Rohit Chopra, director of the Consumer Financial Protection Bureau, faced an intense barrage of criticism from Republicans on the House Financial Services Committee Wednesday in his first appearance before the committee since Republicans took over the House majority in January.
Bloomberg News
Republican lawmakers in the House Financial Services Committee turned the rhetorical screws on Consumer Financial Protection Bureau Director Rohit Chopra Wednesday, accusing him of pursuing regulatory objectives in order to help President Biden win reelection and failing to take industry concerns into account with his agency’s proposals.
At the outset of what was to be a four-hour hearing Wednesday, Rep. Andy Barr, R-Ky., set the tone of the hearing by calling the CFPB “an appendage of President Biden’s reelection campaign.”
Barr, who led the hearing in the absence of committee chairman Rep. Patrick McHenry, R-N.C., lambasted Chopra for labeling all fees “abusive,” and for targeting so-called junk fees. He launched into a tirade about Chopra evading the rulemaking process and engaging in what he called “McCarthyism.”
“You use compliance bulletin, circulars and advisory opinions to sow doubt and confusion in the marketplace,” said Barr. “You vilify an entire industry simply because they are politically unsavory in your opinion. The practice of name-and-shame first, verify later, isn’t consumer protection, it’s McCarthyism.”
Rep. Blaine Luetkemeyer, R-Mo., took up the same line of questioning, asking Chopra whether companies are required by law to abide by pronouncements made in blog posts and speeches.
“Since public statements are not rulemakings or official actions, and the guidance you issue is not legally binding, are financial institutions and firms within their rights if they do not adhere to your proclamations?” Luetkemeyer asked. “This is very concerning because you turn around and you threaten different entities all the time. You’ve become the greatest extortionist in the history of this country.”
The grandstanding became too much for Rep. Juan Vargas, D-Calif., who complained that the committee’s chair failed to intervene to stop the name-calling.
“The hyperbole today is actually rather remarkable,” said Vargas. “Are you the greatest extortionist? Is that true?”
“Obviously that’s not true,” Chopra replied.
“I wanted to give you the opportunity to react to that,” Vargas said. “Are you beating the stuffing out of the free enterprise system? The accusation was of McCarthyism. You heard it, I heard and it wasn’t defined. I hope that we’re a little more careful with our language around here when we accuse people of McCarthyism, extortionism and all these other things.”
CFPB hearings tend to devolve into unproductive partisan brinkmanship, in part, because of the hearing format, in which each lawmaker has five minutes to ask questions.
Many Democrats on the committee lobbed softball questions that allowed Chopra to take the floor. On credit card late fees, Chopra sought to explain that Congress, in passing the Credit Card Accountability Responsibility and Disclosure Act of 2009, known as the CARD Act, prohibited unreasonable and disproportionate penalty fees. Credit card issuers can charge more than the $8 late fee, known as a safe harbor, in order to recoup costs.
“Lenders should want their customers to pay back and pay on time,” Chopra said. “We don’t want a system where people are happy when someone doesn’t pay on time, or when they’ve missed it by a day.”
Rep. Bryan Steil, R-Wis., questioned the tradeoffs associated with lower late fees.
“Nobody likes paying late fees and you don’t want people to get into financial distress,” Steil said. “You don’t think that this will lead to more expensive credit?”
Chopra said he expects competition will lead some consumers to switch credit card providers.
“What I think will happen is that rather than a business model built on penalties, they’ll compete just like other banks and small banks do that offer credit cards, which is really an up front or an annual fee or interest rates and others, I think the competitive process will work better,” Chopra said.
Lawmakers also criticized Chopra for not doing more to promote financial literacy. Rep. Young Kim, R-Calif., said the CFPB should use the roughly $500 million in its civil money penalty fund to promote financial education while others suggested the money should also be used to prevent frauds and scams. Lawmakers on both sides of the aisle asked Chopra about privacy and data protection issues as the CFPB.
Rep. Stephen F. Lynch, D-Mass., said his constituents are complaining about chatbots and other forms of artificial intelligence used by banks and financial firms to resolve problems.
“I’m just wondering, are we meeting our obligations to consumers when we allow banks to put a chatbot interface between them?” Lynch asked.
Chopra said that the CFPB is reminding institutions that “they still have to adhere to important legal protections and make sure that they’re not violating privacy” laws.
Republican lawmakers also questioned Chopra about a data breach by a CFPB employee in February. Rep. Bill Huizenga, R-Mich., said the bureau’s staff did not answer questions about the breach.
“Your staff couldn’t give basic answers and sometimes there wasn’t any answer at all,” Huizenga said. “I’m sorry to be suspicious here, but I know how D.C. works and it makes me wonder, once again, your sort of dismissive attitude towards Congress that has come across in previous hearings and previous interactions.”
Several Republican lawmakers told Chopra that they consider the CFPB to be unconstitutional, even as Democrats defended the agency. The CFPB faces a challenge to its funding before the Supreme Court, which is expected to hear oral arguments in October in a lawsuit filed by two Texas trade groups.
Committee members asked Chopra about a wide range of consumer topics, from credit repair scams to complaints about cryptocurrencies, for-profit debt relief companies to tenant screening firms.
Rep. Ann Wagner, R-Missouri, took Chopra to task for not publicly disclosing his calendar on the CFPB’s website.
“Would you say that a six-month hiatus for public disclosure is your way of showing commitment to transparency?” she asked. “I’m seeing an extremely troublesome theme here.”
Whether you’re jonesing for an epic Antarctic holiday or an extended weekend in the Bahamas, cruises can be a good way to let someone else take the reins for your vacation. But planning a cruise can be confusing, especially when there are several types of cruises, destinations and price points.
When planning a cruise, you’ll want to consider a variety factors, especially if you’re dealing with limited time or a tight budget.
Let’s look at how to plan a cruise, from your budget to booking, and what to expect along the way.
1. Establish a budget
The first step in planning a cruise is deciding how much money you want to spend. Costs for a cruise will vary based on a number of things, including:
Cruise line.
Destination.
Cruise length.
Room type.
Number of guests.
Onboard spending.
Offshore excursions.
If price is top-of-mind, consider a budget-friendly cruise line. These cruise lines tend to be less glamorous, and you’ll likely be paying for more optional add-ons, such as drink packages and excursions. But you’ll still find plenty of activities to keep you entertained, no matter who you’re cruising with.
You may find deals for as little as $40 per person per night, not including gratuities or any onboard spending. For example, we found a deal for a four-night cruise from Long Beach, Calif., to Ensenada, Mexico, for $169 per person on Carnival.
On the high end, you’re looking at costs as high as $90,000 per person — though these cruises tend to be much longer (nearly six months!) or feature exotic destinations and itineraries.
For example, a 168-night cruise on luxury cruise line Regent Seven Seas — with dozens of stops in ports around the globe — costs more than $97,000 per person.
Of course, your budget will likely fall somewhere in between these low- and high-end examples. The bottom line is that it’s important to plan for a cruise that fits your budget. With such a wide variety of options, odds are you’ll find a price point that’s comfortable for you.
2. Decide on cruise length
Once you’ve decided how much money you’re willing to spend, you’ll need to see how much vacation time you have available.
If you live far from a port, be sure to factor in the time it takes to get to and from the departure city. Add that to the length of the cruise, and that’s how many vacation days you’ll need.
To optimize your time off, you’ll probably want to try to leave from the closest port possible. If you’re on the East Coast, for example, leaving from Miami would require far less travel time than leaving from L.A.
If you’re taking a week-long vacation, a five-night cruise would give you the time to arrive in the port city the day before departure and then return home without feeling rushed.
3. Choose a destination
How can you plan for a cruise without giving some thought to the destination? The cruise industry is worth more than 7 billion dollars and includes routes all over the world.
If the number of destinations seems a little overwhelming, remember that you’ve already narrowed down your options by establishing your budget and cruise length.
Many search engines will allow you to look for cruises using these parameters — in addition to helpful filters like departure port and desired departure date.
Your cruise dates will likely affect your destination options. For example, if you want to depart in February, you likely won’t find any cruises going to Alaska. And booking a Caribbean cruise during hurricane season might result in a rerouted itinerary — or even a canceled cruise — if a hurricane forms in the Atlantic.
4. Compare cruise lines
Different cruise lines cater to different clientele. Some are geared toward those who want to travel in luxury, while others are designed for spring-breakers or families.
If you’re looking forward to a quiet getaway in the Caribbean but choose a Carnival cruise in the middle of April (i.e. prime college spring break time), you may not have much fun when the pool party gets going.
Do some research on the demographics each cruise line attracts. For a family-friendly cruise, sailing with Disney or Royal Caribbean might be a good choice. Those looking for a calm, adult-only atmosphere may want to choose an itinerary on Viking Cruises.
5. Book your cruise
There are several different ways to book a cruise, including reserving directly with the cruise line, using an online travel agency or even working with a travel agent.
Each method has its advantages. Booking through an online agency can save you money. Compared to booking directly through the cruise line, though, it may not be as easy to make changes or cancel your reservation if something comes up. If you book through a travel agent, you have the advantage of being able to arrange your cruise and airfare at the same time.
It’s a good idea to compare cruises across all available platforms, because pricing and special add-ons vary. Last-minute cruises can get you serious discounts, as can stacking cash-back opportunities with shopping portals such as Rakuten.
6. Complete your documentation
Once you’ve booked your cruise, you’ll need to submit some documentation, such as an ID, a health declaration, and a credit card to keep on file.
Most of the time, you can also choose to pre-book activities and excursions, though this may depend on the cruise line you’re sailing with.
You’ll want to find out if you need a passport or any visas for your cruise — this will depend on where your cruise is departing from and where it will stop. Be sure to verify this soon after booking your cruise, as obtaining or renewing a passport can take time.
Planning a cruise recapped
Cruises can be an exciting way to visit multiple destinations in a single trip.
When planning a cruise, you’ll want to decide how much you’re willing to spend, where you want to go and the amount of time you have available.
Aside from that, consider what types of cruises you’d like to go on and the people you want to be around. Once everything is taken care of, all that’s left to do is enjoy!
How to maximize your rewards
You want a travel credit card that prioritizes what’s important to you. Here are our picks for the best travel credit cards of 2023, including those best for:
Online banks, often referred to as neobanks (we’ll use both terms in this article), have increased in popularity over the last decade. To keep up, most traditional banks have improved their online presence and introduced comparable digital-friendly services.
But with all these new banking options available to consumers, it can be overwhelming to figure out if a traditional or neobank is best for your own financial goals.
Let’s break down the similarities and differences between neobanks and traditional banks, so you can make an informed decision.
What’s Ahead:
There is a difference between a neobank and a traditional bank with a digital presence
As neobanks increase in popularity and traditional banks try to compete by establishing a stronger digital presence, it can seem, at a quick glance, like they’re now all pretty much the same.
And while they may offer some of the same services, neobanks and traditional banks remain fairly different in their features and capabilities. Here are some of those differences at a glance:
Neobanks (online banks)
No physical locations – Neobanks don’t have physical locations you can visit, so you’ll do all your banking via the web or a mobile app.
Speedy account opening process – Opening an account with a neobank can be quick and easy. You’ll need to provide some personal info and identification documents, but once you identify yourself, your new account can be up and running in a matter of minutes.
A user-friendly interface – Neobanks focus on the user experience, making banking as easy as possible via online platforms.
Some ATM fees – Online banks may offer ATM access, but you’re likely to encounter in-network fees.
Few to no fees – Neobanks are the clear winner regarding fees. They don’t always have the expenses that traditional banks do — no buildings mean fewer overhead costs — so they can pass some of those savings on to the customer.
Better interest rates – Neobanks usually offer better interest rates thanks to the low overhead.
Phone or online customer service – While neobanks do have customer support teams, more often than not you’ll find yourself scrolling for answers in support forums or chatting with an online bot to get the help you need.
Traditional banks
Local branches are available – Banks have actual buildings, called branches, that you can visit on foot or via drive-through. The branch staff usually consists of bank tellers and other employees who can take care of all your banking needs IRL.
Opening an account can take a while – At a traditional bank, you’ll likely have to bring documentation and visit a branch during regular business hours. You could find yourself waiting anywhere from five minutes to an hour to open an account.
Some online banking options – Traditional banks frequently offer a banking website or mobile app to conduct some of your transactions, although they may not be as robust as a neobank.
Large ATM network – Since traditional banks have bank branches, they’ll also offer ATM access in their network of ATMs.
Typically come with fees – A traditional bank might charge $10 or even $15 per month to have a checking account, plus other fees.
Lower interest rates – You might get 0.10% APY (or even 0.01% APY) on savings accounts at a traditional bank.
In-person customer service – Here’s where traditional banks certainly have the edge. After all, part of all that overhead that keeps them charging more is staffing bank branches with friendly faces.
Read more: The history of the biggest banks in America
Benefits of neobanks
Source: Giphy.com
A neobank is a new concept to many, which can create some distrust, especially among older consumers. But neobanks are typically as safe as traditional banks, and their funds are FDIC-insured.
Not only that, but we’ve all become far more digital savvy over the past several years, and so a digital-only approach is far more suited to today’s market than it was in previous generations.
Let’s break down some of the other benefits:
Better rates
One of the most significant benefits of most neobanks is that they typically offer much better interest rates on your savings accounts. Since neobanks have lower overhead, they can pass those savings on to the customer.
The interest rates with neobanks can be as much as 10x higher than at standard banks. Granted, it might not be as much as you’re hoping for — say, 1.0% APY — but that still beats the 0.10% APY of typical traditional banks.
Read more: Best online savings accounts
Low (or no) fees
In addition to competitive interest rates, most neobanks offer their customers significantly lower fees than traditional banks.
Some neobanks offer fee-free checking or savings accounts with no minimum balance requirement. This perk alone can save you about $10 or $15 a month, depending on the bank.
You might even find a bank that doesn’t charge ATM, transfer, or other fees.
Read more: Best online checking accounts
Who should use neobanks?
People who are living their best online life — Neobanks will require you to be comfortable using an app or website to use your account. You can do it all from your laptop or phone: check your balance, order a new card, deposit a check, transfer money, and so much more, and often with little to no fees. If you can confidently open an app and follow on-screen directions, then using neobanks will be extremely easy.
People who are tired of paying for their money — One of the best things about neobanks is that most accounts are free to open and maintain. And most accounts boast no minimum balance requirements, making them attractive to young, tech-savvy consumers like us, with little money but big financial goals.
People who are short on time — Neobanks use streamlined operations to create a faster experience. Services like opening accounts, depositing checks, and sending money to friends are quick and easy. And with 24/7 online customer support, someone with an overnight work schedule and account issues won’t need to call out of work to fix their problems.
Benefits of traditional banks
Source: Tenor.com
Though neobanks sound extremely attractive, there are some benefits to using traditional banks. Neobanks are a newer concept, and someone who is comfortable with traditional banking (especially older consumers) may not want to step out of that routine.
Here are some other perks, as well:
Personal service
A considerable benefit is that traditional banks can offer you more personalized services. Depending on the bank you choose and the tellers who staff your local branch, you might wind up banking at a place where everybody knows your name.
These employees can offer a more customized approach when setting up your banking products, such as loans and credit cards, based on your personally identified financial goals.
Traditional banks are definitely in your favor if you prefer a personal touch to your banking experience.
Range of service
There are services that traditional banks can offer that neobanks don’t. Think services like currency exchange and safe deposit box rentals, thanks to having brick-and-mortar locations.
Most traditional banks offer a wider range of financial products as well. You can use one bank to do it all: buy a house, refinance a car, set up emergency savings, invest for retirement, and manage your monthly expenses in a checking account. With neobanks, you may need to use different banks for different financial features.
Read more: How to choose a bank: 6 features to look for
Who should use traditional banks?
People who value a personal customer experience — Traditional banks are a better option for those looking for a personal touch to their banking. You’ll be able to pop over to your local branch and see a smiling face (instead of spiraling through the multiple-choice labyrinth of a customer service call).
People who deal with large amounts of cash — The branches that traditional banks have allow you to deposit and withdraw larger amounts of money, as opposed to the daily limit fees placed on neobanks that strictly use ATMs.
People who want to invest and bank together — A considerable amount of traditional banks offer investment services or partner with brokerage firms to offer this service to their clients. This benefit is attractive to those focused on wealth building.
The bottom line
Whether you go with a neobank or a traditional bank depends a lot on your banking needs, not to mention your preferences and budget. For the low-cost, tech-savvy route, neobanks might fit the bill, while traditional banks may be more your speed for the high-budget and high-features path.
Remember, no law says you can have only one account — you might prefer to keep your money at a traditional bank but use an online savings account for the great interest rates. It’s up to you. No matter your decision, you’ll be stashing your cash in a safe, dependable place so it can grow — which is the whole point of a bank account, no matter where you put it.
Odds are you hold at least some, if not all, of your money in a checking or savings account (or both).
Odds are you have at least one credit card (if you don’t, you should remedy that ASAP).
Odds are you have, or have had at one time, some type of loan — be it a student loan, an auto loan, a mortgage, or perhaps all of the above.
While you most certainly recognize these as products offered by banking institutions, you may not have known that none of them are free. Banks have to stay afloat somehow, and they do so in subtle ways like monthly maintenance fees on your checking account or interest on your auto loan.
Below, we’ll cover the ways banks earn money so they can continue to help you manage yours.
What’s Ahead:
How do banks make money?
When you think of a bank, what comes to mind? Checking accounts? Credit cards? Loans? Banks provide a wide range of services, but the most prevalent (and the most relevant to me and you) fall under two categories: money held for customers and money loaned to customers.
Banks need to earn some sort of revenue from these services, and they do so in two primary ways.
Fees
Fees are the main way banks make money on the cash they hold for customers.
If your checking account has a monthly maintenance fee, for example, it’s part of that bank’s income. If you recently traveled overseas, you may have noticed a fee for using your credit card abroad. This is a foreign transaction fee, and it’s another means of money-making.
Here are some examples of bank fees, many of which you’ve probably paid:
Source: Giphy.com
Monthly maintenance fees
Credit card fees
ATM fees
Foreign transaction fees
Overdraft fees
Interchange fees
Origination fees
Late fees
And so on…
Read more: How to stop paying ATM fees
Interest
Interest is how banks make money back on the cash they loan to individuals and businesses.
When you borrow money from your local bank to buy a new car, for example, the bank isn’t doing you a favor; they’re providing a service, and you have to pay for that service. The primary way you repay the bank for loaning you money is through interest.
Some of the products banks charge interest on include the following:
Source: Giphy.com
Home loans
Auto loans
Personal loans
Business loans
Student loans
Payday loans
Credit card debt
And so on…
Other bank income streams
While banks make a significant chunk of their income through various fees and interest, their revenue is truthfully much more diverse.
Banks also provide capital markets services, which essentially means they work with investors and businesses who need help with a range of financial activities. Some clients may need help funding a project. Others may need assistance with underwriting and/or building equity. Another business may require the support of an advisor or team of advisors through a merger or an acquisition.
Capital markets services are diverse, but they’re also inconsistent. This is why many banks lean more heavily on revenue from fees and interest.
Do all banks make money in the same ways?
In short, no.
While many banks bring in the bulk of their income through interest and fees, the weight they place on different income streams varies. This is because banks offer two types of services: commercial and investment.
Some banks focus on commercial banking. Some focus on investment banking. Others, but not all, offer products that fall under both categories, and those that do may make more money through one type of banking than another.
Knowing what your bank offers will help you understand why they charge the interest and fees they do.
Commercial banking
Commercial banking is likely more familiar to you, because commercial products are available for individuals and small to mid-sized businesses. In fact, when you hear the term “bank,” more often than not it’s in reference to a commercial bank. The products offered by a commercial bank include deposit accounts (checking and savings accounts) and loans (auto loans, home loans, etc.).
Read more: Which are the best banks?
Investment banking
Investment banking refers to products and services for the “big boys.” We’re talking corporations, high-net-worth individuals, and even governments. These institutions offer financial advice and wealth management, engage in trading activities, and more.
What about credit unions?
At a glance, it may seem like credit unions and banks are virtually the same, and in many ways they are. For instance, both charge customers interest and fees. One notable difference, however, is that credit unions are nonprofit businesses that are owned by their customers, while traditional commercial banks are owned by shareholders.
Read more: Credit unions vs. banks: Think local, save money?
The reason this difference matters from a money-making standpoint is that credit unions are only making enough to cover their own expenses, while banks are actually trying to make a profit. Consequently, credit unions are typically able to offer lower fees and interest rates for their customers.
This said, one of the major drawbacks to working with a credit union is they’re generally smaller than commercial banks, which means they have fewer branches to work with and fewer products.
Read more: The best credit unions
How to reduce your banking costs
Now that you have a clearer idea of how banks make money, you’ll be able to identify opportunities to reduce those funds. Here are two simple suggestions to trim your banking costs:
Pay attention to bank fees
While every bank must charge some fees and interest to stay in business, there are plenty of “fee-free” services you can consider to cut costs.
For instance, online banks are able to maintain lower costs since they don’t have to pay for physical branches. As a result, they can reduce — and sometimes even eliminate — certain fees, like monthly maintenance fees.
Read more: Online banking vs. traditional banking
Another easy fee to avoid is the overdraft fee; all you need to do is opt out of your bank’s overdraft protection and make sure you monitor your account balance to avoid spending more money than you have available.
Read more: Understanding overdraft protection and fees
Shop around before you buy
Banks may sell similar products, but they don’t all charge the same rates and fees.
As mentioned previously, for instance, online banks are able to offer customers reduced fees, because they don’t have to pay for physical branches. With this in mind, before you open a new credit card or take out a personal loan, make sure you spend some time shopping around and comparing options.
Read more: How to choose a bank
Summary
Believe it or not, your bank isn’t free.
Banks have to make money to stay in business, and they do so in a number of ways. If you have a checking account, you’re paying the bank in fees to store your cash. If you have a personal loan, you’re paying the bank in interest to borrow money. But not all banks have identical income streams and understanding how your bank makes money can help you learn how to trim costs for yourself.
Last Updated: May 25, 2023 BY Michelle Schroeder-Gardner – 73 Comments
Disclosure: This post may contain affiliate links, meaning I get a commission if you decide to make a purchase through my links, at no cost to you. Please read my disclosure for more info.
An emergency fund is something I believe everyone should have. However, according to a report by Bankrate.com, 26% of Americans have no emergency fund whatsoever for when they need money fast.
According to this same report, only 40% of families have enough in savings to cover three months of expenses, with an even lower percentage having the usually recommended six months worth of savings.
This is frightening to me, as having an emergency fund can greatly help a person get through tough parts in life.
For us, we have a 12 month emergency fund.
I’ve always been open about this. I am a rather big worrier about things, and having a large emergency fund gives me peace of mind, especially since we are self-employed and our income can vary from month to month.
Even if you aren’t self-employed, there are many other reasons to have a fully-funded emergency fund:
An emergency fund can help you if you lose your job. No matter how stable you think your job is, there is always a chance that something could happen where you may need money fast. What would you do if you lost your job and didn’t have an emergency fund?
An emergency fund is wise if you do not have great health insurance. This is another reason why we have a well-funded emergency fund. We do not have the greatest health insurance, with our deductible being over $12,000 annually. Having an emergency fund can help protect us if something were to happen to either of us.
An emergency fund is a good idea if you have a car. You just never know if it may need a repair.
An emergency fund is a need if you own a home. One of the lucky things that homeowners often get to deal with is an unexpected home repair. Having an emergency fund can help you if your basement floods, if a hole in your roof forms, and more.
An emergency fund can protect you in many other areas as well. This can include if you have a medical cost for your pet, if you have to take time off work for something, you need to go somewhere far to visit someone who is sick, and so on. The list of reasons for why you might need an emergency fund can be a long one.
Emergency funds are always good to have because they can give you peace of mind if anything costly were to happen in your life. Instead of building onto your stress because of whatever has happened, at least you know you can afford to pay your bills and worry about more important things.
An emergency fund is also wise to have because it can help prevent unnecessary debt. There are too many people out there who count on their credit cards as their emergency fund and that is not a good idea. It can lead to debt spiraling out of control because of high interest rates.
Below is what you need to know about emergency funds for when you need money fast.
Should you have an emergency fund if you are in debt?
Yes! I still think you should have an emergency fund even if you have debt. If you have debt, then the usual recommended amount is to have $1,000 in your emergency fund before you start paying down your debt.
After that amount, you need to determine what you are comfortable with.
How much should be in an emergency fund?
The next question I often hear is “How much should be in an emergency fund?” How much money you decide to keep in your emergency fund is dependent on your specific situation. If you don’t have debt, then I usually recommend at least six months of expenses.
For us, I like to have one year of expenses saved since we are self-employed, own a house (although that will be changing soon), we have a high deductible health insurance plan, and for a few other reasons. There are many reasons for why a person might need money fast, and you need to analyze your specific situation.
Where should you keep an emergency fund?
Your emergency fund is there so that when you need money fast, you can use it. Due to this, you will want to put your money in a place where you can easily take it out. This means you do not want to be penalized for taking the money out and you probably don’t want to invest it in a high risk investment as you don’t want to lose it either.
I prefer keeping an emergency fund in a low risk savings account, such as any basic savings account that you will find at a bank. This way it is easily accessible in case anything were to happen and I needed the money quickly.
You can also save your emergency fund in a CD and/or money market account so that you can earn a little in interest. Keep in mind though that you might earn more in interest because there is a more risk.
How can I save enough money to fully fund my emergency fund?
After reading all of the above, I bet you cannot WAIT to start your emergency fund 🙂
It may be hard in the beginning to start saving for your emergency fund, but everyone has to start somewhere and it’s always best to be prepared for when you need money fast. You can save money for your emergency fund by setting out a certain amount out of each paycheck, or you can work towards making extra money so that you can build up your emergency fund even quicker.
Do you have an emergency fund? Why or why not? How much do you keep in it?
“How can I travel on a budget?” is one of the top questions we receive at TPG.
There’s no question that travel is expensive right now as millions satisfy the itch to travel more. Demand has been through the roof. Inflation and correspondingly high hotel, rental car and airline ticket costs have many would-be travelers throwing up their hands in frustration.
However, there are still many ways to save. In addition to using reserves of points and miles to book hotels and airfare, TPGers have many budget travel tips to help stretch your dollars when traveling.
Here are 22 ways to travel on a budget.
Use membership codes to save on car rentals
AARP webpage showing car rental discounts. AARP
If you’re a member of AAA or AARP, have a Costco membership, are a veteran or work for a large company with a car rental discount code, pull all of these levers. You might be eligible for discount codes you didn’t even know about. A few examples from AARP include 30% off a car rental at Budget or Avis.
Related: How to never pay full price for a rental car
Look beyond traditional car rental companies and locations
TURO
Most people search for rentals at the airport with standard companies like Hertz and Avis. If you don’t find good results, consider off-airport locations or try alternatives like Kyte, Turo and Silvercar.
Related: Delta and Turo launch partnership, allowing travelers to earn 2,000 SkyMiles on 1st rental
Check credit card merchant offers
American Express offers. AMERICAN EXPRESS
Before booking your trip, review your credit cards’ special merchant offers. Multiple issuers offer this option (although American Express is a leader in the category).
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Every program works similarly: Log in to your card account online or through your banking app, review the offers available to you, add the ones you want and make a qualifying purchase using the card for which the offer is registered.
There are no promo codes to enter at online checkout or coupons to print to take to the register. There are likely offers you can activate that will provide discounts on dining, gas and entertainment.
Related: How credit card merchant offers can save you hundreds of dollars every year
Take advantage of free days at national parks
Avalanche Lake in Glacier National Park. CLINT HENDERSON/THE POINTS GUY
Every year the U.S. National Park Service sets aside several days when entry is completely free; options include Martin Luther King Jr. Day in January, the first day of National Park Week in April, National Public Lands Day in September and Veterans Day in November.
Visiting a national park on one of the NPS’ free-entry days can save you up to $35 per vehicle at some of the most popular national parks, such as Glacier National Park and the Grand Canyon.
Stay outside the national parks
The Holiday Inn West Yellowstone. CLINT HENDERSON/THE POINTS GUY
You might dream of a night in a rustic cabin inside a national park, but getting that reservation could be challenging or costly — especially if you can’t pay for it with points.
However, just beyond the park, there’s probably a hotel you can book with points. For example, you could stay at the Holiday Inn in West Yellowstone with IHG One Rewards points; the SpringHill Suites just outside of Zion National Park is a great property if you have Marriott Bonvoy points to spend.
Related: The best campgrounds, hotels and lodges near Yellowstone National Park
Download the T-Mobile Tuesdays app
If you’re a T-Mobile user, you’re in luck: This app is a major perk that will put money in your pocket just for checking your phone on Tuesdays.
To participate, download the T-Mobile Tuesdays app, check the app on Tuesday and claim your discount code. We’ve seen weekly discounts on everything from rental cars to gas, hotels and theme park tickets.
Get discounted gas at Shell through the Fuel Rewards app
At TPG, we love to stack savings. The Shell Fuel Rewards app is a good one to pile on the discounts.
You can link it to other loyalty programs — including American Airlines AAdvantage, Giant Food, Stop & Shop, Advance Auto and more — to receive extra discounts. Also, if you purchase through Fuel Rewards, link to partner retailers such as Petco, Bed Bath & Beyond, Office Depot/OfficeMax and many others to save even more.
Don’t forget to use a credit card that gives bonus points or discounts at gas stations for even more savings. TPG likes the Citi Premier® Card (see rates and fees), which awards 3 ThankYou points per dollar at gas stations, and the Blue Cash Preferred® Card from American Express, which also gives 3% back at U.S. gas stations.
Related: These are the best credit cards for gas purchases
Save on theater tickets in New York and London
Check TodayTix for cheap Broadway and West End tickets if traveling to New York City or London.
The TodayTix app has discounted tickets to various shows available. Prices vary, but most of the top shows currently playing are available on the site and the app.
While not all shows are hugely discounted, TodayTix often runs no-fee promotions. Keep in mind that for some shows, you won’t be able to choose your precise ticket location. Instead, you will pick a section you’d like to sit in.
Related: On with the show! How to get a great deal on Broadway tickets
Save on entrance fees with Bank of America
JOHNNY GREIG/GETTY IMAGES
Bank of America cardholders can enjoy free general admission to more than 225 cultural institutions in dozens of U.S. cities on the first weekend of every month just by showing their cards. It’s through the Museums on Us program that’s been going on for 25 years. It’s open to Bank of America, Merrill and Bank of America Private Bank (U.S. Trust) credit or debit card holders.
Related: 5 reasons to get the Bank of America Premium Rewards credit card
Use your library card for museum entry
Another way to get free museum admission is with a library “lending ticket” — a program where libraries will lend museum passes for a set amount of time.
Also, check if your local museum’s membership comes with ROAM (a reciprocity program across North America). It’s an easy way to get maximum value from a regional (and usually less expensive) membership.
Take a free walking tour
Downtown Greenville, South Carolina. DENNISTANGNEYJR/GETTY IMAGES
Sign up for a free walking tour on your first day in a new city. It’s an inexpensive way to learn about the city and orient yourself.
Look online for options before traveling and sign up in advance if necessary. Then, all you need to do is show up with comfortable shoes and enjoy your free tour.
Although tipping is suggested, you’ll spend much less, even after generously tipping your guide, than you would with a standard tour option. You will likely also meet other like-minded travelers, which can be welcome if you’re traveling alone or looking to make new friends.
If you’re interested in seeing what’s available on your next trip, Google the city you’ll visit and the phrase “free walking tour” to see what comes up.
Dine on the cheap with Seated
A view of New York City restaurants on the Seated app. SEATED
Here’s a fun one: The Seated app allows you to dine out and get paid for it.
The app rewards diners who sign up and eat at designated restaurants with cash they can redeem through gift cards. All you have to do is let the app know you’ll be dining at a location before you take a seat. You can also get gift cards for Uber, Amazon and Starbucks.
Fly on weekdays
Flexibility on which days you fly is one of the keys to getting the best airfare prices. Leisure travelers most commonly book weekend flights, while many business travelers fly on Monday. So, the midweek days — Tuesday and Wednesday — have lower demand and are often the best days to travel for lower prices.
Related: When is the best time to book airfare?
Book vacation packages
AAVACATIONS.COM
Airlines that bundle airfare and hotels as vacation packages can offer better deals thanks to their vast buying power and inventory. These bundles can offer savings of up to 40% off. Savings on business-class plane tickets and high-end hotels can offer some of the best deals.
Also, purchasing directly from the airline gives you a one-stop shopping experience. You can even add a car and activities to your trip at the same time. Plus, you’ll often be able to take advantage of special sales and bonus points and miles offers.
Related: Everything you need to know about saving money with vacation packages
Use a price monitoring tool
A Google Flights tracking page. GOOGLE
Airline fare monitoring sites such as Hopper and Google Flights ensure you get notifications when your trip’s best and lowest prices become available. Set up as many combinations as you’re considering, including different departure and return dates, so that you can get alerts for all possible fare reductions.
Be flexible on destination
If you’re not locked into a fall or winter vacation location (like you would be for a destination wedding or family reunion that you can’t change), try an alternative to find better prices. For example, consider subbing Quebec City in for Paris if you want Old World charm. For scuba diving enthusiasts, skip the expensive long-haul flight to Australia and the Great Barrier Reef and instead head to the second-largest barrier reef in the world in easy-to-access Belize.
Related: 5 key tools and tips for cheap airfare
Hold your deal
If you see a great deal but are not yet ready to book, hold it. For example, Hopper’s Price Freeze allows you to lock in the price of a flight for up to seven days to take more time to finalize plans before you book. Some airlines will also let you hold flights for a small fee. (Remember that all U.S. airlines, by law, allow you to hold and cancel a flight booking within 24 hours without penalty as long as you book more than seven days in advance.)
Re-price your flights and hotels
CLINT HENDERSON/THE POINTS GUY
As long as you’ve booked a hotel, car or flight that can be canceled without penalty, you should make it part of your weekly routine to check for price drops. If you find a lower price, rebook. You can use these same rebooking strategies with points to make dynamic pricing work in your favor for hotel stays so you can save on award nights.
Related: How I saved 33,500 points on upcoming hotel stays
Consider alternative airports
JetBlue’s Airbus A321-LR, which flies its transatlantic routes, sits at the gate in Boston ahead of the inaugural flight to London Gatwick Airport. SEAN CUDAHY/THE POINTS GUY
With prices high, now is the time to be flexible and check all nearby airports. For example, Houston and Chicago have two airports, while the New York City area has three, including Newark Liberty International Airport (EWR) in New Jersey. In Southern Florida, you could easily fly to West Palm Beach, Fort Lauderdale or Miami. It works internationally too: Try Gatwick Airport (LGW) instead of Heathrow Airport (LHR) when flying to London.
It may even make sense to get to one city by flying to another city and then taking a short train ride for the rest of the journey. For instance, you could fly into Philadelphia and catch a train to New York. Strategies like this can help you get to your destination on a flight with better pricing or award availability.
Use positioning flights
Positioning flights are unrealistic for every situation or trip, but they can often offer better award availability or pricing than those from your home airport. Can you reach your destination for a lot less by starting in Seattle or Chicago? Would adding another flight to a different airport save you money or miles? Just ensure you leave enough time between flights to avoid unnecessary travel headaches.
Related: Use positioning flights to get amazing deals
Use points and miles when appropriate
Since you are reading TPG, you may also want to earn points or miles through your everyday spending that you can use to pay for part of your trip. Some credit cards — like the Delta SkyMiles® Gold American Express Card and the Hilton Honors American Express Surpass® Card — can help you earn airline miles or hotel points that you can redeem directly with the airline or hotel. Cards such as the American Express® Gold Card earn transferable points you can redeem for travel or transfer to various travel partners.
If you have a stash of points and cash fares are high, it makes a lot of sense to use those points instead. For example, I recently priced a trip to San Francisco and found a flight over the Fourth of July weekend; it should normally cost about $400, but for this particular weekend, it was going to cost me at least $621. I used 46,000 Delta SkyMiles instead. While it wasn’t the best redemption in the world, it was better than shelling out all that cash. Most of those SkyMiles came from credit card spending on my Delta SkyMiles® Reserve American Express Card.
Related: Why I’m keeping my Delta Reserve card even when I’m flying less
There are many strategies for getting the most out of your credit card. You’ll generally get the most value when redeeming for premium-cabin flights or luxury hotel stays. However, you may prefer to book economy award flights or lower-category hotel stays using your points to stretch your points further.
Join AARP
The AARP discount travel page. AARP
You can join AARP for discounts even if you are not retired. The advocacy group for older adults offers all kinds of cool discounts, including $60 to $200 off British Airways flights and 10% off Hilton hotels.
Related: How to use AARP discounts on travel
Bottom line
Paris in 2022. CLINT HENDERSON/THE POINTS GUY
Spending a small amount of time researching the best ways to travel on a budget could easily make a dream trip, like a Paris vacation, more attainable.
It’s possible to take an excellent vacation on a budget. You just need to put in the time to plan your trip, budget your expenses, download a virtual wallet of money-saving apps and consider using points and miles to decrease your out-of-pocket costs.
Some of our top budget travel tips include shopping around, signing up for deal alerts through websites like TPG and using points and miles. Opening a credit card or two for the sign-up bonus once or twice every few years could make your trips even cheaper. Don’t forget to sign up for our daily newsletter, where we teach you how to travel better for less. At TPG, we make traveling on a budget easy.
When someone passes away, there can be plenty of questions over who gets what, especially if there’s a home in the mix. An often-overlooked question centers on who is responsible for paying property taxes when the owner dies. A delinquent property tax bill could result in a lien against the home or worse, a tax foreclosure. It’s the job of the deceased person’s executor to make sure that property taxes—and any other outstanding debts—are paid when finalizing their estate. If you’re ready to create an estate plan, a financial advisor can help.
Understanding What Happens to Property Taxes When Someone Dies
When someone passes away, their debts don’t automatically disappear. Any outstanding financial obligations must be paid, either from the proceeds of their estate or by individuals who are jointly responsible for debts.
For instance, if a husband and wife both sign off on a $30,000 car loan and one of them dies unexpectedly, the other spouse is responsible for the remaining debt since they’re co-borrowers. The same would be true for other co-signed loans, including mortgages and private student loans or joint credit card accounts.
Property tax bills that are outstanding when someone dies must still be paid. Failing to pay property taxes can result in a lien being placed on the property. The agency responsible for collecting property taxes could go a step further and foreclose on the home. In that case, the home could then be sold at auction to the highest bidder.
Who Is Responsible for Paying Property Taxes When the Owner Dies?
The executor of a deceased person’s estate is responsible for making sure that any remaining property taxes are paid when the owner dies. An executor can be named in a will or if there is no will, they can be appointed by the court. Any interested party can petition the probate court to become the executor when one isn’t named in a will.
In terms of where the money comes from that goes to pay property taxes when someone dies, the answer is typically the estate itself. There are different ways this can be handled, depending on how the person structured their estate plan.
For instance, they might specify in their will that certain assets in their estate should be used to pay property taxes. If they’ve set up a trust as part of their estate plan, they could also allocate assets within the trust to cover any remaining tax bills. In that case, a trustee, not an executor would be responsible for making sure the taxes are paid.
If there are no assets set aside to pay property taxes, then the executor or trustee could use assets from the estate to do so. For instance, they might draw money from the deceased person’s bank account or sell tangible assets to raise the money that’s needed. That could even include selling the home itself to pay the tax bill if the will or trust doesn’t specifically disallow it.
Certain assets are beyond an executor or trustee’s reach when settling an estate. For example, if your parents named you as the beneficiary to a life insurance policy or retirement account, that money would come directly to you when they pass away.
Are Beneficiaries or Heirs Responsible for Property Taxes When an Owner Dies?
Inheriting a home from someone doesn’t necessarily make you responsible for any property taxes right away. Again, the responsibility for paying taxes would fall on the executor until the legal title is transferred to you.
However, once the property is in your name, you’d have to pay any property taxes owed on it, including past due amounts, current bills and future bills. The only exception would be if the property owner’s will or trust directs the executor or trustee to pay any and all debts associated with the home before it’s transferred to you. How quickly a home’s title is transferred after death can depend on where you live.
If someone dies without a will in place, their heirs receive their assets in accordance with state inheritance laws. Whomever the home goes to under state law would be responsible for paying property taxes once the title is transferred to them.
What if you have no heirs? In that case, the home becomes the property of the state. The state could then sell the home and use money from the proceeds to pay any remaining taxes due.
Accounting for Property Taxes in an Estate Plan
If you don’t want to leave your heirs with a property tax burden when you pass away, there are some things you can do now to ensure that doesn’t happen. The easiest way to do that is by including a provision for handling property taxes in your will.
You can name an executor and leave directions on which assets they should use to pay the property taxes. You can also direct them to pay the taxes from estate assets before distributing any remaining assets to your beneficiaries. If you’re concerned that there may not be enough assets to cover the tax bill, you can also state that it’s okay for them to sell the home if necessary.
If you’ve put your home into a trust, you can do the same thing in the trust document. That includes directing the trustee to pay property taxes out of trust assets or requiring the beneficiary to pay the taxes before they can inherit the property. Talking to a financial advisor can help you decide what the best option might be.
You could also buy a life insurance policy just to cover final expenses or debts, including property taxes. Instead of naming a loved one as the beneficiary to the policy, you could name your estate instead. That way, you can be assured that the executor will have the funds they need to cover property tax bills once the probate process gets underway.
The Bottom Line
Unpaid property taxes can add a wrinkle to the settlement of an estate after a homeowner passes away. If you own a home that you intend to pass on to someone else, early planning can help your beneficiaries avoid financial hiccups once it’s time for them to inherit the home.
Tax Planning Tips
Working with a financial advisor to flesh out an estate plan can make it easier to decide how to divide your assets while accounting in advance for any debts you might leave behind. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you don’t have a will yet, you might want to consider making one so you can specify how you want property taxes to be handled when you pass away. You can work with an estate planning attorney to draft a will or make one online. There are a number of affordable online will-making software options that you can use to make a basic will. Just keep in mind that once you make the will, you’ll typically need to have it witnessed and notarized for it to be considered legally valid.
Rebecca Lake, CEPF®
Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
Policymakers also want to evaluate the impact of their actions on the economy so far. The Fed imposed its fastest series of rate increases since the 1980s, but it wants to avoid over-tightening and causing a significant recession.
May’s inflation data aided the Fed in making today’s decision. The Consumer Price Index in May rose just 4% year over year, before seasonal adjustment, compared to a 4.9% increase in April. Real wages also continue to fall, suggesting that the Fed has cooled, if not broken, the labor market.
“Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy,” the Fed said in its post-meeting statement. “In determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
But it’s a delicate balance.
A series of bank failures — including Silicon Valley Bank, Signature Bank and First Republic Bank — have spurred concerns that banks are reducing their appetite for new loans, hurtling the economy towards a recession. Fears of a commercial real estate collapse have also emerged.
Fed Chairman Jerome Powell told reporters on Wednesday that it makes sense to moderate rate hikes as the policymakers get closer to the destination. The benefits of that, according to Powell, is that the Fed officials can access more information to make better decisions.
“The main issue that we’re focused on now is determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time,” Powell said. “So, the pace of the increases and the ultimate level of increases are separate variables. Given how far we have come, it may make sense for rates to move higher, but at a more moderate pace.”
Regarding the banking crisis, Powell said that “we don’t know the full extent of the consequences of the banking turmoil that we’ve seen.” However, with today’s decision, the Fed will “have some more time to see that unfolding.”
What’s next?
Investors are waiting for indications of what will happen next, as the macroeconomic policy crafters have yet to break the labor market and inflation levels are still double the 2% target.
The CME FedWatch Tool showed a 98% chance the Fed would hold rates at the current range on Wednesday morning, according to interest rate traders. However, 60% of these investors bet officials will impose a rate hike at the July 26 meeting.
In favor of another rate hike is the fact that employment continues to rise and consumer spending has been resilient. According to the latest labor market report, total nonfarm payroll employment rose by 339,000 jobs in May, compared to April.
The FOMC published new projections for the U.S. economy that expect the GDP to change by 1% in 2023 compared to 0.4% estimated in its March meeting. The unemployment rate is expected to be at 4.1% (compared to 4.5% in March) and the PCE inflation is projected to be at 3.2% (compared to 3.3% in March).
Policymakers also expect the federal funds rate at 5.6% at the end of 2023, which opens the door to the possibility of two rate hikes at the end of this year. March’s projection was at 5.1%.
“Looking ahead, nearly all Committee participants view it as likely that some further rate increases will be appropriate this year to bring inflation down to 2%,” Powell said. “We have been seeing the effects of our policy tightening on demand in the most interest rate sensitive sectors of the economy, especially housing and investment. It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation.”
Today’s Fed decision will have an impact on the housing market. Industry experts believe mortgage rates will remain high compared to last year.
Ahead of the Fed meeting, mortgage applications picked up last week as rates dropped slightly – another factor that impacted rates was the debt ceiling agreement.
On Wednesday afternoon, mortgage rates for 30-year fixed-rate mortgages were at 6.70%, according toHousingWire‘s Mortgage Rates Center. However, at Mortgage News Daily, mortgage rates were higher, at 6.98%.
“For real estate markets, today’s decision by the Fed will ensure that mortgage rates are likely to keep moving sideways for the next couple of months,” George Ratiu, chief economist at Keeping Current Matters, said in a statement. “The 30-year fixed mortgage rate has moved in the 6% – 7% range since mid-November 2022, cresting the upper limit several times over the past few weeks.”
The Fed’s pause means borrowers can see, for June, a stabilization of rates across a range of industries, particularly mortgage and credit cards, according to Michele Raneri, vice president and head of U.S. research and consulting at TransUnion.
Raneri said in the mortgage market, “It remains to be seen if, in the short term, this will spur many who have been holding off to finally engage in a new purchase or refinance, or if they will continue waiting until rates begin dropping.”
Rolling over a 401(k) is something you might consider if you’re planning to retire or just changing jobs and don’t want to leave your savings behind. When deciding where to move retirement assets, a certificate of deposit is one you might consider but it’s important to consider the tax implications. Can you transfer a 401(k) to a CD without penalty? Yes, but there are a few rules to know to make sure you don’t get hit with a surprise tax bill. A financial advisor can help you choose the best option for rolling over your 401(k) money.
Understanding 401(k) Rollovers
When you roll over a 401(k), you’re simply moving it from one place to another. A rollover is not the same as a withdrawal since you’re not taking any assets out of your account. In terms of where you can roll a 401(k) to, the options can include:
Another 401(k) or qualified retirement plan if you’re changing jobs
A traditional or Roth IRA
IRA CDs or money market accounts
Why would you want to roll over a 401(k)? There are different reasons for doing so and it often depends on your financial situation and needs. If you’re changing jobs, for instance, you might want to roll the money over from your old plan to your new one so that all of your 401(k) assets are together. On the other hand, if you’re retiring you may feel more comfortable having your 401(k) funds in an Individual Retirement Account or IRA CD.
Of course, you could always leave your plan where it is if you’re happy with your current investments. Just keep in mind that if your account balance is below a certain threshold, your former employer can cash it out and cut you a check.
Can You Transfer a 401(k) to a CD Without Penalty?
It’s possible to roll 401(k) money into a CD without paying tax penalties but there are some guidelines for doing so. First, you’ll need to make sure you’re using the right type of CD. Specifically, that means an IRA CD.
An IRA CD is a CD account that’s funded through an IRA and enjoys its tax benefits. Banks and credit unions can offer traditional and Roth IRA CDs. Each one follows the same rules as a traditional or Roth IRA. Here are a few things to know.
Both traditional and Roth IRA CDs are subject to IRA annual contribution limits (except when rolling over 401(k) funds).
Traditional IRA CDs are funded with pre-tax dollars and withdrawals are taxed as ordinary income.
Roth IRA CDs are funded with after-tax dollars and allow for tax-free withdrawals in retirement.
Early withdrawals from either type of CD before age 59 ½ could trigger tax penalties.
None of that applies to traditional bank CDs. You can generally put as much money as you like into a standard CD and withdraw the money at maturity without a penalty. Any interest earned is taxed as ordinary income.
Next, you’ll need to make sure you’re handling the transfer the right way. With a 401(k) plan, you can use a direct or indirect rollover to move money from one account to another. A direct rollover allows you to move money from your 401(k) to an IRA CD without ever receiving any of the money yourself. Indirect rollovers send the money to you and you then have to deposit it into a new account.
If you want to transfer money from a 401(k) to a CD without penalty, then a direct rollover is the best option. An indirect rollover puts the burden of redepositing the money into an IRA CD on you. If you fail to do so within 60 days, the IRS can treat the entire rollover as a taxable withdrawal.
Also, note that rollovers need to be like-kind to avoid any tax consequences. If you have a traditional 401(k) and you want to roll it into a Roth IRA CD, for instance, the IRS requires you to pay taxes on the amount that you’re converting. Talking to a financial advisor can help you figure out whether that type of 401(k) transfer makes sense.
How to Transfer Money From a 401(k) to a CD Without Penalty
Rolling over a 401(k) isn’t a difficult process but there are some important steps you’ll need to follow. The first is to decide where you want to open an IRA CD to receive your retirement funds. You can start with your bank first to see what options you might have, then compare them to IRA CDs offered by other banks or brokerages.
Once you choose an IRA CD option, the next step is filling out the paperwork to initiate the rollover. You can contact the company that currently holds your 401(k) to find out what forms you’ll need. It’s possible that you might be able to fill them out and submit them electronically.
You’ll need to tell your 401(k) administrator where to send the money and how much to transfer if you’re only doing a partial rollover. Once you’ve done that the plan administrator and the company that holds your newly opened IRA CD does the rest.
In terms of how long it takes to roll a 401(k) into an IRA CD, it largely depends on the plan administrator and the company that’s receiving the funds. Two weeks is usually a good amount of time to allow for a rollover to complete, though it can take longer in some cases. Following up with your bank or brokerage can help you get a better idea of when your 401(k) funds should hit your CD account.
Is a 401(k) to CD Rollover a Good Idea?
Can you transfer a 401(k) to a CD without penalty? Sure, but the better question is, should you? An IRA CD can be a safe place to park your retirement funds and having your retirement money at your bank might be more convenient than keeping it at a brokerage if you need to withdraw funds. On the other hand, you could be missing out on a chance to grow your retirement savings.
IRA CDs can pay interest like other CDs, but the rates may not be the best. Even if you’re able to find a high-yield IRA CD option, you may still be able to get a better return by rolling over your 401(k) to a regular IRA instead. Traditional and Roth IRAs can offer access to index funds, exchange-traded funds and other investments, all of which could outperform CD rates.
You might consider an IRA CD if you’re looking for safety and virtually guaranteed rates but it’s important to consider the bigger picture where your portfolio is concerned. Depending on what your goals are, you might run the risk of shortchanging your retirement savings if you’re leaning heavily on CDs to save.
The Bottom Line
Transferring money from a 401(k) to an IRA doesn’t automatically trigger a tax penalty if you’re following the proper steps to complete the rollover. Before starting the process, it helps to flesh out what your goals and reasons are for doing so. You’ll also want to shop around to compare IRA CD rates to see which banks have the best options.
Retirement Planning Tips
One of the most challenging parts of retirement planning is deciding when and how to draw down your assets. A financial advisor can help you develop a strategy for withdrawing your savings as efficiently as possible. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
IRA CDs can come in a variety of terms, ranging from as little as three months up to 10 years. When your CD matures, it may renew automatically so it’s important to keep the timing in mind when deciding which ones to choose. If you need to withdraw money from an IRA CD before maturity, your bank could impose an early withdrawal penalty equivalent to some or all of the interest earned. The IRS can also assess a tax penalty if you make early withdrawals before age 59 ½.
Rebecca Lake, CEPF®
Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
A life insurance policy can provide your loved ones with a death benefit should something happen to you. Permanent life insurance can also accumulate a cash value that you can withdraw or borrow while you’re still living. For example, you might use whole or variable life insurance for college savings to pay tuition bills, room and board or other costs. Is using life insurance to pay for college a good idea? There are some pros and cons to consider. Talking to a financial advisor can help you decide on the best way to save for college costs.
Understanding Life Insurance and Cash Value
Life insurance comes in different varieties, but the two main categories are term and permanent life. Term life coverage insures you for a set time period. If you pass away during the term, the policy pays out a death benefit to your beneficiaries that they could use to pay for college or other expenses. If you outlive the term, the policy terminates and no benefit is paid out.
Permanent life insurance, on the other hand, covers you for the duration of your life as long as premiums are paid. Certain types of permanent life insurance can also include a cash value component. As you pay in premiums monthly or annually, part of that premium is deposited into an interest-bearing account. You can then withdraw cash value or take out a loan against it during your lifetime.
Term life, meanwhile, doesn’t build cash value. However, it’s generally less expensive than permanent life insurance coverage. If you’re specifically interested in accumulating cash value with life insurance, you might be able to do that with a permanent whole life, universal life or variable life policy. The main difference between them lies in how the cash value account earns interest.
Can You Use Life Insurance for College Savings?
Yes, if you have cash value in a life insurance policy, you could use it to pay college expenses. There are typically three ways to do that:
Take a loan against your cash value
Withdraw cash from the policy
Surrender the policy
When you get a loan from a life insurance policy, you’re borrowing a lump sum from the cash value. You may not need to pay anything back toward the loan while you’re still living. When you pass away, the remaining loan balance is deducted from the death benefit and any remaining amount is paid to your beneficiaries.
You might choose to withdraw cash instead if your policy doesn’t allow for loans. A withdrawal would allow you to get cash for college or other expenses. Again, the death benefit would be reduced when the time comes to pay out a claim.
The final option is to surrender the policy altogether in exchange for its cash value. If you surrender, the policy terminates and you’ll no longer have coverage. You might choose this option to use life insurance for college savings if you have another life insurance policy as a backup or if you believe you have sufficient assets that make coverage unnecessary.
How to Use Life Insurance for College Savings
If you’d like to tap into your life insurance policy to pay for college, the first step is making sure that you can actually do so. A quick call to your insurance company or a review of your policy documents should tell you whether you have a term life or permanent life insurance policy and if it’s permanent, where there’s a cash value component.
Assuming that your policy has some cash value, the next step is deciding how to go about withdrawing it. Your insurance agent should be able to walk you through the different options. You may also want to talk to your financial advisor to discuss whether it makes more sense to borrow from your policy, withdraw the cash value or surrender it altogether.
If you’re opting for a loan or cash value withdrawal, you’ll need to know how much cash value is available and what amount to withdraw for college costs. You can then make the request to the insurance company to get the cash. Life insurance loans don’t require all the usual hoops associated with personal loans or student loans, though there might be some paperwork you need to fill out.
Once everything is finalized, the life insurance company will cut a check to you for the cash value that you’re taking out. You can then deposit it to your bank and once it clears, use the money to pay for college expenses.
Should You Use Life Insurance to Pay for College?
Life insurance isn’t designed to be a college savings vehicle, per se. Its primary function is to help people leave a financial safety net behind for their loved ones should the worst happen. Life insurance beneficiaries can use the death benefit from a policy to cover a wide range of costs, including mortgage payments, everyday expenses, final expenses and credit card bills.
Education expenses can also be added to that list and there are a few good reasons to consider using life insurance for college savings. Here are some of the advantages of life insurance as a college savings tool.
It’s flexible since you can withdraw or borrow against your cash value and use it to pay education expenses at your own pace.
Life insurance policies and any loans you might take from them, typically don’t affect a student’s ability to qualify for financial aid.
You can continue accumulating interest until you’re ready to withdraw it and you’re not penalized if your child decides not to go to college.
Coverage is lifelong, which means you could use your cash value to fund college for your children, grandchildren or even great-grandchildren.
There are, however, some downsides to using life insurance for college savings in lieu of a tax-advantaged plan, such as a 529 account or even a Coverdell Education Savings Account (ESA). Here are some of the most important things to keep in mind.
Cash value can take time to accumulate in a permanent life insurance policy and it’s possible that you won’t have enough to pay for college costs when the need arises.
A 529 college savings account may offer a higher rate of return, along with tax advantages.
Permanent life insurance can be more expensive than term life insurance when you factor in the premiums, upfront fees and recurring fees that you might pay.
Withdrawing or borrowing against cash value shrinks the death benefit that you’re able to leave behind for your loved ones.
A financial advisor might recommend incorporating life insurance into your college savings plan, but as just one piece, not the main focal point. For instance, you might set up a 529 for each of your children and contribute money to it each year that grows on a tax-deferred basis. When your child is ready to go to school, you can withdraw that money tax-free as long as it’s used for qualified higher education expenses.
If you pass away while your child is still in school, your life insurance policy can help to cover any remaining costs to help them finish their education. And if you have a 529 plan but your child doesn’t go to college, you could always transfer it to another beneficiary without a penalty.
The Bottom Line
Using life insurance for college savings is something you might consider if you have a permanent policy. It’s important to consider all the options for funding higher education, including a 529 plan or Coverdell account, to determine what best fits your needs. And if you don’t have a life insurance policy yet, you might want to get a rate quote to get an idea of how much you’ll pay for coverage.
Insurance Planning Tips
If you’re not sure where to get started with college planning, a financial advisor can help. An advisor can review your financial situation and your student’s estimated needs, then offer solutions for meeting them. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
When comparing life insurance policies, it’s important to consider not only what you’ll pay but how much cash value you might be able to accumulate. Whole life policies, universal life policies and variable life policies can all take very different approaches to growing your cash value.
Rebecca Lake, CEPF®
Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.