below!


2017 Traditional and Roth IRA Contribution Limits

If you’re planning out the rest of this year’s finances, chances are you’re paying attention to the IRA contribution limits for 2017. As a reminder, the limits shown for 2017 are NOT the numbers you will use to file your 2016 taxes in the next couple of months (you’ll want the 2016 numbers for that). These, however, are the numbers you will want to reference when planning your contributions for the rest of this year.

Take full advantage of the account(s)

The easiest way I’ve found to ensure that you max out your IRA (gotta take every advantage the government will give you!) is to simply spread out even contributions throughout the year. So, with this year’s IRA limit being $5, 500, you’ll want to contribute just over $458 a month, from January through December.

What if you receive an unexpected windfall this year or get a raise? Do yourself a favor and put some of that toward your retirement accounts first. Then, come the end of the year, you won’t be stressing about whether or not you’ve hit your mark. (Your deadline actually isn’t December 31st, but more on that below). You might even be able to max out the account earlier in the year. Then, you’ll have wiggle room in your budget for the holidays or to put extra toward savings.

How much can you contribute?

As you can see from the table below, nothing has changed yet again this year as far as IRA limits go.

Year Under Age 50 Age 50+
2002-2004 $3, 000/year $3, 500/year
2005 $4, 000/year $4, 500/year
2006 $4, 000/year $5, 000/year
2007 $4, 000/year $5, 000/year
2008 $5, 000/year $6, 000/year
2009 $5, 000/year $6, 000/year
2010 $5, 000/year $6, 000/year
2011 $5, 000/year $6, 000/year
2012 $5, 000/year $6, 000/year
2013 $5, 500/year $6, 500/year
2014 $5, 500/year $6, 500/year
2015 $5, 500/year $6, 500/year
2016 $5, 500/year $6, 500/year
2017 $5, 500/year $6, 500/year

A few notes…

Traditional and Roth IRA contributions are added together

First, note that this limit is a combined limit for traditional and Roth contributions. While you can contribute to both accounts in the same year, the total contribution cannot exceed the $5, 500 (or $6, 500) limit.

Contributions may or may not affect your tax bill

Second, your traditional IRA contributions may be tax deductible. This depends on whether or not you’re covered by a retirement plan at work, and how much money you make. Details can be found here.

You might make too much for a Roth IRA

Third, you will need to ensure that your MAGI (modified adjusted gross income) does not exceed the eligibility cap for contributing to a Roth IRA. For 2017, this cap has increased and begins at $118, 000 for single filers and $186, 000 for married filers. At that point, an eligibility phase-out begins; once you reach the maximum threshold ($133, 000/single and $196, 000/married), you are no longer eligible to contribute without utilizing a backdoor Roth (a topic for another day).

Status Income
Can Contribute to Roth IRA?
Single Filers $0 – $117, 999 Yes, up to $5, 500 (or $6, 500)
$118, 000 – $132, 999 Limited contributions allowed
$133, 000+ NO
Married Filers (combined income)
$0 – $185, 999 Yes, up to $5, 500 (or $6, 500)
$186, 000 – $195, 999 Limited contributions allowed
$196, 000+ NO

December 31 is NOT your deadline

Finally, remember that you can make contributions for 2017 all the way up to April 15th, 2018. Thus, if you still haven’t gotten around to it making your 2017 contributions by the end of the year, you still have a little bit of time. However, I would still recommend front-loading your tax-advantaged accounts as much as possible, so you can end the year without worrying about maxing out contributions.

 


Should You Pay Off Your Mortgage Early or Invest?

Should you pay off your mortgage early? Or should you focus on investing with your spare cash? This is one of the most hotly debated topics in personal finance, with vocal proponents on both sides. Today, I thought I’d take a look at this issue from both angles and then share our approach with you.

invest or mortgage

Why you should pay off your mortgage early

One of the biggest advantages of paying off your mortgage early is peace of mind. Once you’ve paid it off, you’ll wake up every morning and fall asleep every night knowing that the roof over your head is 100% yours. For many people, you can’t put a price on that sort of security.

Beyond the comfort/security aspect, paying off your mortgage early is a bit like locking in a guaranteed investment return. For every dollar that you pay early, you’re “earning” the interest that you would’ve otherwise paid on it over the balance of the loan period. This sounds great, right? Well…

The flip side of the “guaranteed investment return” argument is that mortgage interest rates are often quite low. On top of that, interest payments on a mortgage are also tax deductible (for those that itemize). These factors make early payments lose a bit of their luster.

Resource: Paying Off Your Mortgage Early: Some Things to Consider

Another advantage of paying off your mortgage early is that doing so protects you from yourself. While paying the minimum on your mortgage and investing the difference might sound like a great idea, there are no guarantees that you’ll actually follow through on the second part of the equation.

To see how long it might take you to payoff your mortgage, there’s a mortgage payoff calculator at this site for mortgage calculators

Why you shouldn’t pay off your mortgage early

The biggest downside to paying off your mortgage early is the (potentially large) opportunity cost that you’ll face. By this, I mean that you’ll be giving up investment returns that might significantly outpace your mortgage interest rate.

In other words, why pay off a 5% mortgage when you could be earning 8-10% on that money? Of course, one only has to look at the past year to know the answer… Those sort of returns aren’t guaranteed, whereas the mortgage savings are.

Another important point to consider is the effect of inflation. Over time, inflation erodes the value of the dollar. This means that your future mortgage payments will effectively cost less than they do now, as the money you’ll be sending in won’t be worth as much in terms of “real” buying power.

What are we doing?

Instead of pretending to know what’s best in your situation, I though I’d tell you what we’re doing. We’ve actually gone back and forth on this issue, but ultimately decided to do a bit of both. And yes, I know that answer is a total cop-out, but it is what it is.

We are currently in the fortunate position of being able to max out our retirement accounts while having enough left over to put some extra cash toward our mortgage and to work on building up a non-retirement portfolio. So, that’s exactly what we’re doing. I view it as “extra diversification.”

A bit over a year ago, we refinanced from a 30 year fixed rate mortgage down to a 15 year fixed rate mortgage. In doing so, we cut our time horizon in half. Beyond that, we’ve been sending in an extra principal payment every month, further reducing the time until we’re mortgage-free.

Related: 30 Years or 15 Years — Which Is a Better Mortgage Choice?

Admittedly, this hasn’t been an easy decision for us, and we’re still tempted to waver at times. After all, now is a great time to refinance, and I also suspect that there’s a good bit of inflation looming just around the corner.

Given the above, we’ve been tempted to refinance into a rock bottom 30 year fixed rate mortgage and pay it off as slowly as possible. At the same time, we would focus on building our investment portfolio. However, a wise man recently reminded me that “pigs get fat, but hogs get slaughtered.” In other words, it pays to be greedy, but not too greedy. In the end, we opted to stay the course.

What about you?

Where do you stand on the mortgage pre-payment issue? Are you looking to get out of debt come hell or high water? Or are you paying off your mortgage on schedule while focusing on your investments?


Top 5 Financial Moves to Make This Year

With a new year comes the chance to have a fresh start. According to a Fidelity study, more than one-third of Americans set a financial resolution for 2017. Whether or not you set a financial resolution, though, improving your finances is likely still important to you. To help with this, we came up with a list of the top five financial moves to make this year.

5 financial moves

1. Create a Realistic Budget

A budget is simply a plan for your money. It can be as minimal or as comprehensive as you like. What’s important is that you know how much money you bring in versus how much money you spend and save.

A realistic budget is one that you can sensibly stick to over time. To create such a budget, you’ll need to track your expenses for a few months. You can do this by looking at your bank account and credit card statements and seeing how much you’ve spent in previous months. You can also use a tool like Personal Capital or Mint to track your expenses for you.

Learn More: How to Budget If You Hate Budgeting

After you’ve tracked your monthly spending, you’ll need to decide how much you can reasonably save each month. If the amount you want to save each month is doable based on your current spending habits, great! Otherwise, you may have to reduce your spending in order to meet your savings goals.

2. Build an Emergency Fund

An emergency fund is an amount of cash set aside for use in the event of a financial crisis such as job loss or a large expense. If you don’t have an emergency fund already, this is the year to build one. Aside from the obvious financial benefit, an emergency fund also provides a peace of mind that’s priceless.

Resource: How to Decide If an Expense Is Emergency Fund-Worthy

To build your emergency fund, you can set it up like any other savings goal you have. You can decide on an amount to be transferred from your bank account into the savings account on a regular basis – for example, every two weeks or once per month – until you reach your goal. Personal finance experts recommend having three to six months of expenses saved in an emergency fund.

Your emergency fund should be liquid, meaning that it can converted into cash quickly. For this reason, it’s a good idea to keep your emergency in a savings account. To get the most interest on your money, consider an online-only bank such as **add affiliate link!!** Capital One 360 or Ally. Online banks offer high-yield savings accounts with competitive interest rates compared to traditional banks.

3. Save for Retirement

If you’re like many who have access to employer-sponsored retirement plans, make sure you’re contributing at least up to the employer’s match if applicable. The good thing about employer-sponsored 401(k)/403(b) plans is that the money comes out of your paycheck pre-tax. This reduces your taxable income for the year. It also makes it a bit easier to save because you won’t have to worry about any manual transfers.

If you’re self-employed, you can still save for retirement. You can save money in a Roth IRA or a traditional IRA. There are no income limits for contributing to a traditional IRA. But to contribute to a Roth IRA, there are income limits. Both retirement accounts offer tax benefits, but in different ways. Traditional IRA contributions are tax deductible, but the withdrawals are taxed in retirement. Roth IRA contributions aren’t tax deductible, but the withdrawals are tax-free in retirement.

Resource: Current IRA Contribution Limits

4. Review Your Insurance Policies

Review all of your insurance policies to make sure you and your family are substantially covered this year. One major insurance policy that you want to be sure to review is your health insurance. A large medical expense could put you in debt if you’re not adequately covered.

The biggest decision you’ll probably have to make is whether to enroll in a high-deductible health insurance plan or a regular health insurance plan. If you have a high-deductible health insurance plan, you’ll be eligible to contribute to a health savings account, which has multiple tax benefits. On the other hand, a regular health insurance plan will give you more predictable medical costs without you having to foot a large bill upfront before your insurance kicks in.

Other insurance policies to review include your life insurance, car insurance, homeowner’s insurance (if you own a home), and renter’s insurance (if you rent your home).

5. Determine Your Lifetime Goals

The last financial move to make this year is to determine your lifetime goals. What do you want achieve? Do you want to retire early? Do you build your own business? Whatever your lifetime goals are, you’ll need to take a look at how your finances fit into that picture. If you want to retire early, you’ll need to make sure you are contributing enough to retirement accounts now to fully fund your lifestyle in the future. If you want to build your own business, you’ll need to set income goals and profit projections to make sure you’re on track.

When you’re clear on what your lifetime goals are, it makes it easier to make decisions now. It makes it easier to say “no” to things that don’t fit into your plans and “yes” to opportunities that will further your progress.

Final Thoughts

As you can see, these financial moves are pretty involved. Each one requires some effort on your part. The good news is that these recommended actions can have a positive impact on your finances and your life overall.

I like to look at personal finance as one pillar of personal development. When you manage your money effectively, you are taking control of your future. Just take things one day at a time, and before you know it you’ll be making substantial progress by the end of the year.