But AI technology is far from new, and chatbots are just one application of this advanced tech. Indeed, nearly every industry has been impacted by AI, from healthcare to freight, and this growth shows no signs of slowing down. Prominent tech industry experts like Bill Gates predict the growing influence of AI technology, and current projections estimate that the global AI market is on track to total half a trillion dollars by the end of the decade. Naturally, this growth is attracting attention from investors. If you’re interested in bringing AI companies into your portfolio, you may want to get to know the biggest players in the field. 

In this article, we’ll cover:

• Top AI companies
• What to consider when researching AI companies

Top AI companies 

Since AI impacts so many industries, the missions of the top AI companies are incredibly diverse, as are the ways they apply this technology, running the gamut from autonomous driving to cybersecurity to application development and more. AI companies also range widely in terms of longevity, with the list of largest companies including long-term tech sector players and newer enterprises alike. These 15 companies represent the largest market cap in the AI space as of winter 2024.

Largest AI companies by market cap as of February 2024:

• Microsoft
• Alphabet 
• NVIDIA 
• Meta Platforms (Facebook)
• Tesla
• IBM 
• Palantir
• Mobileye 
• Dynatrace 
• Uipath 
• SentinelOne
• Aurora Innovation
• Presight AI
• DarkTrace
• C3 AI 

1. Microsoft (MSFT)

Microsoft has remained a leader in end-user computer technology for nearly four decades and currently stands as the largest company in the world. Its popular Windows desktop operating system claims approximately 74% of market share worldwide. 

With a $10 billion investment in OpenAi in January 2023 and subsequent integration of its ChatGPT generative AI chatbot and Dall-E image generation into the Bing search engine and Edge web browsing software, Microsoft has claimed its position as the world’s leading artificial intelligence company. 

• Market cap: $3.00 trillion
• Headquarters: Redmond, WA, USA
• Founded: 1975
• AI focus: Web search, image generation

2. Alphabet (GOOG)

Google’s suite of products extends to a large number of categories in the tech industry, with products that touch on everything from education to advertising and fitness to streaming video. 25 years after the company’s founding, its flagship product remains its eponymous search engine, which reportedly accounts for more than 90% of worldwide searches, averaging 8.5 billion searches per day. Google and its parent company Alphabet expanded into AI and deep learning with the formation of its Google AI division in 2017. 

In February 2023, the company announced Bard, an AI chatbot designed to compete with Microsoft’s integration of ChatGPT into its Bing search engine, though the release was slightly marred by reported internal disapproval of the product’s rollout. 

• Market cap: $1.79 trillion
• Headquarters: Mountain View, CA, USA
• Founded: 1998
• AI focus: Web search

3. NVIDIA (NVDA)

Rounding out the top three AI companies, NVIDIA manufactures graphics processing units (GPUs), whose computing power has been foundational for several generative AI technologies. The company commands 87% of the GPU market and has had a hand in major AI technology advancements, including ChatGPT, which was trained using 10,000 NVIDIA GPUs. The NVIDIA NeMO LLM’s status as one of the most advanced large language models, along with a new partnership with Microsoft, further cement its place among prominent AI companies.

• Market cap: $1.67 trillion
• Headquarters: Santa Clara, CA, USA
• Founded: 1993
• AI focus: GPU manufacturing

4. Meta Platforms (META)

Recently celebrating twenty years, Meta (formerly known as Facebook). The company is known for its social media platforms, including Facebook, Instagram, WhatsApp, and Oculus. While the company has faced criticisms about privacy concerns since the Cambridge Analytica scandal, misinformation spread across platforms, and general antitrust concerns, Meta has made strides to increase transparency in the past year – especially in terms of its ad targeting to users. In 

In February 2024, Meta announced its efforts to draw the line between reality and AI generated imagery and videos on its platforms. The move will notify users when photorealistic content has been AI generated.

• Market cap: $1.17 trillion
• Headquarters: Menlo Park, CA, USA
• Founded: 2004
• AI focus: Social networking

5. Tesla (TSLA)

Twenty years after Tesla launched with a vision for reimagining the automotive industry through technology, the company’s Model 3 vehicle stands as the all-time bestselling plug-in electric car. Tesla has also expanded far beyond the automotive industry, becoming one of the largest global suppliers of battery energy storage systems and solar panels. Among its innovations are self-driving cars and bipedal robotic units, both of which utilize AI technology to sense conditions and events to pilot themselves with minimal human intervention. Musk has recently revealed plans for next-gen vehicles in the latter half of 2025.

• Market cap: $558.54 billion
• Headquarters: Austin, TX, USA
• Founded: 2003
• AI focus: Vehicular AI, robotics, clean energy

6. IBM (IBM)

While artificial intelligence may seem new to many people, one of the “big 5” AI companies has been innovating in this realm for decades. In the 110 years since its founding, IBM has consistently been a cornerstone of the tech industry, producing innovations that have become an ingrained part of everyday life, including the bar code, the hard disk drive, and the personal computer itself. Its Watson question-answering platform, initially developed from 2004-2011, could be seen as the first AI language model technology to attain global notoriety due to its 2011 victory on the quiz show Jeopardy! Since then, its deep learning capabilities have been applied to a wide range of industries, including healthcare, cuisine, hospitality, water conservation, and more. 

In the past 5 years alone, IBM has managed to file 1,591 AI-related US patent applications, showing their interest and push for artificial intelligence. In 2023, Watson earned IBM its second consecutive Gartner® Magic Quadrant for Enterprise Conversational AI Platforms.

• Market cap: $168.01 billion
• Headquarters: Armonk, NY, USA
• Founded: 1911
• AI focus: Conversational AI

7. Palantir (PLTR)

Palantir Technologies specializes in big data analytics through three major software platforms for the public and private sectors. Each of these uses artificial intelligence to access information and strengthen correlations between data points. Palantir Gotham is used by the United States Intelligence Community to aggregate data for national security purposes, including predictive policing systems. Palantir Metropolis learns and uncovers relationships between data points in private and public databases and is primarily used in the finance industry, perhaps most famously by JP Morgan Chase to monitor employees. Palantir Foundry is a flexible system that integrates data and can make decisions using generative processes. The company reported its first-ever profitable quarter in February 2023.

• Market cap: $36.31 billion
• Headquarters: Denver, CO, USA
• Founded: 2003
• AI focus: Data aggregation

8. Mobileye (MBLY)

Mobileye is another AI company focused on autonomous driving and advanced driver assistance systems. Through high-profile partnerships with Ford and Volkswagen, in addition to 25 other automobile manufacturers, the company’s technology is employed in vehicles across the world. Its products include lane assist, automatic emergency braking, and forward collision, all of which aim to increase the ease and safety of driving. 

Since its acquisition by Intel in 2017, the company has grown significantly and continued to expand its innovation in self-driving AI technology. In the summer of 2023, Porsche announced its partnership with Mobileye and its plan to integrate Mobileye’s ADAS into future models.

• Market cap: $21.50 billion
• Headquarters: Jerusalem, Israel
• Founded: 1999
• AI focus: Vehicular AI

9. Dynatrace (DT)

The Dynatrace Software Intelligence Platform, driven by the company’s proprietary AI technology, Davis, is used in products by large companies such as Amazon, Google, and Microsoft. The platform monitors software and uses artificial intelligence to detect issues, discover anomalies, and monitor performance. When problems are detected, the software is capable of generating and implementing its own solutions without human intervention. 

Their February 2023 announcement of the platform’s new ability to predict software issues before they occur is seen as a competitive differentiator by some industry analysts.

• Market cap: $17.44 billion
• Headquarters: Waltham, MA, USA
• Founded: 2005
• AI focus: Observability, application security, cloud computing

10. UiPath (PATH)

The defining function of UiPath’s robotic process automation software offerings is the automation of routine business tasks through AI and machine learning. Over the 18 years since the company’s founding, however, its capabilities have expanded significantly, and the software is now capable of executing customer relationship management (CRM) functions and more on a massive scale. UiPath’s financial picture has followed suit, claiming one of the largest US software IPOs in history. With its July 2022 acquisition of Re:infer, the company has added natural language processing to its artificial intelligence arsenal. 

In October 2023, UiPath announced its latest AI feature, Autopilot, which can transform paper documents into automation-powered apps with a single user click. The AI tool can benefit developers, automation testers, business analysts, and anyone looking to help automate data-intensive work and tedious tasks.

• Market cap: $12.63 billion
• Headquarters: New York, NY, USA
• Founded: 2005
• AI focus: Process automation

11. SentinelOne (S)

SentinelOne became an industry leader by leveraging the power of AI for its next-gen cybersecurity software. The company’s AI technology detects abnormal use in endpoint devices and shuts down processes before viruses or bad actors can spread across networks. Its roster of clients includes high-profile brands such as Samsung, Aston Martin, Politico, EA, and Sysco, embedding its products in a number of industries and sectors. 

The ten-year-old company continues to grow its market cap, recently reporting a 42% increase in revenue in the third quarter of 2023. In January 2024, SentinelOne announced its acquisition of PingSafe, a cloud native application protection platform (CNAPP). The acquisition is meant to further enhance the security offerings of SentinelOne.

• Market cap: $8.05 billion
• Headquarters: Mountain View, CA, USA
• Founded: 2013
• AI focus: Cybersecurity

12. Aurora Innovation (AUR)

Founded by executives from Google, Tesla, and Uber, Aurora Innovation is another of the top AI companies developing self-driving vehicle solutions, envisioning a fleet of autonomous vehicles to be used in applications including freight and ridesharing. Fiat Chrysler, Toyota, and Volvo, are just a few of the manufacturers using their Aurora Driver technology. 

In 2022, the company announced its new Aurora Beacon platform, which will assist users with maximizing uptime and other optimization concerns for these fleets, as well as an expanded pilot with FedEx to bring self-driving technology to the shipping industry. In 2023, the company revealed that it plans to begin a driverless truck route connecting Dallas and Houston by the end of 2024. Recently, Aurora has finalized its truck design, architecture, and hardware that’ll power its future lineup of driverless semi trucks in partnership with German auto supplier Continental starting in 2027.

• Market cap: $4.50 billion
• Headquarters: Pittsburgh, PA, USA
• Founded: 2017
• AI focus: Autonomous driving

13. Presight AI (PRESIGHT.AE)

Presight AI, a G42 company, is a data analytics company that uses artificial intelligence, big data, and analytics to find solutions and create value for businesses. They provide solutions for the public sector, finance, sport, climate, education, and more.

• Market cap: $3.05 billion
• Headquarters: Al Ain, Abu Dhabi, United Arab Emirates
• Founded: 2020
• AI focus: Big data analytics

14. Darktrace (DARK.L)

The Darktrace AI machine learning platform learns to detect normal behavior across a network and its users, forming a profile of typical use. When it detects behavior that diverges from this profile, the software intelligently determines whether a threat is present and calculates the most efficient way to attack and dismantle it. 

In 2023, the company positioned its product as a viable solution to new email security threats posed by generative AI technologies like ChatGPT, arguing that existing tools are not strong enough to address the concerns raised by such advanced chatbots. In October 2023, Darktrace announced a new AI solution that provides visibility of cloud architecture, detects and responds to real-time cloud-native threats, and sets recommendations and actions to help security teams and help further strengthen compliance.

• Market cap: $3.01 billion
• Headquarters: Cambridge, UK; London, UK; San Francisco, CA, USA; Singapore
• Founded: 2013
• AI focus: Cybersecurity

15. C3 AI (AI)

The aptly named C3 AI’s software-as-a-service (SaaS) platform utilizes AI’s ability to interpret and translate ideas to provide innovative solutions for businesses. Its machine learning algorithm allows users to envision and create software applications even without expertise in data analytics. Its software has been utilized by major companies such as Shell and Koch in business applications in energy, chemicals, investments, defense, healthcare, and more. The U.S. Air Force has also employed the platform to develop new technologies and improve upon existing ones.

• Market cap: $2.86 billion
• Headquarters: Redwood City, CA, USA
• Founded: 2009
• AI focus: Application development 

What to consider when researching AI stocks

If you’re enticed by this quick-moving aspect of the tech industry, you may be wondering if investing in the top AI companies is the right move for your portfolio. Before you make the leap, make sure to do your research. Like any competitive market, there are a number of factors you might consider before investing.

The company’s financial statements should give you a window into its revenue, profits, debt, and cash flow for a better understanding of its finances. Another factor you may consider is the company’s management: what previous organizations have company leaders worked for? What goals have they set? Have they shown success in achieving them? Investors often also investigate the potential risks associated with a stock, such as the company’s regulatory risks, legal risks, and macroeconomic risks, as well as the volatility of its share prices over time. 

Additionally, since AI technology is rapidly evolving, it may be helpful to follow the news on a company in which you’re planning to invest, as well as the performance of stocks in the tech industry overall.

Ready to invest in the top AI companies?

There are many options for investing in the technology sector, and Stash can help you get started with shares in top AI companies, as well as an ETF focused on robotics. And with fractional shares, you can begin investing with any amount. 

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The post 15 Largest AI Companies in 2024 appeared first on Stash Learn.

It’s called an “individual” retirement account (IRA) because you, as an individual, set up and manage it on your own. It’s not something your employer handles for you, like a work-related retirement plan. 

But what exactly is a traditional IRA, and how does it work? Let’s find out.

In this article, we’ll cover:

• What a traditional IRA is
• How traditional IRAs work
• Traditional IRAs vs other IRAs
• Pros and cons of traditional IRAs
• How to open a traditional IRA account

What is a traditional IRA?

A traditional IRA is a type of retirement account that offers tax advantages. When you contribute money, you’re often able to deduct that amount from your income taxes. This helps to lower your taxable income for the year.

For example, if you earn $50,000 a year and contribute $7,000 to a traditional IRA, your taxable income would be $43,000. This can potentially save you money on your tax bill.

A traditional IRA is best if:

• You want to lower your taxable income now
• You expect to be in a lower tax bracket in retirement

How traditional IRAs work

Anyone with earned income can contribute to a traditional IRA—there are no income restrictions. You can open a traditional IRA with Stash, your bank, or any other brokerage firm. 

When you put money into a traditional IRA, it’s not just sitting there idly. You get to decide how to invest it. You can invest IRA funds in various ways, like stocks, bonds, exchange-traded funds (ETFs), and other securities. 

The money inside a traditional IRA grows tax-deferred. This means you won’t pay taxes on it until you withdraw the money in retirement. Over the long term, this tax-deferred growth can help you build wealth.

Contribution limits

The annual contribution limit to a traditional IRA is $7,000 as of 2024. If you’re 50 or older, you may make an additional $1,000 catch-up contribution, for a total of $8,000 annually.

There are two caveats, though:

1. If you earn less than the current year contribution limit, you can only contribute up to the total of your earned income for the year. So if your earned income is $3,000, your cap is $3,000.
2. This limit applies to traditional and Roth IRAs combined. So if you have both accounts, your total contribution cannot go over this limit.

Tax deduction

Traditional IRA contributions are typically made with pre-tax dollars, so you can get an immediate tax benefit by deducting them from your taxable income for the year. Doing so might put you in a lower tax bracket or make you eligible for certain tax incentives.

If you don’t have an employer-sponsored retirement plan, like a 401(k) or 403(b), you can deduct the entire amount you’ve contributed for the year. However, if you or your spouse participate in an employer plan, you might not be able to deduct the full amount. 

The IRS sets deduction limits based on your filing status and modified adjusted gross income (MAGI). If you’re single and have a workplace plan, your MAGI must be below $87,000 to receive at least a partial deduction. If you’re married and filing jointly, you must earn less than $143,000. This income limit applies even if your spouse has a workplace plan, but you don’t.

Age limits

Before 2020, you couldn’t contribute to a traditional IRA past age 70½. But now, there is no age limit. Anyone with earned income can contribute to a traditional IRA. This change was due to the SECURE Act, which went into effect on January 1, 2020. 

Early withdrawal rules

Generally, you can start taking funds out of your traditional IRA when you turn 59½, and you’ll pay regular income tax when you make withdrawals. 

If you take out money early, however, you’ll usually have to pay a 10% penalty on top of income tax. There are a few exceptions to the IRA early withdrawal rule, including:

• Becoming totally and permanently disabled
• Paying for certain higher education expenses
• Buying your first home, up to $10,000
• Paying health insurance premiums while unemployed
• Taking substantially equal periodic payments (SEPPs) for at least five years or until you turn 59½, whichever comes later

Check out IRS Publication 590-B for important information on these and other exceptions.

Required minimum distributions (RMDs)

Once you reach a certain age, you’re required to start taking withdrawals from your traditional IRA each year. This age has gradually increased through various legislation over the past four years. Currently, if you reach age 72 after Dec. 31, 2022, then you must start making withdrawals at age 73.  These withdrawals are called required minimum distributions (RMDs), and they’re based on your life expectancy and IRA account balance.

If you don’t take RMDs, you could pay a hefty excise tax of up to 50% of the amount you were supposed to withdraw. So make sure you plan ahead and take your RMDs on time.

Pros and cons of contributing to a traditional IRA

Traditional IRA benefits

An IRA of any kind can help you put away money for retirement and possibly enjoy tax advantages. The particular benefits of the traditional IRA include:

• Your tax-deductible contributions can lower your taxable income for the year, and may even drop you into a lower tax bracket. 
• You pay no taxes on funds while they’re invested, meaning there’s more money in the account to compound over time.
• If you’re in a lower tax bracket when you make withdrawals than when you made contributions, you may pay less tax on your money overall.  
• You can invest in the stock market through a wide variety of securities, including stocks, mutual funds, and ETFs.
• There’s no income limit; you can put money into a traditional IRA no matter how much you make. 
• Some exceptions allow you to avoid the early distribution penalty. 

Disadvantages of traditional IRAs

Depending on your circumstances, there may be some downsides to a traditional IRA compared to other types of IRAs, including:

• Withdrawing before you reach 59½ years of age may result in a 10% penalty
• There are yearly limits on how much you can contribute
• You must take required minimum distributions after age 73
• Possible limits on tax deductions if you or your spouse have an employer-sponsored retirement plan

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How traditional IRAs differ from other IRAs

There are several different types of IRAs, both for individuals and employees. The terms of each differ based on eligibility, contribution limit, income limit, tax treatment, and a few other factors. The comparison chart below reflects information as of 2024 for four common types of IRAs.

Roth IRA

A Roth IRA is similar to a traditional IRA in many ways: it’s an individual retirement account that offers tax advantages as long as you leave your money in it until you turn 59½. The main difference between a traditional and a Roth IRA is when the money is taxed. When you start a Roth IRA, you pay income tax on money before you invest it. Then, when you make qualified withdrawals, you don’t pay any income tax at all, including on the money your account has earned. You’re also allowed to withdraw funds you’ve contributed at any time without penalty, though you’ll be subject to a 10% penalty if you withdraw earnings early.

A Roth IRA is best if:

• You want tax-free income in retirement
• You believe your tax rate will be higher in the future

SIMPLE IRA

The Savings Incentive Match Plan for Employees, or SIMPLE IRA, allows an employer to set up traditional IRAs for their employees; both the employer and employee can make contributions. It’s generally available for small businesses with fewer than 100 employees that don’t have another retirement savings plan, like a 401(k). If your employer offers a SIMPLE IRA, they’re required to contribute a certain amount each year, but you don’t have to put in any money. 

A SIMPLE IRA is best if:

• You’re a small business owner or work for a small business and want an uncomplicated way to save for retirement.

SEP IRA

The Simplified Employee Pension Plan, or SEP IRA, is a retirement account that can be established by either an employer or a self-employed person. Unlike the SIMPLE IRA, only an employer can contribute to a SEP IRA. The employer is allowed to take a tax deduction for contributions made, and they must contribute equally to all eligible employees. Note: if you’re self-employed, you are considered the employer, so you can make contributions and take tax deductions.  

A SEP IRA is best if:

• You’re self-employed or own a small business and want a simplified way to save for retirement while potentially contributing more than traditional IRA limits.

Rollover IRAs

If you have an employer-sponsored retirement plan and leave your job, you can usually do what’s called a rollover, in which you transfer the funds from your retirement plan into an IRA. Most people are eligible to roll over funds into either a traditional or Roth IRA, but there can be tax implications if you’re rolling over pre-tax (traditional) money into a Roth IRA. If you’re trying to decide what to do with your 401(k) or 403(b), you may want to brush up on the IRS rules for rollovers. 

A rollover IRA is best if:

• You’re leaving a job and want to consolidate your retirement savings from an employer-sponsored plan.

How to open a traditional IRA account

To get started with your very own IRA, follow these key steps:

Pick the right IRA provider

The first step to opening a traditional IRA is to pick a reliable provider. Research different options, like banks, online brokers, or Stash IRAs. Choose a provider that suits your investment needs and preferences.

Open your account

Once you’ve chosen a provider, complete the online application process to open the account. This usually takes 15 to 20 minutes, during which, you’ll be asked to give your name, address, and Social Security number to verify your identity.

Choose your contribution amount

Decide how much money you want to put into your IRA each year. The maximum contribution limit for 2024 is $7,000 or $8,000 if you’re at least 50. Remember, you’ll also be limited by your amount of earned income.

Select your investments

In a traditional IRA, you can invest in a variety of assets like stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Research and choose investments that suit your risk tolerance and financial goals. Stash has automatic investing tools to help you build wealth regularly. 

Monitor and adjust

Review your account’s performance and make adjustments as needed. This might mean rebalancing your investments or changing your contribution amounts. 

Use a retirement calculator to determine how much you’ll need to save for retirement based on your age and desired retirement income. This will help you set a realistic savings goal and plan for a comfortable retirement.

Is a traditional IRA right for you? 

The sooner you start investing for the future, the more time your money has to grow. When you’re deciding whether a traditional IRA is the right choice for you, you might consider things like:

• Flexibility: Are you able to leave your funds in your account until retirement age to avoid incurring penalties? 
• Tax deductions: Do you want to lower your tax bill now or pay less tax in the future?
• Income limits: Do you have a higher income level that might disqualify you from opening a Roth IRA?

When it comes to tax-advantaged individual retirement accounts, people are often weighing the pros and cons of a traditional IRA vs. a Roth IRA. Good news: you can have both.

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Frequently asked questions

1. What are the annual contribution limits for a traditional IRA?

In 2024, the maximum you can contribute is $7,000 or $8,000 if you’re 50 years or older. It’s essential to stick to these limits; there may be penalties if you go over them.

2. What happens if I contribute more than the annual limit to a traditional IRA?

If you contribute more than the annual limit to a traditional IRA, you might face a penalty of 6% on the excess amount every year until it’s corrected. This penalty can add up quickly, so if you accidentally over-contribute, correct it as soon as possible.

3. Can I have both a traditional IRA and a 401(k) plan?

Yes, you can contribute to both a traditional IRA and a 401(k) in the same year. However, your ability to deduct your traditional IRA contributions from your taxable income may be limited if you or your spouse is covered by a workplace retirement plan.

4. Should you contribute to a traditional IRA if it’s not tax-deductible?

Even if you can’t deduct your IRA contributions from your tax return, it might still be worth it to contribute. The primary reason is that you can still grow potential earnings tax deferred. But if you’re looking for alternatives, consider opening a Roth IRA or increasing contributions to your 401(k), especially if you have access to an employer match. 

5. What happens to a traditional IRA when you die?

Your traditional IRA will pass to your designated beneficiaries when you die. They will have the option to take account distributions over their lifetime or as a lump sum. If you don’t designate a beneficiary, your traditional IRA will go through probate, which can be a lengthy and expensive process.

6. Who cannot open a traditional IRA?

Individuals who don’t have earned income, like wages, salaries, or self-employment income, cannot open a traditional IRA. One exception is if you’re married and your spouse works. In this case, your spouse can contribute to a traditional IRA on your behalf when you file a joint tax return. This is known as a spousal IRA contribution.

The post What Is a Traditional IRA? appeared first on Stash Learn.

In this article, we’ll cover:

• Key differences between saving and investing
• When to save and when to invest

The key differences between saving and investing

Saving and investing are distinct financial concepts. While they both involve putting money toward the goal of increasing your assets in the future, they have very different functions and results when it comes to time horizon, potential for returns, liquidity, risk, and inflation. Once you understand the differences, you can determine how each fits into your financial plan. 

Your future goals

Some of your future financial goals are achievable sooner than others. If you’re looking at the short term, think of savings. If your goal is further into the future, consider investing. 

• Short-term goals: Saving can be a good choice for achieving short-term financial goals like taking a vacation, buying a car, getting a new computer, or putting a down payment on a home. Opening a savings account is also ideal for building up an emergency fund to cover large, unexpected expenses or get you by if you lose your job. 
• Long-term goals: In contrast, investing is more appropriate for achieving large goals far in the future, like paying for your kid’s college education or setting yourself up for retirement. Investments have the potential to grow your money more over time by earning higher returns than you’d get from earning interest in a savings account, but you may need to keep your money invested over the long haul to realize those gains. 

Potential returns

The return on investment (ROI) differs quite a bit between saving vs. investing. The entire point of investing is to earn returns. Saving is more about setting aside money over time, but earning interest in a savings account certainly does grow your money more than hiding it in your mattress. Most traditional savings accounts pay some interest, and you can often earn an even better rate with high-yield savings accounts, money market accounts, and certificates of deposit (CDs). Interest rates are variable, and often rise and fall in relation to inflation. The longer you keep your savings in an interest-bearing account, the more you can take advantage of compound interest, which is when the interest you’ve earned also earns interest. 

The ROI on different types of investments can vary greatly, but over the long term they usually outpace both inflation and what you could earn through interest in a bank account. The historical average return for stocks is around 10%, while bonds have historically produced 5% to 6% in returns on average. Other investment vehicles like mutual funds, index funds, and ETFs vary quite a bit in their average returns, since each fund contains a different mix of multiple assets. But because they usually hold stocks and bonds, funds tend to offer more lucrative long-term returns than a simple savings account. 

Impact of inflation

Inflation measures how much the cost of products and services rise over a given period of time. When inflation goes up, your purchasing power goes down; your dollars don’t go as far as they used to. This is an important consideration for your savings. If the interest rate on your savings account is lower than the inflation rate, it erodes the value of your savings over time.  

The money you earn today will have less purchasing power in a couple decades, so you want your investments to generate enough returns to compensate. Investing is often used as a hedge against inflation because the returns are generally higher than inflation over the long term. That’s why investing is typically advised for financial goals far into the future, like retirement. In fact, some investors pursue strategies intended specifically to profit from inflation. 

Liquidity (how accessible your money is to you)

Liquidity describes how quickly you can get your hands on your money. Cash is your most liquid asset; actual dollar bills in your wallet can be spent any time. Money in your savings account is also incredibly liquid because you can easily withdraw it at the bank or ATM. The only drawback is that some savings accounts charge a fee if you make more than six withdrawals a month. Liquidity gives you the flexibility you need to spend your savings, such as tapping your emergency fund for a big car repair or buying that TV you’ve saved up for when it goes on sale. 

Investments are typically less liquid than savings; the amount of rigidity varies among asset and account types. Certain types of investment vehicles, like bonds, may have a fixed term that requires you to stay invested for a certain amount of time. Stocks and shares of many funds are more liquid in that they can be sold any time, though it usually takes three business days to get your money. And if you’re selling stock because you need the money for an emergency, you run the risk of having to sell at a loss. Tax-advantaged retirement accounts, which are types of investment accounts, are extremely inflexible; you usually can’t withdraw money before age 59 1/2 without incurring steep penalties. Finally, if you invest in things like collectibles or real estate, your money is locked up in those assets until you can find a buyer, which could take a lot of time and effort.  

Risks involved

People usually think about risk when it comes to investing, but not savings. It’s true that putting money into savings is generally quite low-risk. As long as you keep savings in an FDIC-insured bank account, you’re protected even if the bank were to go under. That said, saving money comes with certain risks, too. For example, if you only keep money in a traditional savings account without investing some of it, you run the risk that it won’t grow enough to keep up with inflation, leaving you with a lot less spending power in retirement. There’s also the risk associated with variable interest rates. If your bank drops interest rates, the return you’re earning on your savings will drop as well. 

With investing, there’s always the risk that you could lose money if the value of your assets drops below what you paid for them. Business risk is the potential for a stock to lose value due to financial or management issues with the company. Geopolitical risk comes into play when things like war, terrorism, and trade relations impact the economy. And overall market volatility can cause the value of your portfolio to fluctuate. One way investors can manage these investment risks is by diversifying their portfolios. Diversification reduces risk by spreading the holdings in your investment portfolio across different asset classes like stocks, bonds, and funds. If one of your investments loses value, others may hold steady or even grow.

When to save your money

How do you decide when you should be saving vs. investing? Consider what you’re trying to achieve. Saving is well-suited to funding things you want within a few years and protecting your financial well-being when life throws you a curveball.  

• Financial goals: If there’s a large purchase you want to make in five years or less, saving for it makes sense. That’s too short a time to be confident that investments will grow, but not so long a timeframe that inflation is likely to seriously erode your purchasing power. 
• Emergency funds: If your dog needed emergency surgery tomorrow, could you pay for it without going into credit card debt? What about if you were laid off; how long could you cover your basic living expenses before your bank account was empty? These kinds of scenarios are exactly what an emergency fund is for. Putting aside money to cover unexpected expenses is one of the primary uses for a savings account.  

If you want to save up more, look for ways to spend less. From sticking to a budget to reducing discretionary spending to lowering your bills, reducing how much money you spend increases how much money you can put into your savings. 

Places you can park your cash and save

When you’re stashing money aside for an emergency fund or savings goal, you can put it to work earning interest so your savings grow faster. There are several different kinds of deposit accounts where you can store your savings, and they vary in the details of potential interest rates, liquidity, minimum balances, and fees.  

• Traditional savings account: A basic savings account usually offers a pretty low interest rate; the average APY (annual percentage yield) was 0.46% as of December 2023. But there are often low or no minimum balances or fees, making them accessible if you’re just getting started with saving.  
• High-yield savings account: This type of account functions just like a traditional savings account, but offers much higher interest rates. At the same time, many require you to maintain a minimum balance and might charge account maintenance fees, which can eat into your returns. There’s often a minimum opening balance, too, so you’ll need to already have some funds accumulated before you can open an account. 
• Money market account: If you want higher rates and more liquidity, money market accounts can be a good place to keep your savings. Their interest rates are usually close to high-yield savings accounts, and, unlike savings accounts, they come with a limited number of checks and debit transactions a month. That makes it even easier to spend your money when you want to. Be aware that minimum balances and fees are common with these accounts. 
• Certificate of deposit (CD): Savings and money market accounts offer variable interest rates, so they could go up or down at any time. CDs, on the other hand, give you a fixed interest rate for a set term, usually between six months and six years. CDs often have interest rates as good as or better than high-yield savings accounts, but the trade-off is a lack of liquidity. If you withdraw your money before the term is over, you’ll generally lose some of the interest you’ve earned. 

When to invest your money

Are you many years, or even decades, away from retirement, sending your kids to college, or putting a down payment on the house of your dreams? Do you have an emergency fund and enough money in savings for your short-term needs? Have you paid down any high interest debt? If so, it may be time to start investing your money. Investing is most likely to help you reach longer-term goals: things for which you need to build up a large amount of money, but you won’t need it any time soon. Consider investing when:

• You don’t need the money within the next five years: Keeping your money in investments for at least five or ten years may lead to better returns in the end. Long-term investing, also known as a buy-and-hold strategy, is the idea that you hang onto assets long enough to ride out the inevitable ups and downs of the stock market.
• Your employer offers 401(k) matching: Many employers will match your contributions dollar for dollar up to a certain percentage of your salary. It’s like free money for your retirement account. If your financial situation allows, invest at least as much as your employer will match so your retirement account grows more quickly. 
• You want tax advantages for retirement investments: The money you put into 401(k)s and traditional IRAs is pre-tax, meaning you don’t pay income tax until you withdraw it in retirement. Your contributions now are subtracted from your taxable income when you file your return, reducing your current tax burden. 

Whether you’re a hands-on DIY investor, prefer working with a financial advisor, or enjoy the ease of an automated robo advisor, opening a brokerage account is the first step in your investment journey.  

Saving vs. investing: strike the balance you need for financial security

Saving and investing aren’t mutually exclusive. Understanding how to use both strategies empowers you to work toward your goals in the short term and far-off future using the right types of accounts for what you want to achieve. Something saving and investing have in common: the sooner you start, the more time your money has to grow. Start finding your balance today.

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The S&P 500 is an index that tracks the 500 leading companies by market capitalization in the U.S. While you can’t directly invest in the index itself, there are two broad options for investing in the S&P 500: through individual stocks or through an index fund, such as a mutual fund or exchange-traded fund (ETF). 

In this article, we’ll cover the following: 

• What is the S&P 500?
• How to invest in the S&P 500: index ETFs vs. index mutual funds
• Investing in the S&P 500 with an index fund
• Investing in the S&P 500 with an ETF
• Pros and cons of investing in the S&P 500
• How to invest in the S&P 500: FAQs

Read on to learn how to invest in the S&P 500. 

What is the S&P 500?

If the stock market is a giant jigsaw puzzle, you can think of an index as a magnifying glass. In the case of the S&P, the magnifying glass offers a closer look at the 500 biggest, most prominent pieces of the puzzle, giving you a clearer picture of the stock market as a whole. 

A stock market index, then, is a measurement of a market. Specifically, an index is a tool (like a magnifying glass) used to examine what’s happening in a stock market. The S&P 500 is one of the most widely used proxies for the overall health of the stock market—the stocks forming the S&P 500 represent roughly 80% of the market’s available market capitalization.

The S&P 500 includes companies across the spectrum, from energy to health care. Here are the top 10 companies in the S&P 500 by index weight as of January 2023: 

1. Microsoft
2. Apple
3. NVIDIA Corporation
4. Amazon
5. Alphabet (class A)
6. Meta Platforms Inc (class A)
7. Alphabet (class C)
8. Berkshire Hathaway Inc. (class B)
9. Tesla
10. Broadcom Inc.

Most of these companies fall into three main sectors: information technology (28.9% of the S&P), financials (13%), and health care (12.6%). These three sectors account for almost half of the S&P 500.

So, how do you invest in the S&P 500? For new investors, the best way is through an ETF or mutual fund. While there are some differences between the two that we’ll explain below, funds are a low-cost way to gain exposure to the S&P 500 and provide instant diversification to your portfolio. 

How to invest in the S&P 500 index fund: mutual funds vs. ETFs 

Since the S&P 500 is simply a measure of its underlying stocks’ performance, you can’t invest in it directly—instead, you can buy S&P 500 index funds through either a mutual fund or ETF that strives to match the performance of the S&P 500 market index.

A mutual fund is a basket of hundreds of stocks, securities, and other assets within a single fund. Instead of purchasing a single stock, funds give you exposure to all the different shares it contains, providing instant diversification for your portfolio. 

ETFs and mutual funds both aim to mimic the performance of an index like the S&P 500, but there are a few differences between the two. 

Investing in the S&P 500 with a mutual fund

Mutual funds that track the S&P 500 usually include most (if not all) of the stocks from the 500 companies comprising the S&P. This is so they can match the performance of the index as closely as possible. 

There are many S&P 500 index-based mutual funds to choose from, but the following criteria can help guide your selection: 

• Minimum investment: index funds will have varying minimum investments, so be sure to check that the minimum amount aligns with how much you have to invest. 
• Expense ratio: since index funds are passively managed, the expense ratio (the ongoing cost of holding the investment) tends to be low. Look for a fund with the lowest expense ratio. 
• Dividend yield: if your index fund comes with dividends, which many do, be sure to compare the dividend yield (the amount investors are paid in dividends) of different funds you’re considering. Some may be higher than others, and capitalizing on dividends is a great way to boost returns. 

Purchasing an S&P 500 index-based mutual fund is a fairly simple process. Here’s how to do it:  

1. Open an investment account: you can sign up with a traditional brokerage or through a robo-advisor.  At Stash, we offer both DIY investing and automated investing.
2. Add funds: decide how much capital you’re able to invest and add the funds to your account. 
3. Choose and buy your index fund: once you’ve decided on an index fund, purchase it through your brokerage account. 

If you don’t have a lot of capital to invest upfront, be sure to shop around for brokerage accounts that meet your needs and align with your budget—there are many available that offer low-fee trading options. 

Investing in the S&P 500 with an ETF

Like index funds, ETFs allow investors to pool their money in a fund made up of stocks, bonds, and other assets. Unlike index funds, however, which can only be traded once a day at the end of each trading day, ETFs can be traded like a stock—meaning their share prices can fluctuate throughout the trading day. 

There are different types of ETFs, and not all of them track a particular index. Some ETFs correspond to a particular sector, industry, or market. To invest in the S&P 500 with an ETF, you’d want to purchase an index-based ETF. The key factors of investing in an ETF aren’t much different from that of an index fund:

• Minimum investment: in many cases, ETFs will have a lower minimum investment than index funds—sometimes, you might only need to pay the amount of a single share to get started. 
• Expense ratio: always compare expense ratios for ETFs you’re considering, and look for one with the lowest expense ratio possible. 
• Dividend yield: compare the dividend yields of ETFs you’re considering, and ensure it’s as high as possible to boost your returns. 

Follow these steps to buy an ETF: 

1. Open an investment account: you can sign up with a traditional brokerage or through a robo-advisor like Stash, where you’ll find many ETFs to choose from. 
2. Add funds: decide how much money you’re able to invest and add the funds to your account. 
3. Choose and buy your ETF: once you’ve decided on an ETF, purchase it through your brokerage account. Be sure to use the key criteria listed earlier to compare expense ratios and dividend yields.

Pros and cons of investing in the S&P 500

Investing in the S&P 500 is a popular way to build wealth for new and seasoned investors alike, and for good reason—in the case of an S&P 500 index fund or ETF, you gain exposure to the world’s leading companies without spending hours researching individual stocks. If you’re still on the fence, here’s a look at the main pros and cons of investing in the S&P 500.

Pros

In general, the benefits of investing in the S&P 500 outweigh the disadvantages. 

• Consistent long-term returns: the S&P 500 has historically provided consistent annual returns over the long term—from 1950 to 2023, it has yielded an annualized average return of 11.28%.
• Instant diversification: if you invest with an index fund, you gain exposure to an array of companies, industries, and sectors that instantly diversify your portfolio. 
• No research or prior investment knowledge required: investing in the S&P 500 through an index fund or ETF means no intensive stock-picking research is required. 

Cons

While the benefits of investing in the S&P 500 outshine the drawbacks, there are still a few to be aware of. 

• Dominated by large-cap companies: since mainly large-cap companies dominate the S&P 500, it won’t provide exposure to many small-cap or mid-cap stocks, even when investing in S&P index funds.
• Short-term volatility: while the S&P 500 historically provides strong annual returns over the long term, it’s not immune to market volatility. Investors must be able to stomach short-term price swings and even sustained periods of market downturn like a bear market.
• No exposure to international companies: since the S&P 500 only includes U.S.-based companies, it won’t provide stock exposure to companies in other parts of the world. This is less of a concern for new investors, but spreading your portfolio across different regions is another diversification strategy. 

When held for the long term, an S&P 500 investment can be a core holding of any portfolio—particularly for new investors looking to build wealth for the future. With exposure to some of the most dynamic companies in the U.S. and a history of strong returns over time, there’s no reason to put off investing in the S&P 500.

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FAQs about how to invest in the S&P 500

Still have questions about how to invest in the S&P 500 index? Find answers below. 

Should I invest in the S&P 500 index through an ETF or mutual fund? 

One of the main differences between index-based ETFs and mutual funds is that ETFs tend to require a lower minimum investment to get started. For new investors without much capital to invest upfront, an S&P 500 ETF is a low-cost option. 

What is the minimum investment for the S&P 500?

For an S&P 500 index fund, many come with no minimum investment. For an S&P 500 ETF, you might need to pay the full price of a single share, which is generally upwards of $100—but some robo-advisors like Stash offer fractional shares for as little as $5. 

If you’re investing in individual stocks, you’ll just need to pay the cost of the share, which varies by company—you’ll find some for under $100 and others for $350+. 

Can you invest in the S&P 500 with individual stocks?

Yes. If you don’t want a mutual fund or ETF, you can hand-select individual stocks of companies you want to invest in. Keep in mind that investing in a single company increases the risk and volatility of your investment, and will require thoughtful research and stock performance analysis. 

Can you invest in the S&P 500 as a non-U.S. investor? 

Yes. While the S&P 500 is an index of U.S. companies only, there are no restrictions as to who can invest in it. 

The post How To Invest in the S&P 500: A Beginner’s Guide for 2024 appeared first on Stash Learn.

Here are the stock market holidays for 2024:

• New Years Day: Monday, Jan. 1st (observed)
• Martin Luther King Jr. Day: Monday, Jan. 15th
• President’s Day: Monday Feb. 19th
• Good Friday: Friday, March 29th
• Memorial Day: Monday, May 27th
• Juneteenth National Independence Day: Wednesday, June 19th
• Independence Day: Thursday, July 4th
• Labor Day: Monday, Sept. 2nd
• Thanksgiving Day: Thursday, Nov. 28th
• Christmas: Wednesday, Dec. 25th

Stock market holidays and early closings

In 2024, there are 10 days that the stock market closes and two days with early closings, limiting trading hours. During these holidays, traders and investors cannot buy or sell shares of companies listed on the stock exchange. The dates of these holidays are set far in advance.

Here are the U.S. stock market holidays and early closings recognized in 2024:

Bond market holidays and early closures

Similar to the stock market, the bond market observes several holidays throughout the year, during which the market is closed or has limited trading hours that affect your ability to purchase bonds. These holidays can impact trading activity, settlement dates, and other aspects of the bond market. In addition to observing the same holidays the NYSE and Nasdaq do, the bond market also closes on Columbus Day and Veterans day.

Here are the bond market holidays and early closings recognized in 2024:

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Stock market and bond market closing FAQ

What days is the stock market closed this year?

In 2024, the U.S. stock market is closed:

• Monday, Jan. 1st
• Monday, Jan. 15th
• Monday, Feb. 19th
• Friday, March 29th
• Monday, May 27th
• Wednesday, June 19th
• Thursday, July 4th
• Monday, Sept. 2nd
• Thursday, Nov. 28th
• Wednesday, Dec. 25th

Why is the stock market closed on Good Friday?

The stock market is closed on Good Friday due to both historical tradition and some practical considerations. While the initial reason for the closure was a religious observance, the lower trading volume and the desire for a long weekend break have made it a standard practice in modern times.

Is the stock market closed for Columbus Day?

No, the stock market is open on Columbus Day (Indigenous Peoples Day), which is on Oct. 14th, 2024. The bond market, however, is closed on Columbus Day.

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The average American retires with $200,000 to $250,000 between various retirement savings accounts—just a measly one million dollars shy of the recommended amount. This explains why so many retirees return to work either part-time or full-time—34% of the American workforce is 65 or older, with almost 9% being 75 or older.

For some people, retirement can seem like an impossibility. Even retiring by the standard retirement age of 65 can seem out of reach.

While we all have different ideas of what retirement can or should be—from moving into an old missile silo to long days spent playing bird bingo with the grandkids—everyone eventually hopes to punch the clock one last time and enjoy life without work.

But getting there takes resources and planning. Specifically, how much you’ll need in retirement savings.

How much do I need to retire?

The most common recommendation to save for retirement is between $1.2 and $1.5 million. However, if you are hoping for an exact amount, there isn’t a one-size-fits-all number. Everyone has different retirement goals and methods of reaching them. Though, there are formulas to use as starting points to determine how much you’ll need in retirement.

The table below lists a 20- to 35-year retirement plan with access to 80% of pre-retirement salary. For example, to retire early at 50, an individual earning $50,000 a year should have $1.4 million in their retirement account to support a 35-year retirement. If that person were to retire at 60, they would need $1 million in retirement savings.

Two important considerations for early retirement:

• Some retirement accounts penalize withdrawals before 59 ½. You can contribute more to account for the penalties or plan on how to pay for it.
• Realistically, if an individual retires early, they don’t solely rely on their retirement funds. Setting up a steady stream of passive income is a common way retirees bring in money while enjoying retirement.

How Much Do You Need to Retire: By Income

How to calculate retirement savings

While the numbers above are a good benchmark for how much you’ll need in retirement by age, the exact amount varies on your specific situation. Many free tools can help you calculate exactly what you need.

Savings calculators can help you see how much money you need to set aside each month to reach your financial goals and retire by 65 or any other age. Check out Stash’s retirement calculator. Simply plug in your age, income, and current savings, and it can help you calculate how much you’ll need to save to reach your retirement goals.

How much do you need to retire?

Use our retirement calculator to find out.

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Try playing with these calculators and inputting different numbers to see what’s possible. Even minor changes to your saving and spending habits can greatly affect the eventual outcome.

If your salary isn’t in the table above or you are a couple looking for your combined retirement savings benchmark, use the following calculations.

High earners should consider contributing on the higher end of the scale to maintain their typical lifestyle while in retirement. For example, the retirement account of a Chief Financial Officer making $275,000 a year should hold about $2,200,000—eight times their salary—when they turn 55.

Retirement Savings Benchmark By Age

How to save for retirement

There are numerous ways you can start saving for retirement. If you’re looking to build your wealth by investing for retirement, the most common retirement investment accounts are 401(k)s, Roth IRAs, and traditional IRAs. Stay with us as we break each one down.

401(k)

A 401(k) plan is an employer-sponsored retirement plan offered to employees. Contributions are invested and grow over time. However, the employer and plan provider determines what investment options are available.

401(k)s can be either traditional or Roth—about 88% of 401(k) plans offer a Roth version. The main difference between the two is how they’re funded. Those enrolled in traditional 401(k)s contribute pre-tax dollars, whereas Roth 401(k)s use after-tax dollars.

While both traditional and Roth 401(k) employee contributions are generally eligible for an employer matching contribution (if available), the employer’s contribution will be deposited as traditional 401(k) funds. Approximately half of all employers offer some degree of matching.

Traditional IRA

A traditional IRA is a tax-advantaged retirement account where investors contribute pre-tax dollars into investment types like stocks, bonds, and mutual funds. Balances grow tax-deferred, meaning investments accumulate tax-free until withdrawn. If you expect to be in a lower tax bracket after retirement, a traditional IRA might be best for you.

Roth IRA

A Roth IRA is another type of investment retirement account, but unlike traditional IRAs, Roth IRAs are funded by after-tax dollars. After contributing, investments continue to grow tax-free and do not face further taxes when withdrawn. Stocks, bonds, and mutual funds are also common Roth investment types.

Roth IRAs are appealing due to their high-growth nature. If you started maxing out your Roth IRA in your twenties, you could retire as a millionaire in your sixties.

However, Roth IRAs have high-income eligibility limits meant to prohibit those earning over $161,000 from profiting from Roth tax benefits. However, high earners can get around this stipulation by converting a traditional IRA to a backdoor Roth IRA.

Retirement savings considerations

Think ahead, and consider the costs related to your future retirement plans. Bills don’t go away when you retire, so you need a plan for how you’ll pay living expenses like healthcare and property taxes. There are also factors beyond your control that impact your retirement savings, like where you live and inflation.

1. How much can you contribute?

You shouldn’t put yourself in financial trouble now to save for retirement. But that doesn’t equate to skipping out on saving for retirement altogether. Analyze your financial standings and create a budget to determine how much you can contribute to your retirement savings. Remember, some retirement savings is better than none.

2. Where do you want to retire?

Perhaps the biggest factor in figuring out how much you’ll need to retire is where you hope to live. Ask yourself:

• Do I plan on downsizing and moving into a smaller house? Selling your home for a smaller, cheaper one may provide additional extra money for your retirement savings.
• Will I move to a different country? A European villa will cost much more than a small house in Indiana or Ohio.
• If I don’t plan on moving, will my maintenance costs, property taxes, and home improvements rise with time?

Think about where and how you want to live to understand how your cost of living might change. Also, if you plan on moving away from friends and family, you could spend more on frequent trips to visit—just one more thing to consider.

3. What do you envision retirement to be?

Another important question to ask yourself: “What do I want to do when I retire?”

For example, if you hope to retire at 65 and spend your retirement golfing at the local country club, you’ll need far less than the person who retires at 50 and travels the world.

Read more: How to calculate opportunity costs

4. How can you account for inflation?

It’s impossible to know how much the prices of goods will increase over time, making it difficult to plan for inflation in retirement savings. You could look at historical inflation rates, but even that might not be a completely accurate prediction of the future. For example, the COVID-19 pandemic, which led to inflation spikes in 2022, couldn’t have been predicted.

The best way to account for inflation in your retirement savings is to save for more than you’ll need if you can afford to. Additionally, Social Security increases with inflation, though this shouldn’t be your primary source of income in retirement.

Frequently Asked Questions (FAQ)

Still have questions about how much you’ll need in retirement? Let us help!

How much does a couple need to retire?

On average, couples should have about eight to 10 times their combined pre-retirement salaries saved for retirement. For high earners, that amount should be closer to 15 times their combined salaries.

Can I retire with $1.5 million comfortably?

Yes, it’s possible to retire with $1.5 million and live a comfortable life if you retire at a typical retirement age. However, this is only true for those used to living with a salary of less than $100,000.

Can I retire at 60 with $500,000?

It’s not impossible to retire at 60 with $500,000 if you live a frugal lifestyle. This savings amount would provide a $16,000 to $25,000 annual salary. But people retire with much less. The average American has less than half this amount in their 401(k) accounts.

However, if you want to truly retire and not pick up a part-time job, you would need much more savings. Or, you may consider putting passive income streams in place to supplement your retirement savings.

Why you should start saving now

Now that you’ve calculated how much you’ll need in retirement to live comfortably, it’s time to get started saving. Compound interest can heavily impact long-term retirement savings, which is why it’s important to start saving early to reach your goals.

The earlier you start saving, the more time your money has to compound and the more interest or returns you could earn. Even if your current contributions are small, compounding can help them add up by the time you reach 65.

The sooner you start, the better. Saving small amounts over longer periods is typically easier than scrambling to save several thousands of dollars per year in your 50s and 60s. Starting to save at a young age could give you a huge head start.

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You’ve heard it before—it’s never too early to start saving for retirement. The earlier you start, the more comfortable you’ll be sitting on a beach with the rest of the snowbirds in Florida. But how do you start stashing away for your later years?

Individual retirement accounts (IRAs) are one of the most common types of investment accounts. If you’re debating between a Roth IRA vs. traditional IRA, you’ll want to consider the pros and cons of each. Both offer tax benefits, but they differ in important ways, including the timing of those tax benefits, accessibility of funds, and income limits.

Read along to learn the pros and cons of Roth vs. traditional IRAs to determine which is best for you.

Comparing Roth vs. Traditional IRA

What is a Roth IRA?

A Roth IRA is an individual retirement account you fund with after-tax income. This is separate from an employer-sponsored retirement plan. You can reap tax benefits by keeping your money in the account until retirement age. Your money grows tax-free while in the account and you don’t pay any taxes on withdrawals after age 59½. Plus, you can withdraw funds you’ve contributed at any time without penalty (early withdrawals on earnings are subject to a 10% tax penalty).

Benefits of a Roth IRA

Saving for retirement with a Roth IRA can have some notable advantages.

1. Tax-free growth and earnings

In exchange for contributing after-tax dollars, your money grows tax-free. Basically, you pay your taxes on contributions up front, let your money compound, and then pay no taxes when you withdraw earnings after age 59½.

Note that this tax benefit is subject to the five-year rule: you must hold a Roth IRA for five years, or earnings you withdraw may be subject to taxes and penalties. If you have multiple Roth IRAs, once you satisfy the five-year rule for the first one you open, the IRS generally considers the rule satisfied for all of them, even those you opened more recently.

2. Withdraw contributions penalty-free

At any time, you can withdraw the money you’ve contributed without paying penalties or additional taxes. That flexibility can be helpful, but remember that it applies to contributions only; any earnings on your investments will usually be subject to taxes and penalties if withdrawn early.

3. No required distributions

Required minimum distributions (RMD) force you to make withdrawals from your account annually starting at a certain age. Roth IRAs don’t have RMDs, allowing your money to compound for as long as you like. You can even pass along the untouched money to your heirs, tax-free.

Disadvantages of a Roth IRA

When you’re considering a Roth IRA, you may want to take into account the potential downsides.

1. Contributions are not tax-deductible

Because you’re contributing after-tax dollars, your annual Roth IRA contribution isn’t tax-deductible at the end of the year, meaning your contributions don’t reduce your taxable income in the year you make them.

2. Taxes and penalties for some withdrawals

While you can withdraw contributions to your Roth IRA without penalty, you may owe income tax and a 10% penalty if you withdraw earnings before you’re 59½ years old. There are, however, a few exceptions to IRA withdrawal penalties.

3. Limited annual contributions

In 2024, Roth IRA contributions are limited to 7,000 per year until age 50, at which point you can start contributing up to $8,000 annually. If you earn less than the contribution limit, you can only invest up to the amount of your earned income for the year. Contribution limits may also be reduced based on how much money you make. See the next item.

4. Annual income limits

The IRS restricts your ability to contribute to a Roth IRA based on your income. For instance, single filers earning over $146,000 in 2024 are limited to making a reduced Roth IRA contribution. Once they earn over $161,000 (in 2024), they are not eligible to contribute to a Roth IRA at all. 

The contribution limit starts to reduce for joint filers when their earnings reach $230,000, and they are not eligible to contribute to a Roth IRA when they’re income reaches $240,000. Income in this case is measured by your Modified AGI (MAGI). 

There is a loophole for high earners to get around the income limit while still reaping tax benefits. This is known as a backdoor Roth IRA. This strategy allows individuals to make contributions to a traditional IRA and then later convert the account into a Roth IRA. Conversions aren’t subject to income thresholds but are still subject to contribution limits. You should consult with a financial planner or tax advisor before making a backdoor Roth contribution, because if done incorrectly it may result in an unwanted tax liability.

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What is a traditional IRA?

A traditional IRA is also a tax-advantaged individual retirement account, but it functions differently than a Roth IRA. You may contribute pretax dollars, and your investments grow tax-deferred until you withdraw them during retirement.

Generally contributions are tax-deductible which can lower your taxable income for the year. After age 59½, you can withdraw your contributions and earnings and pay income tax on your money at that time.

Benefits of a traditional IRA

For some investors, the benefits of a traditional IRA outweigh those of a Roth IRA.

1. Tax-deferred growth

Once the money is in your traditional IRA account, it grows tax-free. Earnings and gains are not taxed until you make a qualified withdrawal during retirement. This can be an appealing tax benefit because many people are in a lower tax bracket after they retire.

2. Tax-deductible contributions

Note that if your or your spouse are eligible to participate in an employer-sponsored retirement plan, like a 403(b) or 401(k), it can impact the deductibility of your traditional IRA contributions. As of 2024, single filers who are covered by a workplace retirement plan, and with incomes over $77,000 ($230,000 for married filing jointly) may face limitations on the amount they can deduct. For married individuals filing separately, the income threshold is notably lower; those earning over $10,000 might not qualify for a full deduction of their traditional IRA contribution.”

3. No income limits

Anyone with earned income can contribute to a traditional IRA, regardless of how much you make.

Disadvantages of a traditional IRA

A traditional IRA tends to be a bit less flexible than a Roth IRA. Depending on your circumstances, that might be a disadvantage.

1. Penalties for early withdrawals

Unless you qualify for an exception to early-withdrawal penalties, any withdrawals from a traditional IRA before age 59½ are subject to income tax and an additional 10% penalty. That applies to both your contributions and gains.

2. Limited annual contributions

The contribution limits for 2024 are the same as Roth IRAs: $7,000 or $8,000 if you’re over 50.

3. Required minimum distributions

As of 2023, RMDs must be taken from a traditional IRA each year once you turn 73. The RMD for each year is calculated by dividing the IRA account balance as of Dec. 31 of the prior year by the applicable distribution period or life expectancy.

Roth IRA vs. Traditional IRA: Key Similarities

IRA pop quiz: Check your knowledge

Test your knowledge of Roth vs. traditional IRAs by answering true or false to the following questions in this quick pop quiz.

1/4

Quiz

 

With which type of IRA do you pay taxes when you contribute money to the account?

Roth IRA

Traditional IRA

Roth IRA. You contribute to a Roth IRA with post-tax dollars and you contribute to a Traditional IRA with pre-tax dollars.

2/4

Quiz

 

Which type of IRA requires you to withdraw money from your IRA at a certain age?

Roth IRA

Traditional IRA

Traditional IRA. Traditional IRAs require you to withdraw a certain amount of money at a certain age, called a required minimum distribution (RMD).

3/4

Quiz

 

At what age are you required to withdraw required minimum distributions from your Traditional IRA?

59 ½

62 ½

67 ½

70 ½

70 ½. You got it! You’re required to withdraw RMDs at age 70 ½ if your birthday is before June 1, 2019, or age 72 if your birthday is June 1, 2019 or later. 

4/4

Quiz

 

True or False: You can have both a Roth and a Traditional IRA.

True

False

True. Just make sure you don’t exceed the annual total contribution limit.

 

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How to choose between a Roth vs. traditional IRA

You have many options when saving for retirement, and an IRA of any type could offer tax benefits. When deciding between a Roth or traditional IRA, ask yourself the following questions:

1. Am I eligible for an IRA? Do you meet the income requirements to open an IRA account?
2. How much can I contribute? Roth IRAs and traditional IRAs hold the same contribution limit. But if you can afford to max out on IRA contributions on an IRA, it makes the most sense to opt for a Roth IRA and avoid paying taxes later.
3. Am I close to retirement age? A traditional IRA might be best if you’re within five to 10 years of retirement. The tax-free growth benefit of Roth IRAs works better if you have a long time before retirement.
4. Do you foresee your IRA as a potential nest egg for heirs? Since Roth IRAs don’t require minimum distributions, you can pass them on to heirs. You cannot do this with traditional IRAs.
5. Do you want your IRA to benefit you now or later? Traditional IRAs offer immediate tax benefits since they count as tax deductions, putting more money in your pocket now but leaving you to pay taxes down the road. With Roth IRAs, you reap the tax benefits later. You have to decide whether you prefer the extra cushion now or later.
6. Do you want flexible access to your money before retirement, just in case? Roth IRAs allow you to withdraw penalty-free from your contributions five years after opening the account. With a traditional IRA, nonqualified distributions incur tax and a 10% penalty.

For many investors, a deciding factor is whether you want to pay taxes now or in the future. You may want to consider whether your annual income and tax bracket will likely be higher or lower when you retire than it is now.

• If you think you’ll be in a higher tax bracket when you retire, a Roth IRA may be right. Your tax rate will be lower now, and you can withdraw those funds, plus earnings, tax-free in retirement.
• If you think you’ll be in a lower tax bracket when you retire, a traditional IRA may be the right choice. You’ll get the tax deductions today and pay a lower tax rate on your money later.

Saving for retirement is generally a good idea, and the right investment option for you depends on your current circumstances and goals. The tax benefits of both Roth and traditional IRAs could help your investments grow, so whichever you choose may help you build a brighter financial feature.

FAQ

Still unsure about which type of IRA you should have? Let us help.

Can you have multiple IRAs?

As long as you meet the eligibility requirements, you can invest in both a Roth IRA and a traditional IRA. You can also hold multiple Roth IRAs or multiple traditional IRAs. However, your combined annual contribution to all your IRA accounts will still be capped at $7,000 or $8,000 if you’re over 50.

Can my employer match my IRA contributions?

Employers cannot contribute to your individual Roth or traditional IRA because they are set up by you as an individual, separate from your employer plan. However, your employer can offer a different type of IRA plan, including an employer match. Smaller businesses often use these plans to help employees save for retirement without the costs of more complex plans like 401(k)s.

• Payroll Deduction IRA: This allows you to contribute to your Roth or traditional IRA through direct deposit from your paycheck. There is no option for an employer match.
• Simplified Employee Pension (SEP): This type of IRA allows an employer to open and contribute to an IRA for you. You cannot make contributions yourself; all the funds come from your employer.
• SIMPLE IRA plan: These plans are designed for small businesses that want to offer an employer match. Your employer must make matching contributions; plus, they have to contribute some funds even if you don’t.

Which IRA is right for you?

Whether you should choose a Roth or traditional IRA depends on your circumstances and goals. A Roth IRA may work well for you if you want more flexibility with your money and anticipate being in a higher tax bracket when you retire. A traditional IRA may be a better investment option if you want tax deductions now and expect to be in a lower tax bracket upon retirement.

Once you’ve decided which IRA is best for you, you’ll need to set a retirement investment strategy. Try our retirement calculator for a guided look into how much you’ll need to retire and the monthly contributions to get you there.

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When you start getting serious about your finances, one of the first things you might realize is that a budget can help you answer a lot of questions, from “Can I afford this?” when you’re about to hit the add-to-cart button to “When can I retire?” when you’re thinking about your long-term plans. For many people, budgeting can seem intimidating or too time-consuming at first. But learning how to budget may be the key to setting yourself up for financial success. 

Budgeting doesn’t have to be complicated. This guide will take you through the process, including six steps for learning how to make a budget you can stick to.  

In this article, we’ll cover:

• What a budget is
• The importance of budgeting
• Calculating your net income
• Recording your spending habits
• Predictable vs. variable expenses
• Balancing your budget
• Types of budgeting
• Setting goals for your budget

What is a budget?

In its simplest form, budgeting is just figuring out how much you make and how much you spend and then using that information to inform your future financial decisions. Your budget allows you to plan how you’ll spend your income and keep track of money coming in and out. Tracking your spending lets you see your true financial picture in real-time so you can make informed choices. And planning ahead gives you a chance to put money toward your longer-term goals, like paying off credit cards, saving for a downpayment on a house, or planning for retirement.  

Why budgeting is important

Why learn how to make a budget? The short answer is that knowledge is power. It can be difficult to exercise control over your money until you have a clear picture of your finances. However, the benefits of budgeting extend far beyond just gaining financial control. Let’s dive into the specific advantages and rewards that come with implementing a budget.

Improved financial security

Let’s face it, life can be unpredictable. But with a budget, you can gain control over your finances and build a safety net. By understanding your financial situation, you can build an emergency fund to handle unforeseen circumstances, such as medical emergencies, car repairs, or job loss. This financial security provides peace of mind and reduces the stress that comes with financial uncertainty.

Reduced stress

Financial stress can take a toll on your well-being. Whether you’re living paycheck to paycheck or worrying about money in general, it can be overwhelming and emotionally draining. A budget gives you a clear overview of your income, expenses, and financial goals. It helps you identify areas where you can cut back, eliminate unnecessary debt, and save for the future. With a budget in place, you can make informed financial decisions and eliminate the anxiety that arises from financial instability.

Better decision-making

Picture this: you’re equipped with a budget that serves as your compass. It guides you to make intentional choices aligned with your goals. When you have a budget, every financial decision becomes more deliberate and informed. By tracking your spending habits, you become aware of patterns and identify areas where you may be overspending. This knowledge empowers you to make adjustments and allocate your resources according to what truly matters to you.

Ability to achieve financial goals

A budget serves as a roadmap for reaching your financial aspirations. Whether your goals include paying off debt, saving for a dream vacation, saving for a down payment on a home, funding a child’s education, or planning for retirement, a budget provides a structured approach to allocate funds towards these objectives. It helps you track your progress, make necessary adjustments, and stay motivated on your path to financial success.

Enhanced control and discipline

Setting a personal budget promotes discipline and self-control in managing your finances. It encourages you to prioritize expenses, distinguish between needs and wants, and resist impulsive spending. By consciously allocating your income, you gain control over your money and avoid the pitfalls of overspending or unnecessary debt. Over time, budgeting becomes a habit that empowers you to make smart financial choices that align with your values.

Improved relationships and communication

Money matters can strain relationships. Budgeting is not only a personal endeavor but can also benefit relationships. It fosters open communication about money between partners or family members, ensuring everyone is on the same page regarding any financial goal, spending limits, and saving strategies. Budgeting encourages accountability and cooperation, leading to stronger relationships and shared financial success.

6 Steps to budgeting your money

Step 1: Calculate your monthly net income

You may have heard the terms “gross income” and “net income.” Gross income is the total amount you earn before taxes, benefits, and other payroll deductions are taken out. Net income is the amount of money you actually take home every month after taxes and deductions. For budgeting, you want to identify your net income.

If your sole source of income is a job with a regular paycheck, it’s pretty straightforward: tally up the total amount of all your paychecks during a month. Your employer typically subtracts taxes and other deductions from your base salary before issuing your paycheck. 

You might have additional sources of income, so be sure to include those when calculating your monthly net income. This might include things like:  

• Alimony payments and/or child support 
• Government payments, like disability or veterans benefits
• Passive income, such as income from rental properties 
• Any money you earn from a side hustle or gig work

Step 2: Gather and record your expenses

Once you know how much money is coming in, figure out how much money is going out. Make a list of everything you spend money on every month and about how much you’re spending: bills, necessities, discretionary spending, etc. It can be tough to remember everything, so do some digging by looking at your records. 

You might start by reviewing statements from the accounts you use to pay for things, such as:

• Bank accounts
• Credit cards 
• Digital payment apps

Other useful information about expenses might be found in statements or receipts from:

• Car payments
• Car insurances
• Mortgage documents
• Utility bills
• Investment accounts
• Email receipts 

After your initial pass at tracking your expenses, consider some of the following options to help automate your tracking:

• Embrace budgeting apps: These user-friendly apps often allow you to link your bank accounts and credit cards and automatically categorize transactions and provide a visual representation of your spending patterns.
• Leverage online banking tools: Your bank’s online platform can have a treasure trove of features to help you track expenses. Explore the tools provided, such as spending categorization, transaction history, and spending alerts. 
• Use expense tracking spreadsheets: If you prefer a hands-on approach, a spreadsheet can be your best friend. Create a personalized template with columns for date, description, category, and amount. Enter your expenses regularly and categorize them accordingly. 
• Use the envelope system: The envelope system is a physical method where you assign cash to different envelopes, each labeled with a specific spending category. Whether it’s groceries, transportation, or entertainment, this system allows you to visualize your available funds and make mindful spending choices.
• Keep your receipts: Make it a habit to collect and store receipts for your purchases. Create a designated email folder for digital receipts and store your physical receipts in an envelope or folder.
• Account for cash transactions: Cash can be elusive when it comes to tracking expenses. Stay on top of it by jotting down cash transactions in a small notebook or using a budgeting app that allows manual entry.

Remember, effective expense tracking is crucial for accurate budgeting. Choose a method that works best for you and consistently track and categorize your expenses. Regularly reviewing your spending habits will provide valuable insights for making informed financial decisions and adjusting your budget as needed.

It can be helpful to look through 12 months of records to get a full picture of your spending. Some expenses vary from month to month, and any bill or subscription renewal that recurs yearly will only show up as a charge in one month over the course of the year. Budgeting requires being aware of and anticipating these expenses so you can plan for them. 

Step 3: Categorize fixed expenses vs. variable expenses

Among the easiest expenses to track are those that occur at regular intervals with the same amount, like rent or mortgage payments, your phone bill, and streaming services. These are called fixed expenses, and because they’re predictable, planning for them tends to be easier. 

Variable expenses, on the other hand, shift from month to month. They fall into two categories:

• Predictable expenses that you know will occur even if you don’t know the specific amount, like groceries or utility bills
• Unpredictable expenses that you can’t easily anticipate, such as home and car repair or health care emergencies

Expenses in the first category may vary from month to month but will typically stay within a certain range. The longer you track your spending, the better a feel you’ll get for how much to set aside for these categories. However, even these expenses can sometimes surprise you, as when gas prices suddenly rise. 

Unpredictable expenses are more challenging to budget for. If you own a car, you can reasonably assume that at some point it will need repairs, but you don’t know when or how much money it will cost. For this reason, many budget experts suggest building an emergency fund for contingencies. 

To get you started, here are some examples of different types of expenses: 

Step 4: Calculate your monthly income and expenses

This step is often referred to as balancing your budget; it can be the most sobering part of the process, but it may also be the most useful in planning for the future. If you want to gain any benefit from learning how to budget, you’ll need to be honest with yourself about your income and your spending habits. 

Add up all your monthly income and expenses, then subtract your expenses from your income. The number will tell you whether you’re in the red or in the black. Now it’s time to balance your budget.

• If you’re spending less than you earn, your income is enough to cover all your usual expenses. You can use your discretionary funds to store up for emergencies or start building your nest egg by saving or investing your money. 
• If you’re spending more than you’re taking in, you’re living beyond your means, and paying for things with credit cards can hide this fact for only so long. The good news is that learning how to budget will make it easier to gain control of your money. Look over your spending to see if there are areas where you can cut back, paying close attention to your non-essential spending. If you find that your spending is already at the bare minimum, you may want to look for additional sources of income.   

• You may also find that you’re generally in the black, but not by much, or that some months you come out ahead and some months you’re in the red. Reducing your spending on nonessential items might help you spend less than you earn more consistently and make it easier to plan for the future.

Step 5: Choose your budgeting method

You now have a clear picture of your financial situation; it’s time to start planning and tracking your spending. There are several approaches to budgeting, and each has its advocates. It’s up to you to find the method that works best for your circumstances and personality. You might even find that combining elements of different methods makes sense for you. What’s important is that you find a way of budgeting that you can commit to over the long haul.  

Here are some popular budgeting methods you might want to try out:

• 50-30-20 budget: The 50-30-20 budget helps you set your priorities by clearly laying out how much of your monthly income you should spend on each of three categories: 50% to needs, 30% to wants, and 20% to investing and saving. One advantage of the 50-30-20 budget rule is that it provides clear guidelines for your monthly spending while leaving flexibility to adjust as you continue learning how to budget for your personal circumstances.
• Zero-based budget: A zero-based budget is just what it sounds like: you assign every dollar of income a category until you hit zero. That includes all your expense categories: necessities, nonessential spending, investing, saving, and emergency funds. Some people enjoy planning with this level of specificity because it can help you feel in control and be disciplined about paying down debt or saving money. That said, you’ll need to track your spending extra closely to make sure you stay on target.
• Pay yourself first method: The pay yourself first budgeting method is oriented toward saving and puts your long-term financial goals at the top of the list of funded categories. Essentially, you begin your budgeting process each month by setting aside money for saving and investment. By prioritizing this part of your budget, you can keep your focus on building wealth; some people find it easier to cut down their spending on unnecessary things when the big picture is top-of-mind. 
• Envelope method: The envelope method is a classic approach that allocates the money you have on hand to your expense categories. In the most literal form of this budget, you put physical cash into envelopes marked with categories. Then, when it’s time to spend, you take the cash out of the relevant envelope; when the envelope is empty, your budget for that category is used up for the month. The envelope method is the conceptual basis for a lot of budgeting apps, including the Stash partitions feature.   

Step 6: Set realistic financial goals for yourself and stay motivated

Once you learn how to make a budget, the final step is to put your new budget plan to use. That means tracking your spending regularly, planning out your budget for each month, and readjusting as you learn. 

One of the keys to maintaining a budget is motivation: What are you trying to achieve financially? It could be a goal as modest as saving for a new couch or as ambitious as starting your own business. Keeping your focus on why you’re budgeting, and what you hope to get from it, can help you commit to the process.

Here are some tips to help you establish goals that align with your current financial situation and increase your chances of success:

SMART goal setting

Utilize the SMART framework when setting your financial goals. By making your goals specific, measurable, achievable, relevant, and time-bound, you’ll have a solid foundation for success:

• Specific: Clearly define what you want to achieve. Instead of a vague goal like “save money,” specify an amount or percentage you aim to save.
• Measurable: Make your goals quantifiable. This allows you to track your progress and know when you’ve achieved them.
• Achievable: Set goals that are realistic and within your reach. Consider your income, monthly expenses, and financial obligations when determining what you can reasonably accomplish.
• Relevant: Ensure that your goals are relevant to your financial situation, values, and long-term aspirations.
• Time-bound: Set a deadline for achieving your goals. This provides a sense of urgency and helps you stay focused.

Break goals into smaller milestones

Breaking larger goals into smaller, manageable milestones can make them less overwhelming and more attainable. For instance, if your goal is to save $10,000 for a downpayment on a house, break it down into monthly or quarterly savings targets.

Align Goals with Personal Values and Priorities

Consider your personal values, aspirations, and priorities when setting financial goals. Determine what truly matters to you and what you want to achieve in the long run. Aligning your goals with your values will provide a strong sense of purpose and increase your commitment to following your budget.

Remember, the purpose of setting financial goals is to provide direction, motivation, and a sense of accomplishment. Regularly review and reassess your goals as your financial situation evolves. Stay committed to the process and celebrate your progress along the way.

1/4

Quiz

 

With the 50-30-20 budget, 20% of your income should go to:

Savings

Needs

Bills

Wants

Savings. 50% of this budget goes toward fixed or essential expenses (needs), 30% goes toward variable or flexible expenses (wants), and 20% goes toward savings.

2/4

Quiz

 

True or False: Everyone should use the same budget template.

True

False

False. You should tailor your budget to your life and your needs. If you want to prioritize your savings over your “wants”, that’s up to you!

3/4

Quiz

 

Which of the following would be included in your fixed or essential expenses?

Shopping

Retirement

Rent

Going out to eat

Rent. This expense stays the same month-to-month and is essential.

4/4

Quiz

 

Which of the following is another example of a budget you might use?

The piggy bank budget

The zero-sum budget

The credit card budget

The shoe-string budget

The zero-sum budget. With the zero-sum budget, you give every dollar a job and the objective is to get to $0 every month.

 

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How to budget for beginners

If planning and tracking your spending is new territory, the steps above will get you started on the right foot. It may be helpful to keep in mind that you don’t have to get every detail correct from the very beginning. Your budget will always be changing to reflect your circumstances, and the more you use it the more accurate it will become. So get started now and give yourself permission to learn as you go.    

The best budget is the one you stick to

Just by deciding to learn how to budget, you’ve taken an important step toward improving your financial well-being. Budgeting will do you the most good if you can make it a lifelong habit, and taking a long-range perspective can allow you some leeway. If you overspend in a category one month, try to figure out whether you’re underestimating how much you need or if you can adjust your habits to spend less. Eventually, you’ll start to get a sense of the difference between what you need and what you want. Even the simplest budget can change your approach to spending,  saving, and investing for the long-term if you’re willing to commit to it over time.  

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The post How to Budget: A 6-Step Guide for Beginners appeared first on Stash Learn.

A stock buyback is when a public company repurchases shares of its own stock from shareholders, usually on the open market, reducing the total number of outstanding shares. 

Stocks are units of ownership of a company. By buying back shares owned by investors, companies are, essentially, re-purchasing themselves. A stock buyback is often called a share buyback, share purchase authorization, or share repurchase. Stock buybacks have been on the rise in recent years: in 2022, stock buyback announcements reached a record $1.22 trillion. 

In this article, we’ll cover:

• How stock buybacks work
• Why companies buy back stock
• Implications of stock buybacks 

How do stock buybacks work?

Most of the time, companies repurchase stock from shareholders on the open market, at market value. A company performing a stock buyback will generally announce a “repurchase authorization” alongside how much money they’re allocating to buying shares or the percentage of total shares they’re looking to purchase. 

Investors are under no obligation to sell back their stock. The company buys from those who want to sell, just like any other investor would. These shares are then purchased and “removed” from the market, and that ownership is reabsorbed into the company. 

A company will generally use its own money to repurchase stock, but it could also borrow cash for a stock buyback, though it’s a higher risk. And, despite having an authorization in place, there’s always a chance that the company doesn’t go through with the buyback should other priorities arise. 

Why do companies buy back their stock?

Companies issue a stock buyback for several reasons, but the primary goal is to create value for shareholders by raising share prices and increasing the company’s value on paper. 

Stock prices are driven by supply and demand. By reducing the number of available shares (supply), companies increase demand. More demand can drive higher stock prices, boosting value for shareholders.

Stock buybacks also impact a company’s balance sheet. The shares the company buys back are either canceled or held in treasury, not counted as outstanding stock. Having fewer shares on the market increases the earnings per share (EPS) and the price-to-earnings ratio (P/E ratio). Both are data points that help investors understand a company’s value and performance. 

Beyond simple valuation, stock buybacks offer companies several additional benefits.

• Consolidate ownership: A stock represents partial ownership in a company and usually comes with voting rights and claims to capital. By issuing a stock buyback, a company reduces the total number of owners with these rights. 
• Boost share prices: If a company feels that its shares are undervalued, it may repurchase stock to increase demand and boost investor confidence. If a company is worth the same amount as before but split into fewer pieces, each remaining shareholder now has a bigger piece of the pie. 
• Attract more investors: Stock buybacks can be seen as a sign of management confidence in future performance. After all, why would a company buy back stock they expect to decrease in value? This display of optimism can attract future investors.
• Increase flexibility: Stock buybacks are a more flexible way to return cash to shareholders than paying dividends. Dividends are paid on an ongoing basis,  and they’re a long-term strategy for providing shareholder value. Stock buybacks, on the other hand, are one-offs, so they’re easier for companies to control.

Is a stock buyback a good thing?

Stock buybacks can be a good thing, but they can also come with drawbacks for companies, employees, and investors if mismanaged. 

Is a stock buyback good for companies?

Stock buybacks allow companies to consolidate ownership, increase a stock’s demand, and possibly improve their valuation. By buying back shares, the company is paying off investors and reducing the overall cost of capital, especially if they offer dividends. On paper, a buyback often looks like a good idea. 

When mismanaged, a stock buyback can backfire for the company. By spending money on a buyback, a company isn’t investing in other ways that could improve the business or increase efficiency. The improved EPS and P/E ratio is just on paper, and the increase is often temporary or inflated. It can make a company’s earning potential appear better than it actually is. And if a company borrows money for a stock buyback, there’s always the risk that the debt could negatively affect their finances down the road. 

Is a stock buyback good for employees?

Stock buybacks could be good or bad for employees depending on the company, its financial situation, and how they provide benefits to their employees. When stock is a part of total compensation, employees of public companies often own a fair amount of their company’s stock. Because they are both investors and employees, they can benefit when a company buys back their stock at a good value, whether they sell or hold onto their stock at a higher price.

But stock buybacks mean that companies are investing money in the buyback that they could theoretically use elsewhere in their budget, like for employee compensation or reinvestment in the business. If the company is using a stock buyback to artificially bump up a company’s earnings, it could negatively impact employees. 

Is a stock buyback good for investors?

Just like employees and companies, stock buybacks can be good or bad for investors. It all comes down to whether the increased stock value is meaningful or artificial and temporary. 

In the short term, investors will see an increase in stock prices because the total number of available stocks has decreased. But that doesn’t necessarily mean that the company is performing any better than before. The money companies are reinvesting in their stock could be used to grow or increase efficiencies. There’s also a chance that the increase in share value could be temporary if the buyback is artificially inflating prices.  

Additionally, many companies provide stock to executives as part of their compensation. In some cases, company leaders might use a buyback to temporarily boost share prices in order to secure a bigger gain on their stock options. This may not necessarily be in the best interests of other shareholders. 

Investors should look at the company’s performance, any available plans, and the results of past buybacks when deciding whether to sell or hold onto their stock. If the company is buying at a premium price and you believe the company is continuing to work toward improving shareholder value, it may make sense to stay invested. If you believe the share price is overvalued or you don’t have confidence in the company’s future growth, a stock buyback may be an opportunity to sell.

Start participating in the stock market

A stock buyback only affects investors who already own shares in the company. You may or may not encounter a buyback as an investor, but it’s good to be prepared by understanding how stock buybacks work. In fact, getting to know key investing terminology can come in handy no matter where you are in your investing journey. With a focus on investing for the long term and keeping yourself educated, you can pursue a strategy that makes sense for your financial goals. 

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Understanding stock market fundamentals is key to making smart investing decisions, keeping a pulse on the market, and eventually taking on more complex trading strategies. Use the terms below to get a jump start on learning basic stock market vocabulary and create a strong foundation for your long-term wealth goals.

In this article, we’ll cover:

• Arbitrage
• Ask
• Asset allocation
• Asset classes
• Averaging down
• Bear market
• Beta
• Bid
• Bid-ask spread
• Blockchain
• Blue-chip stocks
• Bond
• Bull market
• Buyback
• Capitalization
• Capital gains
• Common stock
• Current ratio
• Day trading
• Debt-to-equity ratio
• Diversification
• Dividend
• Dividend yield
• Dollar-cost averaging
• Dow Jones Industrial Average (DJIA)
• Earnings per share (EPS)
• Economic bubble
• Equal weight rating
• Equity income
• Exchange
• Exchange-traded funds (ETFs)
• Expense ratio
• Futures
• Going long
• Going short
• Growth and income funds
• Growth stocks
• Head and shoulders pattern
• Index funds
• Inflation
• Initial public offering (IPO)
• Limit order
• Liquidity 
• Margin
• Market index
• Market volatility 
• Moving average 
• Mutual funds
• NASDAQ
• Non-fungible token (NFT)
• Order imbalance
• OTC stocks
• Outstanding shares
• P/E ratio
• Preferred stock
• Price quote
• Profit margin
• Recession
• Risk tolerance
• Roth IRA
• Sector
• Shares
• Stock market holidays
• Stock option
• Stock portfolio 
• Stock split
• Time horizon
• Value stocks
• Volume
• Volume-weighted average price (VWAP)
• Yield
• 52-week range

What is the stock market?

The stock market is a collection of markets where people buy and sell shares of publicly traded companies. When someone invests in a stock, their investment is represented by a share, or partial ownership, of that company. 

The stock market operates by potential buyers naming the highest price they’ll pay for an asset (the “bid”) and potential sellers naming the lowest price they’re willing to sell for (the “ask”). Trades are typically executed by stockbrokers on behalf of individual investors.

72 stock market terms for new investors  

The stock market terms below are a great starting point if you’re new to trading stocks. Study these terms to familiarize yourself with common stock lingo that any new investor should understand. 

1. Arbitrage 

Arbitrage refers to purchasing an asset from one market and selling it to another market where the selling price is higher than what you paid for it, resulting in profit. 

2. Ask

An ask is the selling price that a trader offers for their shares. 

3. Asset Allocation

Asset allocation is an investment strategy that aims to balance risk and reward by dividing a certain percentage of investments—like stocks, bonds, real estate, cash, etc.—across different assets in an investment portfolio. 

4. Asset Classes

Asset classes are categories of assets, such as stocks, bonds, real estate, or cash. 

5. Averaging Down

Averaging down is an investing strategy that involves buying additional shares of an asset or stock after its price has fallen, resulting in a lower average purchase price. 

6. Bear Market

A bear market is a market condition in which prices are expected to fall. Typically, this entails major indexes or stocks decreasing by 20% or more compared to previous highs. 

7. Beta

Beta is the measure of an asset’s risk in relation to the market. A stock with a beta of 1.5 means that the stock typically moves 50% more than the market in the same direction. Generally, a higher beta indicates a riskier investment—if the market rises 10%, the stock will rise by 15%, but if the market falls by 10%, the stock will fall by 15%. 

8. Bid

The price a trader is willing to pay for shares of a stock or other asset. 

9. Bid-Ask Spread

Bid-ask spread is the difference between what buyers are willing to pay and the price sellers are asking for a stock. 

10. Blockchain

A blockchain is a record-keeping database in which transactions made in Bitcoin or other cryptocurrencies are recorded across multiple computers and distributed across the entire network of those computers.

11. Blue-Chip Stocks

Blue-chip stocks are common stocks of well-known companies known for their quality and history of growth. 

12. Bond

A bond is a type of security loaned by an investor to a borrower like a company or government used to fund its operations. 

13. Bull Market

A bull market is a market condition in which prices are expected to rise.

14. Buyback

A buyback is when a company repurchases outstanding shares to reduce the number of shares on the market and return profits to their investors, resulting in an increased value of the remaining shares. 

15. Capitalization

Also known as market cap, capitalization is the total market value of all a company’s outstanding shares. It’s calculated by multiplying the total number of shares by the current share price. 

16. Capital Gains 

Capital gains refers to the profit earned after selling an asset or investment for a higher price than you paid for it. 

17. Common Stock

This is one of the most basic stock market terms to know. Common stock is a type of security that represents ownership in a company. Holders of common stock are able to vote on matters like corporate policies and elect directors within that company. 

18. Current Ratio

The current ratio is a measure of a company’s ability to pay short-term debt. It’s determined by dividing current assets by current liabilities. 

19. Day Trading

Day trading is the practice of buying and selling shares of stock within a single day.   

20. Debt-to-Equity Ratio

Debt-to-equity ratio represents a function of a company’s debt relative to its equity, or the value of its assets minus its liabilities. The ratio is found by dividing total liabilities by total shareholder equity. 

21. Diversification

Diversification is an investment strategy that divides investment funds across a variety of assets in order to minimize overall risk. 

 22. Dividend

“Dividend” is one of the most basic terms for the stock market. It’s simply a portion of a company’s earnings paid out to its shareholders. 

23. Dividend Yield

A dividend yield is a dividend expressed as a percentage of its stock price. 

24. Dollar-Cost Averaging

Dollar-cost averaging is an investment strategy in which you invest a fixed amount on a regular basis regardless of the price of the asset. 

25. Dow Jones Industrial Average (DJIA)

Also known as Dow 30, the Dow Jones Industrial Average is a stock market index consisting of the 30 most-traded blue-chip stocks on the New York Stock Exchange. It’s used to measure the performance of shares among the largest U.S. companies and gauge the overall direction of stock prices. 

26. Earnings per Share (EPS)

Earnings per share is a company’s profit divided by its number of outstanding shares, and is used to measure corporate profitability.

27. Economic Bubble

An economic bubble is a situation where asset prices surge to significantly higher levels than the fundamental value of that asset. 

28. Equal Weight Rating

An equal weight rating is a measure used by equity analysts to signify how well a stock is performing relative to other stocks. An equal weight rating suggests that a stock will perform similarly with the average of all the stocks being used for comparison.

29. Equity Income

Equity income is used to describe any income received from stock dividends. 

30. Exchange

An exchange, or stock exchange, is a marketplace where investors and traders buy and sell stocks. You’ve probably heard of the most well-known exchanges in the U.S.: the New York Stock Exchange (NYSE) and Nasdaq. 

31. Exchange-Traded Funds (ETFs)

Commonly known as ETFs, exchange-traded funds are a collection of stocks or bonds combined in a single fund that can be purchased and traded on major stock exchanges. Similar to mutual funds, they’re a pooled investment fund, meaning a “pool” of money is aggregated from multiple investors. 

32. Expense Ratio

An expense ratio measures the cost of owning a mutual fund, including expenses like the management of the fund, overhead fees, and any other costs associated with running the fund. It’s essentially an administrative fee paid to the company in return for owning the fund. The ratio is measured as a percentage of your total investment—for example, if you invest $10,000 in a fund with an expense ratio of .20%, you’ll pay $20 on top of your investment. 

33. Futures

A future is a contract that requires a buyer to purchase a specific asset, and the seller to sell that asset at a certain future date at an agreed-upon price. Futures are a way for investors to hedge current investments—a risk management strategy intended to offset potential losses in other investments.

34. Going Long

Going long refers to the act of buying stock shares with the expectation that the asset’s price will rise, resulting in a profit. 

35. Going Short

Going short—the opposite of going long—refers to the act of selling stock shares with the expectation that the asset’s price will fall. When an investor goes short on an asset, they borrow that asset, sell it, and hopefully purchase it later at a lower price if the price does decline, resulting in profit. 

36. Growth and Income Funds

This is a type of mutual fund or ETF that has both a history of capital gains (growth) and income generated from dividends (income). Growth and income funds have a two-sided strategy of both long-term growth and short-term income. 

37. Growth Stocks

A growth stock is a common stock of a company whose revenues are expected to grow at a significantly higher rate than what’s average for that industry. 

38. Head and Shoulders Pattern

The head and shoulders pattern refers to a specific chart formation seen on a technical analysis chart. It appears when a stock price reaches three peaks: when the price peaks then declines; rises above that peak and declines again; and rises a third time (but not as high as the second peak) and then declines again. The second peak represents the formation’s “head,” and the first and third peaks represent the “shoulders.” It’s generally considered to be an indicator of an impending bear market. 

 39. Index Funds

Index funds are investment funds that follow the performance of a specific benchmark or stock market index, like the S&P 500. When you invest in an index fund, your money is used to invest in every company in that index. This results in a more diverse portfolio than if you were hand-selecting individual stocks, for example. 

40. Inflation

Inflation is the rate of increase in prices for goods and services in the economy. 

41. Initial Public Offering (IPO)

An IPO refers to a previously private company that becomes public by selling stock 

shares on the stock market. 

42. Limit Order

A limit order is an order to buy or sell a stock at or below a specific price. Limit orders give traders control over how much they pay. 

43. Liquidity 

Liquidity measures how quickly and easily a stock can be bought or sold without impacting its price. Cash, for example, is the most liquid asset—no exchange is necessary to gain value from it, and it’s already in its most liquid form. On the other hand, a car is less liquid—regardless of its value, you might have to wait to sell it at its best price. 

44. Margin

Sometimes referred to as “buying on margin,” margin is when investors borrow money from a broker to purchase a stock, similar to a loan. 

45. Market Index

A market index tracks the performance of a certain collection of stocks, often grouped to represent a certain industry. They’re a tool for investors to gauge the health of the stock market by comparing current and past stock prices.

46. Market Volatility

Market volatility is a measure of how much and how often the value of the stock market fluctuates. 

47. Moving Average

A moving average is the average price of stocks or other assets over a specific period of time. Generally used in technical analysis charts, it’s calculated by averaging data from the previous time periods to help investors identify the current direction of price trends.

48. Mutual Funds

Mutual funds are pools of investments from shareholders used to “mutually” buy securities like stocks, bonds, and other assets. 

49. Nasdaq

Nasdaq, or National Association of Securities Dealers Automated Quotations, is an electronic exchange where investors can buy and sell stocks through an automated network of computers. It’s the second-largest stock exchange in the world, following the NYSE.  

More broadly, Nasdaq can also refer to the Nasdaq Composite Index, a stock market index of over 3,300 companies listed on the Nasdaq exchange. In this context, it can be thought of similarly to other indexes like the DJIA or the S&P 500.

50. Non-Fungible Token (NFT)

A non-fungible token, more commonly known as an NFT, is a blockchain-based financial security. Each NFT represents a unique digital asset. “Non-fungible” indicates that it can’t be replicated or replaced with something else. 

51. Order Imbalance

An order imbalance occurs when orders of one type of stock aren’t offset by opposite orders, resulting in an excess of orders for that specific stock and sometimes volatile price changes. 

52. OTC Stocks

OTC stocks, or over-the-counter stocks, are securities that are traded on a broker-dealer network instead of on a major U.S. stock exchange. They’re often used by smaller companies who don’t meet the requirements to be listed on a formal stock exchange.

53. Outstanding Shares

Outstanding shares refers to the total number of a company’s shares that have been issued to shareholders, including restricted shares. 

54. P/E Ratio

Used to value a company, the P/E ratio, or price-earnings ratio, is the ratio of a company’s share price to the company’s earnings per share. 

55. Preferred Stock

Preferred stock is a type of stock that combines characteristics of both common stock and bonds. Owners of preferred stock receive different rights than common stockholders, like receiving dividends before common stockholders, but they generally don’t come with corporate voting rights like common stocks do. 

56. Price Quote

A price quote is the price of a stock or other security as quoted on an exchange. Price quotes usually come with important supplemental information to help traders make more informed investment decisions. 

57. Profit Margin

Profit margins are used to gauge the profitability of a company. It’s expressed as a percentage and is calculated by dividing the company’s net profit (total revenue minus total expenses) by total revenue. 

58. Recession

A recession is defined as a period of decline in economic performance throughout the economy, generally lasting for at least several months. 

59. Risk Tolerance

Risk tolerance is a measure of the level of risk you’re willing to accept on your investments. Someone with a lower risk tolerance typically sees lower returns on their investments in exchange for lower overall risk in periods of market decline. 

60. Roth IRA

A Roth IRA is an individual retirement account that allows you to contribute after-tax dollars, allowing your earnings to grow and be withdrawn tax-free. 

61. Sector

The stock market includes shares from thousands of different companies, which are broken into 11 different sectors. A sector is a group of companies with similar business products, services, or characteristics. 

62. Shares

Shares are units of ownership in part of a company’s total stock. 

63. Stock Market Holidays

While this isn’t necessarily a term or definition, it’s important to know what days you can and can’t buy or sell on the U.S. stock exchange. The U.S. stock market observes 10 holidays a year, closing on those days. In 2023, the observed holidays are New Years Day, Martin Luther King Jr. Day, President’s Day, Good Friday, Memorial Day, Juneteenth National Independence Day, Independence Day, Labor Day, Thanksgiving, and Christmas.

64. Stock Option

A stock option is a contract that gives an investor the right to purchase or sell a specific number of stock shares at a predetermined price within a specified time period. 

65. Stock Portfolio

A stock portfolio is an individual’s collection of investments, including stocks, bonds, mutual funds, and other financial assets. While a portfolio refers to all of your investments, they might not be contained in one single account. 

66. Stock Split

A stock split occurs when a corporation increases the number of its outstanding shares by distributing more shares to current stockholders. By splitting existing shares into multiple new shares, the stock becomes more affordable. 

67. Time Horizon

Time horizon refers to the period of time an investor expects to hold an investment, which will vary based on personal investment goals and strategies. For example, investing in a retirement account like a 401(k) has a longer time horizon, since the funds won’t be withdrawn until you reach retirement age. Generally speaking, longer time horizons correlate to more risk potential in a portfolio, and shorter time horizons correlate to a more conservative (less risky) portfolio. 

68. Value Stocks

Value stocks are shares of companies selling at bargain prices that investors expect to rise because the company’s financial fundamentals suggest the shares are actually worth more than the current value.

69. Volume

Volume is a measure of how much a certain stock or other investment has been traded over a certain period of time. Volume is a critical component of strategically analyzing stock market trends, and is often used to determine market strength.  

70. Volume-Weighted Average Price (VWAP)

Volume-weighted average price (VWAP) is a measure of the average trading price of a stock or other asset, adjusted for volume. It’s calculated by dividing the total dollar value of trading in that asset by the volume of trades. 

71. Yield 

Yield refers to the income earned on an investment over a set period of time, expressed as a percentage of your original investment. 

72. 52-week Range

The 52-week range is a technical indicator that measures the lowest and highest price of a stock traded during a 52-week period. Traders use this measure to analyze current stock prices and predict its future movements. 

Learning to navigate the stock market and stock trade terms for the first time might feel daunting, but consider this your official first step on the path to developing your investing muscles. When you come across a term you’re unfamiliar with in your own research, refer back to this post until you’ve mastered them. You’ll find that learning these stock terms for beginners is more doable than you think. 

The more time you invest in learning stock market terms and fundamentals, the more confident you’ll become as an investor. And if you’re looking for a little more support, consider turning to a platform like Stash. We make it easy to invest what you can afford on a set schedule, all the while providing unlimited financial education and personalized advice based on your risk level—so you can start building long-term wealth, even if you’ve never invested before. 

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FAQs About Stock Market Terms 

Have more questions about stock market terms? We have answers.

Why Should You Know Stock Market Terms? 

Establishing a working knowledge of stock market terms forms the foundation for the rest of your investment journey. It’s the gateway to crafting a strategic market approach, understanding different trading strategies, and making sense of market fluctuations that will inform your future trading decisions. 

How Do You Buy Stocks? 

Before investing a dollar, get clear on your investment goals—this informs everything from your investment timeline to the specific investments you’ll choose. From there, the process of buying your first shares of stock is surprisingly easy:

1. Open a brokerage account
2. Research what stocks you want to buy
3. Determine how much you can afford to invest 
4. Purchase your first share
5. Maximize returns with a buy and hold strategy

What Are the Most Used Stock Market Terms?

The most used stock market terms include bear market, bull market, dividend, ask, bid, and blue-chip stocks. 

The post 72 Stock Market Terms Every Beginner Trader Should Know appeared first on Stash Learn.

Investing isn’t just for the wealthy; it’s a pathway to financial growth for everyone. Whether you’re a beginner with a very modest budget or someone looking to diversify their savings, understanding how to start investing is your first step towards financial empowerment.

In this article, you’ll learn:

• Decoding investing: What you need to know first
• How to get started investing
• Why investing is important
• When you should start investing
• The difference between active vs. passive investing
• Common questions about investing

Decoding investing: What you need to know first

Investing – it’s a word that might conjure images of high-flying stock traders, complex charts, and confusing terminology. But at its core, investing is simply about putting your money to work for you in a way that earns more money over time.

Why Invest? The primary reason is to grow your wealth. Essentially, it involves looking out for your future self. Whether saving for retirement, a down payment on a house, or your child’s education, investing is one of the best ways to reach these financial goals. Unlike putting your money in a savings account, investing offers the potential for higher returns, albeit with some level of risk.

How to get started investing

Investing means buying securities (which is an investment), like stocks, bonds, mutual funds, and exchange-traded funds (ETFs), to make money as they grow in value over time. 

Investors generally create a portfolio made up of these various investments and often hold them for years or even decades. Traders, on the other hand, generally buy and sell investments rapidly to generate many small profits as prices rise and fall. 

If the idea of day trading makes you sweat, rest assured: investing is generally much simpler and less stressful. Remember that investing should be a marathon, not a sprint. Here’s how to get started.

1. Define your investment goals

Learning how to invest starts with a crucial step: defining your investment goals. It’s about understanding why you want to invest and what you hope to achieve. Are you saving for a comfortable retirement, a down payment on a house, or your child’s education? 

Defined goals help new investors stay focused and motivated, especially during market fluctuations. They act as a compass, guiding your investment decisions and helping you measure progress. Each goal will have a different time frame and risk profile. 

At Stash, we believe in the power of goal-oriented investing. It’s not just about growing your wealth but aligning your investments with your life’s objectives. When you have clear goals that matter to you, you can tailor your investment strategy to match them. 

2. Make sure you’re ready to invest

Before you start investing, you may want to first determine if you’re ready. Here are some indicators that the time may be right:

• Disposable income. If you can pay all your bills with a bit left over, it might be time to put your dollars to work. If you’re not currently budgeting, now is the perfect time to get started.
  >>Learn more: How to make a budget
• No high-interest debt. Let’s say you earn 5% on your investment, but you owe 18% interest on a credit card balance. That cancels out your return and then some, so paying down high-interest debt before you invest may be a good option.
  >>Learn more: How to get out of debt
• An emergency fund. Do you have three to six months of expenses in savings? If not, tying up all your extra cash in investments might force you to liquidate fast in case of an emergency, which may cause you to lose money on your investments.
  >>Learn more: How to start emergency and rainy-day funds
• Clear financial goals. Both investing and saving can be good ways to set aside money for the future; they each serve different functions. Setting goals and determining the right financial tools for meeting them lay a solid foundation.
  >>Learn more: How to create your financial plan

Even if you have $1,000 to invest, it may be better to put that money toward things like high-interest debt and an emergency fund if those aren’t in place yet. 

3. Set up your investment budget

If you’re ready to invest, the next step is to decide how much you can afford to invest. It doesn’t have to be a large sum; even small, regular contributions can grow significantly over time, thanks to compound interest. 

In fact, with many online brokers, you can often get started investing with as little money as a dollar. While shares of stock and other securities can be costly, many brokerages sell them by the slice via fractional shares. 

Once you start investing, you’ll likely want to keep adding money to your accounts, especially if you have long-term goals like retirement. Many experts recommend investing 10-20% of your income on an ongoing basis. But these are guidelines, not hard rules. 

The 50/30/20 budgeting method, for example, allocates around 20% of your budget to savings and investments. 

But for many people, investing 10-20% of your income might not be immediately practical. What matters most is starting early and investing consistently within your means. Even using a strategy like micro-investing can lead to significant growth. Use a compound interest calculator to see how your money could grow over time. 

>>Learn more: How much you should be investing

4. Choose the right investment account

The next pivotal step in your investing journey is opening an investment account, but it’s not just about picking any account. Your choice should be guided by the goals you’ve set. 

For instance, if you’re saving for retirement, you might choose a tax-advantaged individual retirement account (IRA). If you’re saving up for your future dream house, you might consider a standard brokerage account. 

There are several types of investment accounts to choose from. 

• Taxable brokerage accounts. A brokerage account allows you to buy and sell virtually any investment. Adults can also create custodial accounts for children.
  >>Learn more: How to open a brokerage account
• Employer-sponsored retirement plans. This category includes 401(k), 403(b), SEP Individual Retirement Accounts (IRAs), and SIMPLE IRAs. Many workplaces offer an employer match, which is essentially free money for your retirement.
  >>Learn more: Roth IRAs vs. 401(k)s
• Individual retirement accounts (IRAs). If you don’t have an employer-sponsored plan, or if you want to invest more, a traditional or Roth IRA can help you save for retirement and reap tax advantages.
  >>Learn more: Traditional vs. Roth IRAs
• 529 education savings plan. Saving for your child’s education? A 529 savings plan may offer flexibility and tax advantages.
  >>Learn more: Custodial accounts vs. 529 savings plans 

5. Think about your risk tolerance

All investment involves risk, including the risk that you could lose money. But how much risk each person is comfortable with is very personal. Your age, income, financial goals, and other factors play a role. Investors typically sort risk tolerance into three categories:

• Conservative. A conservative investor values stability over the potential for higher investment returns. Asset allocation is likely to be 40% stocks and 60% bonds.
• Moderate. Moderate investors aim to balance stability with higher reward potential. Typically, they allocate 60% to stocks and 40% to bonds.
• Aggressive. Aggressive investors feel comfortable taking big risks and hope to earn big rewards. They usually allocate 80% to stocks and 20% to bonds.

It’s vital to know your comfort level. Are you okay with high-risk, high-reward options, or do you prefer a safer, steady growth approach? Are you getting closer to retirement age, or do you have decades to go? Your risk tolerance will influence the types of investments you choose, balancing potential gains with the possibility of losses.

>>Learn more: Determine your risk profile  

6. Choose your investments

In this next step, you’ll choose investments based on your goals and risk tolerance. There are many types of stock market investments available; most everyday investors put their money in stocks, bonds, mutual funds, or ETFs. Cryptocurrency is also becoming a popular investment option, although it is a very risky investment. Additionally, you can even invest in real estate through a real estate investment trust (REIT).

For beginners, index funds and mutual funds can be a great way to start as they can offer built-in diversification and lower risk. Stash can guide you in choosing investments that match your financial objectives and risk profile.

The table above reflects general information on volatility and performance profiles. But there is tremendous variation within each investment type. Value stocks, for example, tend to be relatively stable, while “junk bonds” can be quite risky. That’s why it’s important to research stocks, funds, and any other investment options before investing.

>>Learn more: Different types of investments 

7. Decide your investment approach – DIY or robo-advisors

As you learn how to start investing, another critical decision you’ll make is whether to manage your investments yourself (DIY) or use a robo-advisor. Each approach has its benefits and considerations.

DIY investing allows you full control over your investment choices. You can select individual stocks, bonds, ETFs, and other assets based on your research and preferences.

It requires a commitment to learning about financial markets, investment strategies, and how to monitor your portfolio. It’s ideal for those who have a keen interest in financial markets and want to be actively involved in managing their investments.

Robo-advisors use algorithms to manage your investments based on your goals and risk tolerance. They automatically allocate your funds across various assets and rebalance your portfolio as needed.

Automated investing is great for beginners or those who prefer a hands-off approach. It eliminates the need for extensive market knowledge and ongoing portfolio management, saving you time and effort.

8. Monitor and adjust your investments

Once you’ve laid the groundwork and made your investment choices, you’re officially investing. You no longer have to figure out how to start because you’re doing the thing. 

But remember — investing isn’t a set-it-and-forget-it activity. Regularly review your investments to ensure they align with your goals and make adjustments as needed. Market conditions change, and so might your financial situation or goals. Consult a Certified Financial Planner for personalized advice on how to use investment funds to reach your financial goals.

When you first start investing, it can feel overwhelming. But it doesn’t have to be complicated to begin putting your money to work. The Stash Way® can help: it’s all about investing what you can afford on a regular basis, building a diversified portfolio, and investing for long-term growth. 

>>Learn more: How you can diversify your portfolio in 2024

Why is investing important? 

Many experts agree that investing is a critical component of a brighter financial future. About 61% of Americans own stock (Gallup, 2023), and many invest in other types of investments as well. Here are some of the most common reasons people invest:

• Retirement. In 2022, 72% of non-retired Americans had some retirement savings, and many put those dollars into investment accounts. Investing could help your nest egg grow faster than saving alone (Federal Reserve, 2023).
  >>Learn more: Calculate how much you’ll need to retire
• Combating inflation. Money loses buying power over time: an item that cost $100 in 1950 would cost over $1,276.64 today in 2023. Investing can be particularly important during inflationary times to preserve and grow the purchasing power of your money.
  >>Learn more: How to combat inflation
• Lowering tax burden. Retirement and college savings accounts offer tax advantages that could lower your taxable income, and some investment profits are taxed at the lower capital gains rate of 0-15%.
  >>Learn more: How taxes on stocks work
• Growing wealth through passive income. Investing puts your dollars to work for you. You might earn passive income through dividends, as well as returns when you sell securities that have increased in value.
  >>Learn more: Passive income streams 

How early should you start investing?

As a general rule, the sooner you start investing, the greater your earning potential. How? The power of compounding. 

Imagine you invest $100 and earn a 5% return annually. In the first year, you’d earn $5. When you re-invest those earnings, you’d earn interest on $105 the next year, for a return of $5.25. Every time your money makes money that you re-invest, it increases your balance, as well as the return on that balance. 

The longer your money compounds, the greater the effect. Let’s say you start with $100 and contribute $25 a month for 20 years, earning an average rate of 5%. After 20 years, you’d have deposited $6,100 and your balance would be over $10,000. And after 50 years, you’d have contributed $15,100 and your balance would be almost $64,000. 

The moral of the story is clear: there is no right age to start investing. But the earlier you begin, the more time your money has to grow. Think long-term and harness the power of compounding to build wealth.

>>Learn more: Calculate compounding over time

What’s the difference between active vs. passive investing?

In the world of investing, there’s a place for every kind of investor. Are you a hands-on or hands-off investor? Each approach comes with risks and benefits.

Hands-on, active investors tend to focus on short-term gains; they usually spend substantial time maintaining their portfolios and trade more frequently. Active investors may also try to beat the stock market by choosing specific stocks that may outperform leading indexes like the S&P 500. 

But even professional fund managers don’t beat the market reliably. Active investing can be a higher risk and involve more account fees due to the frequency of trading. 

Passive, hands-off investors usually practice a buy-and-hold investing strategy: they hold their investments for long periods of time, seeking a long-term return. They frequently invest in index funds that aim to mimic the performance of the market overall and keep them for a long time. 

Passive investing is often recommended for long-term goals like building wealth for retirement. Even Warren Buffett, one of the most successful investors, emphasizes the importance of long-term, value-driven investing strategies.

>>Learn more: How passive investing works  

Common Questions About Investing

Is investing in the stock market risky?

Investing in stocks always involves risk. While you can make money by investing in stocks, bonds, funds, and other securities, you can also lose money, especially if your investments lose value. It’s a good idea to diversify and do careful research before you purchase securities, so you can reduce your risk.

How do I invest money in the stock market?

You can invest in the stock market by purchasing stocks, bonds, mutual funds, and exchange-traded funds (ETFs), as well as other securities. You can make these purchases by setting up an investment account with a brokerage, either online or through an investment app. Use the steps in this article to learn how to start investing.

How much money do you need to invest in stocks?

You may think you need a large sum of money to start investing in order to buy pricey stocks or other investments. But you can crack into the investing world with as little as $1 thanks to fractional shares. As their name implies, these are fractions of full shares that can help you start investing, sometimes with just a few dollars.

Is $100 enough to start investing?

Absolutely, $100 is enough to start investing. Many online brokers and robo-advisors offer low or no minimum investment requirements, making it accessible for beginners. Also, options like fractional shares allow you to invest in high-value stocks with smaller amounts of money. Starting with what you have, even if it’s $100, is a great step towards building your investment portfolio.

What is the difference between trading and investing?

Trading is the process of buying and selling individual stocks, which usually takes place over the short term. Investing generally implies buying stocks or bonds and holding onto them over a longer period of time. 

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The post How to Start Investing: A Comprehensive Guide for Beginners appeared first on Stash Learn.

As a new investor, you might be weighing the difference between mutual funds and stocks. While both can help you earn solid returns, mutual funds are generally considered a safer investment than individual stocks.

A mutual fund is a pooled investment containing many stocks and other assets within a single fund, while a stock is an investment in a single company. By divvying up your investment across hundreds of companies instead of just one, mutual funds spread out your risk and add more diversification to your portfolio than a single stock would. 

Ultimately, choosing between stocks vs. mutual funds depends on your investment goals. Both can be a smart addition to your portfolio, but the right choice for you depends on factors like your risk tolerance and time horizon. 

Ready to learn the difference between mutual funds and stocks? Here’s a breakdown of the key differences and pros and cons to know.   

Mutual funds vs. stocks: key differences 

What’s the difference between mutual funds and stocks? Purchasing a stock means buying a small piece of ownership, or a share, in a company. When you buy a stock, your returns are based on the performance of that company. When the company does well, the stock price typically goes up, and stockholders who own shares reap the benefit. 

A mutual fund is a basket of hundreds of stocks, securities, and other assets within a single fund. With a mutual fund, you’re investing in the many different shares that make up the single fund, giving you broader market exposure compared to a single stock. 

Since an investment fund manager actively manages mutual funds—the individual responsible for implementing a fund’s investment strategy and making the behind-the-scenes trading decisions—they make a convenient investment avenue for beginners who would rather leave the research and stock-picking decisions to an expert.  

Here’s a quick overview of the difference between stocks and mutual funds, based on key investment characteristics: 

For a more in-depth comparison of individual stocks vs. mutual funds, we break down the pros and cons of each below. 

Pros and cons of mutual funds

For new investors, mutual funds are ideal thanks to their low barrier to entry and instant diversification. 

Pros

Mutual funds are an ideal investment because they offer instant diversification and carry less risk than a single stock. 

• Instant diversification: Because you get exposure to an array of companies, industries, and sectors, mutual funds instantly diversify your portfolio which can help to reduce the impact of a single investment on your overall portfolio.
• Minimizes risk: It’s unlikely that every company within a mutual fund will go down at the same time, protecting your portfolio from volatility. 
• Convenient: Mutual funds allow new investors to leave the complex research and stock-picking decisions to an expert. 
• Can be affordable: While actively managed mutual funds may have higher fees, passively managed mutual funds like index funds or ETFs typically have lower fees. 

In comparing stocks vs. mutual funds, here’s why mutual funds are often the better investment: rather than betting on the ups and downs of a single company or industry, your holdings are spread across an array of companies, industries, and sectors. If one company in the fund has a bad quarter, its performance can be balanced out by other companies that are doing well. In short, they’re less risky overall. 

Cons

While mutual funds are a convenient way for investors to get broad market exposure, they still come with a few drawbacks.

• Less control for investors: Since a fund manager decides which stocks and other assets make up the fund on your behalf, you have no say in what’s included. 
• Can have higher costs: Mutual funds often charge management fees, which can eat into investment returns over time. Actively managed funds typically have higher fees compared to passively managed funds like index funds.
• Less tax efficient: Due to the activity and active involvement of a fund manager, mutual funds can generate more taxable events and higher capital gains. 
• Trades only allowed once per day: Mutual funds can only be bought or sold at the end of a trading day, limiting the ability to respond quickly to market changes for active traders.

While mutual funds only allow trades once per day, there are other types of funds like ETFs or index funds that offer many of the same advantages. With an ETF, investors can buy and sell shares throughout the day, based on the fund’s real-time share price. They also tend to have lower fees than mutual funds.

Pros and cons of stocks

Stocks are an attractive investment namely due to the potential for outsized returns, but there are some drawbacks to be aware of. 

Pros

When quarterly revenue and profits are high and the stock price increases, stocks can provide higher-than-average returns compared to the overall market. 

• Potential for outsized gains: Depending on the company’s performance, you could see higher-than-average returns. 
• Full control over which companies you invest in: Buying individual stocks means there’s no fund manager involved, so you’re in control of every trading decision. 
• No management fees: By self-managing your own stock picks, you avoid the management fees you’d have to pay for an actively managed fund.  

While the potential gains of individual stocks are higher, so are the potential losses, as explained below. 

Cons

Even though it’s possible to see substantial returns from individual stocks, stock prices can be volatile, meaning they may rise and fall quickly. Stocks are also a more ambitious and time-intensive undertaking since you’ll have to research the stocks of individual companies yourself. 

• Higher risk and volatility: Betting on a single company increases the risk and volatility of your investment. 
• Potential for outsized losses: With stocks, the potential for higher returns comes with the potential for bigger losses if the company underperforms. 
• Requires time-intensive research and investment knowledge: Knowing what company to invest in requires intensive research—investors must analyze earnings reports and market performance, and make predictions about future price movements. 
• Low diversification: Allocating your portfolio toward one or two companies doesn’t provide diversification. 

In short, when you buy a single stock, you’re putting all your eggs in one basket. Your fortunes rise and fall with the company’s performance. This makes for a more volatile investment, meaning that it’s more likely to have big gains or losses—sometimes even in the course of a single day. This makes investing in an individual stock riskier than investing in a mutual fund.

Mutual funds vs. stocks: which is the better investment?

For long-term investors looking to build wealth over time, mutual funds are a dependable investment, as they aim to reduce overall risk—an important factor in a successful retirement portfolio. They’re also well suited for beginner investors who want to reap the benefits of the stock market without any prior investment knowledge. 

For investors who want to capture the potential growth of a particular company, individual stocks offer the potential for larger returns. Investors who go this route must be able to stomach more risk and be confident in their ability to analyze individual stocks. 

Investing in mutual funds vs. stocks comes down to your investment goals and risk tolerance. The main difference between stocks and mutual funds is the number of eggs in your basket—and diversification is usually considered a solid investment strategy. 

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FAQs about mutual funds vs. stocks

Still have lingering questions about stocks vs. mutual funds? Find the answers below.

Are mutual funds safer than stocks? 

Generally, yes. Since diversification is a risk-management strategy, the instant diversification that mutual funds provide lowers their overall risk compared to individual stocks.

Why would someone choose a mutual fund over a stock? 

The most common reason someone would choose a mutual fund over a stock is that it’s a convenient, hands-off way to profit from the stock market without any active management on their part. It’s also an easy way to diversify your holdings, which isn’t the case when you purchase a single stock.

Is it better to invest in stocks or mutual funds?

Whether it’s better to invest in stocks or mutual funds depends on your individual preferences and circumstances, as stocks offer potentially higher returns but come with higher risk and require more active management, while mutual funds provide instant diversification, convenience, and professional management at the cost of potentially lower returns.

Do mutual funds outperform the stock market?

The performance of mutual funds compared to the stock market can vary widely, as some mutual funds may outperform the market over certain periods, while others may underperform. It ultimately depends on factors such as the fund’s investment strategy, the skill of the fund manager, and market conditions.

The post Mutual Funds vs. Stocks: Which Is Better for Beginner Investors? appeared first on Stash Learn.

The Financial Independence, Retire Early (FIRE) movement is a philosophy dedicated to aggressive budgeting, extreme saving, investing, and retirement planning. The goal is to achieve financial freedom that allows you to retire far earlier than traditional savings methods would allow. 

In this article, we’ll cover:

• What the FIRE movement is
• How  the FIRE movement works
• Common FIRE movement philosophies
• Who the FIRE movement attracts
• Tips for participating in the FIRE movement

What is the FIRE movement?

FIRE stands for Financial Independence, Retire Early. The goal is to save up enough money so you no longer need to work and to do so much younger than the traditional retirement age of 65. Financial independence is achieved when you can cover all your living expenses with your savings and investment income so that you can retire early.

Exactly who started the FIRE movement is unclear, but many of the concepts underlying it come from Your Money or Your Life, a 1992 book by Vicki Robin and Joe Dominguez. The book’s core premise is that people should evaluate their expenses in relation to the number of working hours it took to pay for them. For example, if you want to buy shoes that cost $100, and you make $25 an hour, are those shoes worth working for four hours of your life?

FIRE is a long-term strategy that involves maximizing income, reducing costs, and aggressive saving and investing. There are three common kinds of FIRE strategies to choose from. 

• Fat FIRE: Those attempting Fat FIRE want to retire early but maintain their current standard of living. This requires substantial savings, heavy investing, and generally a high income, as the focus is more on maximizing income and investment returns than reducing expenses.
• Lean FIRE: Lean FIRE is the opposite of Fat FIRE, and is the more traditional FIRE strategy. When you Lean FIRE, you’re willing to pursue a minimalistic lifestyle in order to retire early. Some people will live on as little as $25,000 per year, even if their income is many times more than that.
• Barista FIRE: This approach balances the techniques of Fat FIRE and Lean FIRE. These individuals are willing to “partially retire,” quitting their full-time job and supplementing their retirement with part-time work or passive income in order to live below their means without committing to an extremely frugal lifestyle. 

How does the FIRE movement work? 

There are three major elements to any FIRE strategy: reducing expenses, increasing income, and investing as much money as you can in a mix of taxable and tax-advantaged accounts. 

To achieve financial independence and retire early, you’ll need to understand how much you need to retire, actively manage your current lifestyle and expenses, and stick to a strict savings and investing strategy. 

• Thorough planning: The FIRE movement stresses the importance of having a detailed financial plan and sticking to it long-term. That requires close attention to personal finances, including detailed retirement planning and precise budgeting for how every penny is spent, saved, and invested. 
• Financial discipline: The goal is to maximize the money coming in, minimize the money going out, and optimize where your money is stored and invested. You can’t casually participate in the FIRE movement; it requires consistency and discipline. That said, you can use a lot of the FIRE concepts to improve your own financial situation, even if you aren’t following the philosophy to the letter.
• Dedicated investing: Investing is at the core of retirement planning. But when you pursue FIRE, you can’t rely solely on traditional retirement strategies. Retirement accounts like 401(k)s and traditional and Roth IRAs come with steep penalties for withdrawing money before age 59½, and you can’t start drawing social security until age 62. So FIRE followers need a taxable brokerage account that can provide income when they retire early. FIRE followers also have to invest a larger portion of their income than is traditionally recommended in order to retire more quickly. 

Core FIRE movement techniques

FIRE followers have put together a handful of specific strategies for achieving the level of financial independence needed for early retirement. 

The rule of 25

If you want to retire early, you need to know how much money you need to live after you stop working. The rule of 25 states that you’ll need to save up 25 times of your annual expenses before you retire. You can calculate this number for yourself by estimating your monthly expenses, multiplying them by 12 to get your annual expenses, and then multiplying that number by 25. 

Here’s an example:

• Monthly expenses = $5,000
• Annual expenses = $5,000 x 12 = $60,000
• FIRE number = $60,000 x 25 = $1.5 million

The rule of 25 provides the key financial goal for the FIRE method: the amount of money you have to save up before you can retire. Of course, the rule makes several assumptions, so think of it as a goalpost for planning instead of a fixed number. This rule doesn’t account for inflation or significant lifestyle changes, like new chronic illnesses or substantial changes in annual costs. It’s also designed to cover 30 years of retirement. Depending on how early you plan to retire and how circumstances change over time, you may need to adjust your target number.  

The 4% rule

The 4% rule states that retirees can withdraw 4 percent from their savings and investment accounts every year in order to have enough money to live on for 30 years. This means withdrawing 4 percent in year one and then adjusting for inflation in subsequent years. 

For example:

• Value of savings and investments: $1.5 million
• Annual withdrawal in year one: 1,500,000 x .04 = $60,000
• Annual withdrawal in year two (assuming 2% inflation): $60,000 x 1.02 = $61,200 

The 4% rule is designed to be general. So, when building your personal FIRE strategy, test out a couple of variations to see what might work for you. Maybe you need closer to 5% to 6% or can get away with as low as 3.5% depending on the lifestyle you plan to have in retirement. 

The power of compounding growth

Compounding is when your interest and returns from one period earn additional interest and returns in subsequent periods. Essentially, it’s a percentage of money you gain on top of what your principal investment earns. Compounding can be a powerful tool to get you closer to early retirement and financial freedom. 

The power of compounding relies on long-term savings and investments. Interest on savings, dividend income from stocks, and returns on investments must stay invested in order to earn additional returns. The sooner you start investing, the longer your money has to grow and compound. 

Tax efficiency

Traditional retirement accounts come with tax advantages that help you keep more of your money instead of spending it on taxes. But if you withdraw money before you’re 59½, you lose those advantages and have to pay penalties. FIRE followers often seek to retire much earlier than that, so they diversify where they invest so they can reap tax benefits while also generating enough income to cover their expenses between early retirement and traditional retirement age.  

• Tax-advantaged retirement accounts: IRAs and 401(k)s can help lower your taxable income and allow for tax-deferred or tax-free growth on investments as long as you don’t withdraw money early. FIRE investors often leverage these accounts to save for their retirement expenses after age 59½, while planning to withdraw from their brokerage account after they retire but before they hit that milestone.
• Health savings accounts (HSAs): Healthcare expenses are an important consideration in planning for your later years, and HSAs can provide significant tax savings on money you spend on qualified medical expenses. First, you fund the HSA with pre-tax money, reducing your taxable income each year you contribute. Second, you don’t have to pay taxes on money you withdraw from the account as long as you spend it on qualified healthcare expenses. And finally, the funds in your HSA can be invested, and earnings are not taxed if they’re spent on qualified medical expenses. 
• Tax-efficient investments in brokerage accounts: While a brokerage account doesn’t offer any particular tax advantages, FIRE investors can look for tax-efficient options. Holding investments for more than a year generally lets you pay the lower long-term capital gains rate on returns, as does earning qualified dividends. Index funds, exchange-traded funds (ETFs), and some mutual funds may also be more tax-efficient because they might trigger fewer capital gains. 

Who is the FIRE movement for?

People who follow the FIRE movement would rather live frugally and be very disciplined about their personal finances so they have more years of their lives free from the obligation to work. FIRE followers often forgo living in high-cost areas, owning new cars, taking vacations, dining out, and spending on entertainment to accomplish this goal. 

Each individual has their own definition of early retirement; some people see age 55 or 50 as attainable, while others aspire to leave the workforce much younger. Regardless of the specific goal, anyone who can live well below their means to reach financial independence can follow the principles of the FIRE movement. For a real-life example, check out the story of one couple who used the FIRE movement to pay off $200k of debt and move toward financial independence.  

Limitations of the FIRE movement

While anyone can technically pursue financial independence and early retirement, it can be a difficult path, and there are a number of barriers that can make achieving FIRE more difficult. These include financial burdens beyond one’s control, like extensive or chronic healthcare needs, familial obligations, high student loan debt, and unpredictable life events and emergencies. Additionally, pursuing FIRE can require a high income that may be more difficult to obtain for those coming from historically oppressed populations, lower socioeconomic backgrounds, or those who face barriers working traditional jobs. 

In reality, FIRE isn’t necessarily attainable for everyone. That said, even those who can’t commit fully to a FIRE method can use elements of the philosophy to improve their overall financial situation. 

Tips for participating in the FIRE movement

• Create and stick to a budget: Building a budget that includes detailed plans for spending, saving, and investing is fundamental for following the FIRE method. If you already have a budget, you might need to heavily rework it or start from scratch to make sure you’re allocating enough money each month toward your retirement goals, debt repayment plans, emergency fund, and other financial goals. 
• Determine your retirement needs: If you want to retire early, you’ll need to plan meticulously. Start by understanding when you want to retire and how much money you’ll need. Then you can work backward, using the rule of 25 and the 4% rule to determine what income and savings rate you need. A retirement calculator can help you zero in on those numbers based on your individual goals and circumstances.
• Save or invest 50% to 70% of your income: To successfully FIRE, you’ll need to save and invest as much as you can. The usual rule of thumb is to save 20% of every paycheck, but those participating in the FIRE movement usually aim for 50-70% of their income instead.
• Pay off your mortgage: You can dramatically reduce your post-retirement expenses by paying off your mortgage early. This has the dual advantage of reducing how much you pay in interest on your mortgage overall and reducing your monthly post-retirement expenses by eliminating a mortgage payment from your budget. 
• Minimize expenses and spending: FIRE is a long-term goal, and requires significantly trimming short-term spending. To successfully FIRE, you’ll need to reduce your expenses and save as much money as possible. You’ll also need to track expenses carefully to ensure you don’t derail your plans. Many people use cash or a debit card instead of a credit card to help curb the potential for overspending.
• Get out of debt: Debt can quickly douse your FIRE strategy. The sooner you get out of debt, the sooner you can start putting the money you’re spending on interest payments toward your retirement savings. Paying off high-interest debt through the avalanche method can help you spend less on interest payments overall.
• Build up your emergency fund: An emergency fund helps you avoid going into debt or draining your savings and investment accounts when unexpected expenses come up. Most experts recommend you maintain enough for three to six months of living expenses in your emergency fund. For those pursuing FIRE, it’s generally recommended to stash enough money to live on for 12 months if possible.
• Plan for medical needs: While it’s not possible to anticipate exactly what your healthcare needs will really be in the future, they’re an important factor in understanding how much money you’ll need to live on in the future. If you have known medical expenses, factor those into your FIRE strategy. Take advantage of an HSA and maintain an emergency fund to prepare for medical expenses. Remember, you don’t qualify for Medicare until you’re 65, so you’ll have to be able to cover all your medical expenses in the meantime. 
• Start investing with a brokerage account: Think of your brokerage account as a bridge to carry you from your early retirement age to 59½, when you can withdraw from tax-advantaged accounts penalty-free. Take the number of years you have between those ages and multiply it by the annual retirement income withdrawal you determined using the 4% rule. For example, say you want to retire when you’re 54½ and will need $60,000 a year to live on. Since you’d need to draw from your brokerage account for five years, you’d need about $300,000 in that account. 
• Contribute to tax-advantaged retirement accounts: You can have multiple tax-advantaged retirement accounts, so explore all your options. Traditional and Roth IRAs have different tax advantages; you might leverage one or both to get the most tax benefits. If your employer offers a 401(k) plan, you might want to take advantage of it as well, as it comes with an entirely different set of benefits and limitations compared to IRAs. 
• Diversify your investments: To ensure your investments will carry you through retirement, you’ll want to reduce risk by diversifying your portfolio. This means spreading your holdings across different asset classes so major changes in one company or sector don’t have as significant an impact on the overall value of your investment portfolio.

How to make the FIRE movement work for you

FIRE isn’t for everyone, but its philosophies can benefit even those who don’t want to commit to the movement fully. The core concepts of decreasing expenses in order to save and invest can help anyone improve their personal finances and work toward a greater sense of financial freedom. 

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The post What Is the FIRE movement? appeared first on Stash Learn.

You want to be better with money but don’t know where to start. This year, with high inflation, the return of student loan repayments, and global uncertainty—perhaps your finances have paid the price. 

All that to say: Improving the bottom line has never been harder for hardworking Americans.

So in service of helping you get on track, Stash collected 100 of the best financial tips you’ll want to implement going into 2024—advice that will lessen the burden on your wallet and make it possible for you to get closer to your money goals.

Our Stash 100 tips are simple, jargon-free, and easy to follow. Bookmark them, share with your friends, and scrawl them on your mirror. It’s advice that will lessen the burden on your wallet and, even more importantly, put your mind at ease as you tackle the world ahead.

Investing 

1. Invest now. The sooner you start investing, the greater your earning potential.

2. Invest for the long-term with a buy-and-hold approach, and put your money to work. 

3. Invest regularly, and it becomes a powerful new habit that compounds your success. 

4. Diversify. Choose a variety of investments with different risks to reduce your risk of loss and reduce swings in your account value.

5. Choose low-fee ETFs. It’s safer to invest in ETFs, or baskets of assets, than in any one asset. 

6. Take advantage of dollar-cost averaging, which is periodically buying certain stocks or other assets using a set amount of money on a schedule. You’ll buy assets when the price is low and when it’s high without being driven by emotion. 

7. Combat inflation by investing your cash. Keeping too much money on-hand allows inflation to erode its value over time.

8. Don’t be afraid to invest. Having some cash is important, but keeping all your money on the sidelines can put you at risk for missing out on tens of thousands, or even millions of dollars over the course of your lifetime.

9. Keep your emotions in check. Avoid impulsive decisions based on fear or greed, and instead focus on your long-term goals and intentions. 

10. Don’t panic sell just because an investment is down. Knee-jerk reactions can derail your investing success.

11. Leave day-trading behind. You can be a great investor without being a frequent trader. In fact, trading less often can often be a better investment strategy. 

12. Focus on goals. Understand your objectives and time horizon to help you determine what combination of investments is right for you.

13. Park your cash in short-term Treasurys if you think you will use it within a year. 

14. Learn the value of compound interest, or when interest earns interest because it remains invested. It allows your money to grow exponentially over time. 

15. Avoid concentration risk. Buying individual stocks can be fun, but you shouldn’t invest more than 2% of your portfolio in any one stock.  

16. Automate your investments. Then check in at least once a year or when you have a major life change to make sure your investing strategy still makes sense for you. 

17. Understand and minimize what fees you are paying on your investments. Compare similar funds’ expense ratios and look out for commissions and other hidden fees. 

18. Don’t trust anyone that tells you they know how the market or a stock will perform in the future. No one has a crystal ball. 

19. Remember that investing is a marathon, not a sprint. Get-rich-quick schemes often end up in losses.

Retirement Planning 

20. Save for retirement. The years pass faster than you expect.

21. Start by saving 1% of your salary if that’s all you can afford now, and work your way up in 1% increments. Saving for retirement may feel like a luxury or impossibility, but any amount of savings is better than none. 

22. Use standard guidelines for retirement planning: Consider setting aside 15% of your pre-tax salary for retirement if you want to retire in your 60s and maintain your lifestyle. 

23. Calculate a personal retirement goal. If you aren’t sure, retirees typically spend between 70-80% of their pre-retirement income to maintain a similar lifestyle. You can also multiply how much you think you’ll spend every year of retirement by 25, and start there. 

24. Does your employer offer a retirement plan? Evaluate the investment options because every plan is different. Then choose one that’s appropriate for you, and never let your contributions sit idle. 

25. Don’t leave money on the table. Prioritize taking advantage of any employer match offered in your retirement plan. 

26. Consider multiple accounts. If you’re eligible for an employer-sponsored plan like a 401(k) and an individual retirement account like a traditional or Roth IRA, you may want to take advantage of both simultaneously—they each have their own pros and cons. 

27. Add social security benefits into your calculations by checking your Social Security Statement at SSA.gov. Guaranteed monthly income in retirement can help you maintain your retirement nest egg much longer.   

28. Healthcare related costs are retirees’ largest annual expense. Consider investing in a Health Savings Account (HSA) if you have access to a high deductible health plan. They have great tax benefits and will help offset those large expenses in your golden years. 

29. Try to avoid touching your retirement accounts, and learn about the tax implications and penalties associated with different retirement account withdrawals. Retirement funds are generally only accessible without penalty after you turn 59.5. 

30. Plan to retire early? Understand the tax rules and penalties of accessing your investments, and consider having alternate investment accounts that you can withdraw from first if need be.   

31. Avoid cashing out your retirement plan when changing jobs (it’s called an early distribution), which can tack on taxes and fees. Roll that money into an IRA or your new company’s 401(k) plan and allow the money to continue to grow. 

Financial Wellness 

32. Honor the principles of saving and investing. It’s not about how much you make—you can make a million dollars a year and still be flat broke if you spend it all. 

33. Set SMART savings goals. Make goals Specific, Measurable, Achievable, Realistic & Timely. This will help keep you motivated and aware of your progress.  

34. Establish an emergency fund as priority one. A good rule of thumb is to save between 3-6 months worth of your essential expenses. 

35. Eliminate stress over your bills by setting up automatic payments. 

36. Avoid the pitfalls of the U.S. post office by opting for direct electronic payments.  

37. Save money by changing banks. You may reduce expenses like monthly fees by switching banks or using an online financial institution for your checking and savings accounts.

38. Earn money on your cash. Set aside what you need for regular spending, then maximize the interest you earn on excess cash by comparing high yield savings accounts, money market funds, and U.S. Treasurys. 

39. Pay yourself first. Sometimes an employer can deposit a percentage of your paycheck directly into your savings or investment account, or set up an automatic transfer for when your paycheck hits. 

40. Check your pay stub regularly. Ensure that deductions are accurate and tax withholding seems appropriate. Consult HR right away if something seems off.

41. Protect what you have. Insurance is an often overlooked part of financial health. Whether it’s adequate health insurance, car insurance, homeowners, life or disability, set yourself up for unexpected life events.

42. Jumpstart your child’s long-term savings with a custodial account.

43. Talk to your kids about money. Teaching financial skills such as budgeting at a young age can help lead to strong financial habits as they grow. Celebrate milestones together to model diligence. 

44. Acknowledge your hard work when you hit a savings balance or come in under budget. It’ll keep you motivated for future success.  

45. Take security seriously. Use strong passwords, two-factor verification, and secure internet connections when managing your finances online. 

46. Be vigilant about phishing scams, especially approaching the holiday season when fraud activity tends to increase. It can be very hard, if not impossible, to get stolen money back.

Budgeting

47. Create a budget to help you understand where your money goes every month. One way to do it: Take the money that hits your bank account, minus your expenses, equals what’s available for your goals. 

48. Keep budgeting simple with the 80/20 approach: Save 20% of what you make so you limit the rest of your spending to 80% of your income. You can also get even more detailed with the 50/30/20 rule.

49. Keep a money journal and track all of your expenses—but don’t let it overwhelm you. The goal is to build awareness of your spending habits.

50. Create funds for large and irregular expenses like the holidays, travel, camp, or car maintenance. Set aside money each paycheck or month so that the money is available when you want it.

51. If taxes aren’t automatically deducted from your paycheck, set aside part of your paycheck so you don’t find yourself in trouble come filing season. 25-35% is a good starting point (refer to last year’s taxes or speak with your accountant for a more precise estimate).

52. Make a shopping list in advance—and stick to it! Studies show you can save yourself from unplanned purchases when you have it in-hand. 

53. Overspending? Try the 30-day rule. If you want to make an unplanned purchase, set the money aside for 30 days, then revisit. Often you’ll find the impulse to spend has gone away and you’re able to avoid unnecessary purchases. If waiting 30-days feels unrealistic, start with 48 hours. 

54. Delete your online payment info. The more effort it takes to shop online, the more likely you’ll be to pause and think about whether you truly want to buy it.

55. Sometimes it’s the right time for a “cash diet.” Commit to only making purchases in cash. You’ll likely spend less even on planned purchases like groceries, and it guarantees you won’t spend more than you’ve budgeted.

56. Swap your credit card for a debit card: Research shows that consumers spend less when they see real money immediately leaving their bank account. Pay down your credit card more frequently for a similar effect. 

57. Buy store brands instead of name-brand products with the same ingredients. Tiny savings add up on frequent purchases. 

58. Beware of BOGO “deals.” Slow down and consider the price of one item; often they are marked up to cover the cost of the discount. 

59. The best rates on hotels sometimes come 15 days before you travel. Make a refundable reservation far in advance, and then check the rates again leading up to your trip. If rates have dropped, cancel the original booking for free and lock in the lower rate. 

Debt

60. Take inventory. Make a list of your debts, such as credit card bills, student and auto loans, and mortgages, and include the lender, balance, interest rate, payment date, and monthly payment amount. Then take action.

61. Consider using the debt snowball or avalanche methods to prioritize which debt to pay down first. Each approach targets focusing on one debt at a time, rather than making extra payments on multiple obligations each month. 

62. Try to avoid paying more in interest and fees. While consolidating debt can be a smart solution, doing so in a high interest rate environment might mean more dollars out of pocket now. Beware of committing to a higher minimum monthly payment if cash flow is tight.

63. Pay off your high interest rate debt—such as credit card debt—first. You’ll save more by paying off credit card balances than you can realistically expect by investing those dollars in the stock market instead. A credit card balance can also bring down your credit score.

64. Take advantage of debt that works in your favor. Low-interest, installment loans like mortgages (especially those that are fixed and below 5%) and auto loans can help you build credit. 

65. Don’t pay more than the minimum required for low-interest, fixed-rate loans. If your fixed rate loan is low enough, invest the extra dollars for a higher return. 

66. Pay extra attention to variable interest rates to avoid fluctuating payments that are out of your control. 

67. Considering a new debt? Practice paying for it. Set aside a monthly payment for a few months for insight into how a new financial expense will impact your finances. 

68. A car payment doesn’t have to be an indefinite expense. Try to keep a 60 month loan or less, and continue to drive the car once it’s paid off. 

69. Zero-percent interest car loans may mean the car price itself is marked up or there’s some other catch. 

70. Beware of credit card rewards. Avoid spending more than you would typically spend just for the rewards. Buy the perk with cash—save your bottom line.

71. Refinance. When your credit score goes up or your cash flow improves, you may be eligible for a better rate on your existing loans. Run the numbers to see if it makes sense—this strategy may have upfront costs but could lower your monthly payments.

Credit

72. Not sure how to build good credit? You’re not alone. Consider using a secured credit card, which requires payment upfront. Make sure to understand the fees.

73. Lean on family or friends to build your credit. Asking someone with strong credit to cosign for you can help you obtain a better rate, or faster approval, than what you may be able to secure on your own. 

74. Build better credit in a short amount of time when you are added as an authorized user on someone else’s account. Note: Credit scores become intertwined, and both can be negatively impacted if someone doesn’t pay the bill on time. 

75. Take good care of your credit to be eligible for loans with more favorable rates. Pay bills on time and keep your outstanding balances low compared with your limits (this metric is called credit utilization). 

76. Remember that your credit score isn’t private. Think of it as a financial report card that can be shared with future employers, landlords, and lenders. 

77. When you open a credit card, use it responsibly. Charge at least one expense per month, like gas, and pay it off in full if possible. Then continue to pay it off in full every month. 

78. Carrying debt does not benefit your credit. Credit card interest compounds daily, working against you because the debt adds up rapidly. 

79.Set a reminder to check your credit report for free once a year with these three credit bureaus: Experian, Equifax, and Transunion. Or check annualcreditreport.com, which is a one-stop-shop. 

80. Dispute credit report errors. If there’s any incorrect information, contact the credit bureau directly.

81. Ask for a credit line increase. A good repayment history, higher income and/or higher credit score can warrant an increase. A higher limit can help your credit too, as long as you don’t spend more and raise your average balance. 

Homebuying/Home ownership 

82. Renting may be smarter—most homebuyers don’t break even for five years. If you expect to move sooner, consider renting instead.

83. When thinking about home-buying, cap your housing costs. Target a total monthly payment of no more than 28% of your gross monthly income towards a home. This should include principal, interest, taxes and insurance (PITI). 

84. Know what you have available for a down payment, and what you can afford monthly for your mortgage. Keep both in mind when trying to determine your price range. 

85. Negotiate your interest rate, and shop around. The process can be tedious, but every point negotiated down on your mortgage can be a huge cost savings. 

86. Do your research before making an offer. One tried and true way to value a home is looking at “comps,” which are comparable homes in the area that recently sold.

87. Understand PMI. Private mortgage insurance is an additional monthly cost assessed by a lender in the event you put less than 20% down. It may not be a reason to wait until you can afford more, but you’ll want to budget for the extra monthly cost, which is usually 0.5–1.5% of the cost of the mortgage each year.

88. Don’t overlook closing costs, which usually range between 3-5% of the purchase price. Example: if you want to make a 10% down payment, you’ll need between 13-15% of the purchase price in cash to complete the transaction. For a more exact estimate use a closing cost calculator specific to your state. Don’t forget moving costs.

89. Get pre-qualified and include it in your offer. Obtaining pre-qualification (not to be confused with pre-approval) can start the process of determining what you can afford, and it should not impact your credit or require underwriting. 

90. Build a home emergency fund for the things you need to repair and replace, ongoing costs, and one-time costs, too. Plan for overages when setting a budget for home renovations. 

Taxes

91. Keep track of deductible expenses throughout the year to maximize your tax deductions, especially if you’re self-employed. A standard deduction is applicable to everyone; other deductions—like large medical expenses and charitable donations—are relevant only if you decide to itemize your deductions. 

92. Know the tax implications of different retirement accounts. Investing into a traditional 401k or IRA can reduce your current taxes, which saves you money now, but in retirement, you’ll have to pay taxes on your withdrawals. Compare that to a Roth 401k or IRA, which won’t reduce your current taxes, but investments will grow tax free and you’ll save on taxes in the future.

93. Consider investing into a 529 plan for your children’s education. In some states, 529 plan contributions are tax-deductible and your investments grow tax-free.

94. Save on childcare. If you have kids and pay for daycare or camps, save on your taxes by contributing to a Dependent Care Flexible Spending Account (DCFSA.) Money is added directly through your paycheck pre-tax and can be used to reimburse you for your childcare related costs.

95. Self employed and/or experience a major life event? Tax professionals are a worthy investment. Not only can they make sure you file your taxes accurately, they can also help you make strategic money decisions throughout the year. Make sure their expertise is relevant to your situation. 

96. A large tax refund isn’t necessarily something to celebrate, as it typically means you overpaid the government during the year. Think of it as an interest-free loan to the government—not the prize you’re hoping for. 

97. Getting a tax refund year after year after year? Adjust your tax withholdings with your employer to keep more of it each paycheck. 

98. Use tax software to simplify the filing process. Depending on your income, you may be able to use some services at no cost. Find more information at irs.gov.

99. Keep copies of your tax returns for reference (digital is okay!). Up to seven years is suggested if you worry about being audited. Lenders typically only ask for a two-year history when applying for a loan.   

100. Make tax filing easier. Create a physical or digital folder and collect all tax related documents over the course of the year and you’ll stress less in spring. 

BONUS: Holiday

101. Set and stick to a holiday season budget. In addition to gifts, include travel and transportation, new clothes, holiday bonuses, decorations, and fun activities (like ice-skating). Be specific. 

102. Make a list of gift recipients and a spending limit per person.

103. Shop early. You’ll avoid rush delivery costs and needing to search for last-minute, expensive alternatives.

104. Book travel as soon as you can and be flexible with your schedule for better deals. 

105. Hosting doesn’t have to be expensive. Price shop and avoid recipes with too many new ingredients. Consider a pot-luck option instead of trying to do it all yourself.

106. Shop online. You’ll avoid impulse purchases, and it’s easier to search for discounts and price comparisons. Many online retailers offer free shipping during the season. 

107. Get creative. Thoughtful gift giving doesn’t have to cost you a lot of money. You can make gifts, like art, a note or baked goods, or you can gift time by offering to babysit/pet sit or help someone with other household chores. 

108. Suggest a gift exchange. Suggest a white elephant or secret santa so everyone only needs to buy one gift that will likely be more thoughtful and exciting to receive. 

109. Avoid (or limit) self-gifting. Retailers will be bombarding you with “deals.” Resist sales and unneeded purchases. Unsubscribing works wonders.

110. Celebrate late. Consider doing your holiday gatherings a few weeks later, allowing you to book less expensive travel and buy up gifts at post-holiday sales. 

111. Be selective. You don’t have to say ‘yes’ to every invitation, or include everyone on your guest list. Keep gatherings intimate, and choose only the events you want to attend most when choosing how to allocate your dollars.  

112.  Reflect and evaluate what worked this holiday season, then eye January as an amazing time to commit to new financial goals. 

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If you’ve been watching the market, you know that a recession has been in the forecast for most of 2023. Although the economy has grown at a modest pace throughout the year, inflation and higher interest rates from the Federal Reserve have taken a toll on consumer spending, income, and production. And, whether current conditions are a short-lived downturn or another recession looms in the future, preparing now can help you weather whatever economic ups and downs may come. 

If you’re unprepared for an economic downturn, you’re likely to experience consequences with potentially negative long-term financial impacts. But with some proactive readiness, you can avoid the financial vulnerabilities associated with job loss, financial instability, and other recession-driven hardships. These eight steps will help you make a plan to ride out an economic decline with confidence.

In this article, we’ll cover:

1. Understanding your finances
2. Creating a budget to stick to
3. Building your emergency fund
4. Getting rid of high-interest debt
5. Living below your means
6. Avoiding new financial commitments
7. Securing your career
8. Why you should continue to invest

1. Review your finances

First, evaluate your current situation. Compile a comprehensive overview that includes income, expenses, liabilities, and assets.

• Income: Total up your income from all sources, including your salary and any additional money you bring in from things like side gigs, child-support payments, and government benefits programs.
• Expenses: List all your monthly expenses and how much you spend on them. Categorize them into two groups: necessities like rent/mortgage, utilities, and groceries, and discretionary spending like entertainment, dining out, and treats.  
• Debt: Gather the current balances and interest rates of all your debts. Be sure to include every kind of debt, such as credit cards, auto loans, personal loans, medical debt, mortgages, and student loans. 
• Savings and investments: Add up the balance in all your savings and investment accounts; don’t forget to include any retirement accounts you have.  

This information allows you to lay out a financial plan to guide you through a potential recession, as well as look ahead to long-term goals. Consider creating a visual representation like a spreadsheet or financial statement that allows you to assess your situation at a glance. 

Having all of this information in one place can keep you from making panicked financial decisions in the face of economic uncertainty. Determine where you could make cutbacks if needed now, instead of scrambling to make ends meet if your income decreases or disappears later. 

2. Create and stick to a budget

Making a budget is a fundamental step in planning how to prepare for a recession, particularly if you’re new to managing your personal finances. When uncertainty looms, there’s no better time to track and adjust your spending habits. Understanding your cash flow today and where you could potentially cut back tomorrow is vital, especially if your job is recession-sensitive. 

Start building your recession-friendly budget by subtracting all your monthly expenses from your income; this will tell you whether you’re living within your means or need to trim expenses. With that information in hand, you can establish monthly spending limits for each expense category and set savings goals. This is the time to decide if you want to cut down on your spending in certain areas so you can bolster your emergency fund so you have more of a cushion in case of recession. 

You may want to use the 50-30-20 budget guideline to simplify the process. Assign 50% of your income to essential living expenses like housing, food, utilities, and debt. Devote 30% to things you’d like to spend money on but could ultimately do without, and 20% to savings goals, your emergency fund, and long-term investments. 

3. Build your emergency fund

Financial curveballs like unexpected expenses and job loss could have a bigger impact during an economic downturn. A solid emergency fund provides a safety net you can use to handle those crises without going into credit card debt or wiping out your other savings.

Building an emergency fund can be especially important during a recession, when economic decline can undermine job stability. The rule of thumb is to save up three to six months’ worth of living expenses so you can cover your bills in case your pay is reduced or you get laid off. While you might be able to receive unemployment benefits if you lose your job, they may not cover all your essential expenses or float you for as long as you need. Unemployment usually replaces only half your income and ends after 26 weeks in most states, so chances are you’ll need the extra money in your emergency fund to get by until you find a new job. 

While three to six months of living expenses may seem like a lot to save up, you can make it feel less daunting by breaking that larger goal into smaller ones based on priorities. You might start by saving enough to pay rent for three months, then setting aside enough for your essential bills, and so on. Just getting started is what matters most.

If you want to grow your emergency fund faster, consider cutting some discretionary expenses and putting that money toward your emergency savings. If you get a bonus, tax refund, or other windfall, add it to this savings goal. Keeping your fund in a high-yield savings account can also help amplify your savings by earning interest, as well as ensuring your money is easy to access when you need it.

4. Prioritize paying off high-interest debt

High-interest debt is expensive, and it can keep you stuck in a rut of never-ending monthly payments that strain your budget and undermine your savings goals. Credit cards, personal loans, unsecured lines of credit, and payday loans are generally classified as “bad debt” because they tend to have high interest rates and steep late fees; the interest rates are also variable, meaning they could skyrocket at the lender’s discretion. Bad debt can even negatively affect your credit score if you’re late on a single payment. 

If you’re worried about how to prepare for a recession, getting out of debt as soon as possible may be high on your priority list. And paying off credit card debt might be extra important: the average credit card rate in the U.S. is 27.80% as of November 2023. Even if you currently have a low rate, credit card issuers often hike their rates when the Federal Reserve raises interest rates during periods of inflation. 

Consider attacking your high-interest debt before recession strikes by using the avalanche method. This debt-repayment strategy prioritizes paying off your highest-interest debts first in order to reduce the overall amount you spend on interest over time. As you pay off each debt, the extra money rolls down to the next, and the impact becomes greater over time. Here’s how works:

1. Organize your debts by interest rate, highest to lowest.
2. Make the minimum monthly payments on all of your debts, except for the highest-interest one.
3. Every month, pay extra on your highest-interest debt. 
4. When the first debt is paid off, put the amount you’d been paying on it toward the debt with the next-highest interest rate. 
5. Repeat the process until all of your debts are paid off.  

Here’s an example of the avalanche method in action. Imagine you have the following debts and can afford to put an extra $110 a month, over and above the minimum payments, toward paying them off.

After eight months, the credit card would be paid off, so you’d start paying an extra $150 on the personal loan; $150 is the total of the credit card’s minimum payment and the extra avalanche payment.

Once the personal loan is paid off, you’d put an extra $190 toward the unsecured line of credit until all your debts are satisfied.

5. Spend less and stay frugal

While you don’t need to deprive yourself of every little luxury, it does help to adopt a frugal mindset while preparing for a potential recession. Reducing discretionary expenses can help you put more money toward your emergency savings. 

When looking for ways to save money, use the financial plan and budget you’ve already created to distinguish between needs and non-essential wants, then make some choices in the name of frugality. Dining, entertainment, and impulse buying are some of the most common culprits in a ballooning budget, so many people find that reducing these expenses can have a big impact.

• Limit dining out: Meal planning and cooking at home takes more time than dining out or ordering in, but it saves money on food costs in the long run. You might be surprised at how much you really spend in this category. If your parent ever said, “We have food at home” when you wanted to stop at the drive-through, you might want to adopt that adage yourself.
• Reduce entertainment expenses: Spending on events, travel, and hobbies can add up quickly, but you can have fun without breaking the bank. Keep an eye out for low-cost entertainment alternatives like home streaming services, free community events, or hobbies that don’t require expensive supplies. 
• Suspend subscription services: There are a vast number of options for entertainment delivered right to your home: movie and music streaming services, mobile apps and games, monthly product deliveries, and many more. In many cases people rarely use most of the services they subscribe to. Review all of your subscriptions and consider canceling or temporarily suspending those that don’t truly feel worth the money.
• Curb retail therapy: Everyone wants a little treat from time to time, but impulse buys and regular retail therapy can take a toll on your budget. Remove the temptation to buy on impulse by deleting your payment information from websites that store it, and carry only cash when you’re shopping in person so you can’t spend more than you have in your pocket. Institute a 24-hour rule before you buy something that’s not in your budget; you might find that the urge to spend fades if you wait a day. 

6. Avoid new, big financial commitments

When preparing for a recession, signing up for new expenses puts you on the hook for things you might not be able to afford if your cash flow starts to dry up. Avoid making new financial commitments, especially those with high monthly payments or interest rates. Forgo taking on new debt, stick with your roommates or your parents for a little while longer, and say no to pouring money into risky new ventures. 

• Mortgages: The beginning of a recession often sees rising interest rates, so the timing isn’t great for locking yourself into a fixed-rate mortgage. Instead of buying real estate, save for a downpayment so you can buy that house when conditions are more favorable. 
• Car loans: Getting more miles out of your current car instead of buying a new one keeps you from signing up for payments you may not be able to afford if recession hits. Funnel the money you’d spend on those car payments into your emergency fund or a sinking fund you can use to repair your existing vehicle. 
• Large personal loans: Going into debt should be a last resort when preparing for a recession, and that includes borrowing significant sums of money for non-essential purposes. If you need a personal loan to buy something, it may be wiser to put that purchase on hold and save up for it instead so you’re not committed to monthly payments and interest.
• Business ventures: Starting a new business is a risk under any circumstances, but even more so during a recession. An economic downturn is likely to significantly curb consumer spending, leaving you without the customers and cash flow you need to succeed. Use this time to shore up your business plan and save so you can launch your venture when economic indicators are more favorable.

7. Cushion your career

Financial preparedness includes both enhancing your job security and focusing on career development, just in case you need to make an unexpected change. When you make yourself indispensable in your current position, you might be in a better position to weather potential layoffs. But if you do wind up in the market for a new job, ongoing professional development efforts could help you get noticed and hired faster. In either case, it’s important to know your industry, stay up to date with trends, learn new skills, and network before a recession hits. Consider taking these steps to stay ahead:

1. Diversify your skill set: Identify and acquire skills that are in demand across various industries. Diversifying your skill set can make you more adaptable during economic downturns, especially if your specific industry takes a harder hit.
2. Update your resume: Job searching can be stressful, especially when you haven’t updated your resume in a while. Give yourself some peace of mind and polish it up now. You’ll be more prepared to make a move, whether your company decides to downsize or an unexpected job opportunity pops up.
3. Network, network, network: Landing a job often comes down to knowing the right people. Building a strong network of professional relationships can lead to new opportunities or fortify your job security in the midst of a recession. Stay in touch with colleagues on LinkedIn, join professional organizations, and attend industry conferences to grow your network.
4. Stay informed about your industry: It pays to know what’s going on. Don’t ignore company news and industry reports. Stay informed about the health of your industry overall and monitor economic indicators so recession doesn’t take you by surprise. 
5. Deliver your best work: It may be difficult to stay positive and productive at work with economic uncertainty on the horizon. However, consistently delivering high-quality work, being flexible with company changes, and projecting optimism can enhance your professional reputation with your colleagues and boss. It can also help you obtain the glowing recommendation you need to snag your next job.

8. Continue to invest what you can

Perhaps the most important thing for investors to remember when recession looms is this: don’t panic. Even when the stock market is in a slump, don’t abandon your investing plans. While it may be stressful to see the value of your portfolio drop, remember that economic downturns don’t last nearly as long as periods of economic growth. A long-term investment strategy is intended to help you ride out market volatility and natural fluctuations in the business cycle, including a recession. 

As long as your spending is under control and your emergency fund is solid, continuing to invest now can help you work toward retirement and other far-off goals. Keep making your regular contributions to 401(k) and IRA. If you want to make adjustments to the holdings in your brokerage account, you might consider defensive stocks and other investments that may perform well in a recession to further diversify your portfolio. You might also want to talk with a financial advisor about the options that best align with your goals and risk profile. 

When recession looms, take the long view

Determining how to prepare for a recession involves taking stock of where you are now as well as your long-term goals. When you’re uncertain about the immediate future, it can help to get a firm handle on your personal finances to build a solid budget, emergency fund, and plan for paying off debt. 

At the same time, remind yourself that economic recessions are temporary and recovery will follow. Staying invested throughout the ups and downs of the market cycle is key to reaching long-term investing success. 

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