Personal Finance

Yields on cash ‘well ahead of inflation,’ expert says. How to invest now

Published

2 months ago

November 8, 2024

Nopphon Pattanasri | Istock | Getty Images

Investors have been able to get the best returns on cash, as the Federal Reserve raised interest rates to bring down the pace of inflation.

Now that the central bank is lowering rates — with a new quarter point rate cut announced by the Fed on Thursday — experts say having money in cash can still be a competitive strategy.

“The best yields, whether we’re looking at high yield savings accounts, money markets or CDs [certificates of deposit] are well ahead of inflation, and that’s likely to continue for a while,” said Greg McBride, chief financial analyst at Bankrate.

“Rates are coming down, but cash is still a pretty good place to be,” he said.

Yet just how much cash to set aside is a question every individual investor needs to determine.

Earlier this year, Callie Cox, chief market strategist at Ritholtz Wealth Management, warned investors may be holding too much cash. That may still be true today, she said Thursday.

“If you’re sitting in cash because the environment doesn’t feel right, then that’s probably not a good reason to be sitting in cash,” Cox said.

Strive for at least a six-month emergency fund

Most financial advisors recommend having cash set aside so that unexpected expenses don’t blow your budget or cause you to rack up credit card debt.

“The rule of thumb is six months of really necessary expenses,” said Natalie Colley, a certified financial planner and partner and senior lead advisor at Francis Financial in New York.

However, having a year’s worth of expenses set aside may also be reasonable, depending on your household budget, she said.

If your savings are not yet at that six-month or one-year mark, start with a goal of setting aside three months’ expenses and then keep building your cash, Colley said.

If you’re behind on emergency savings, you’re not alone.

Almost two-thirds — 62% — of Americans feel behind on emergency savings, a September Bankrate survey found. For many individuals, inflation and having too many expenses has made finding cash to set aside more difficult.

Pay attention to asset allocation

Savers may be at risk of missing out on today’s higher rates if they have not moved their savings to a high-yield online savings or other account paying a more competitive yield.

Yet even if they’re accessing those higher interest rates on cash, investors may still be missing out.

Whether or not that’s true for investors comes down to a person’s time horizon, experts say.

For longer-term goals, stocks pay the best returns on your money, and can best help ensure you have the money you need for your intended milestones.

“Stocks move higher over time,” Cox said. “If you let your emotions get in the way, you could miss out on a rally that’s crucial to you meeting your financial goals.”

If you have cash on the sidelines that you want to put into the market, it can make sense to add a fixed portion of that money over time, say every month — a strategy called dollar-cost averaging, Colley said.

Having that fixed schedule can help you avoid trying to time the market, which can be difficult to do effectively, she said. Importantly, investors should try to opt for broadly diversified funds rather than individual stocks.

Having a long-term view can pay off.

If you had invested all of your money before the financial crisis, it would have felt like the worst timing in the entire world, Colley said.

Now, your returns look great, provided you let that money grow for the 15-year run, she said.

Revise your cash strategy as conditions shift

To be sure, there are risks that investors need to keep tabs on when it comes to their cash and other investments.

“Rates are going to come down slower than they went up — much slower,” McBride said.

Consequently, cash investors may enjoy returns that have the potential to outpace inflation for longer, he said.

Still, there are risks for savers to watch.

The policies put in place under the next presidential administration may affect both inflation and interest rates, Cox said.

“If inflation picks back up, it could be hard to earn a beatable yield in cash,” Cox said.

In that case, stocks may provide a better way to beat inflation, though there are no guarantees on prospective returns, she said.

Regardless of whether investors opt for cash or stocks, they need to be asking themselves why they’re making those choices and what they need that money for, she said.

Personal Finance

Nearly half of credit card users are carrying debt, report finds

Published

2 hours ago

January 8, 2025

Business Finance News

Consumers still face inflation challenges despite having spending power: TD Cowen's Oliver Chen

Many Americans are starting 2025 a little worse off than before, at least when it comes to credit card debt.

Almost half of cardholders — 48% — now carry debt from month to month, according to a new report by Bankrate. That’s up from 44% at the start of 2024. Of those carrying balances, 53% have been in debt for at least a year.

Roughly 47% of borrowers said they carry a balance due to an unexpected or emergency expense, most commonly medical bills or car and home repairs. Others cite higher day-to-day expenses and general overspending.

“High inflation and high interest rates have been a nasty combination, and while the worst is behind us, the cumulative effects are significant and will linger,” Ted Rossman, Bankrate’s senior industry analyst, said in a statement.

Overall, Americans’ credit card tab has continually crept higher.

The average balance per consumer now stands at $6,380, up 4.8% year over year, according to the latest credit industry insights report from TransUnion from 2024’s third quarter.

By way of example: With annual percentage rates just over 20%, if you made minimum payments toward the average credit card balance ($6,380), it would take you more than 18 years to pay off the debt and cost you more than $9,344 in interest over that time period, Rossman calculated.

Meanwhile, 36% of consumers added to their debt load over the holiday season, according to a separate report by LendingTree.

Of those with debt, 21% expect it’ll take five months or longer to pay it off, LendingTree found.

According to another report by WalletHub, 24% of Americans said they will need more than six months to pay off their holiday shopping debt. In that survey, most consumers said inflation caused them to spend more than they initially planned.

“Many people need months to repay holiday bills after overspending,” said John Kiernan, editor at WalletHub.

The best way to pay down debt

The best move for those struggling to pay down credit card debt is to consolidate with a 0% balance transfer card, Bankrate’s Rossman said.

“You could pay about $300 per month and knock out the average credit card balance in 21 months without owing any interest,” he said.

As it stands, 30% of credit cardholders expect to pay off their credit card debt within a year, while 41% expect to pay it off in 1 to 5 years, Bankrate also found. Another 13% expect it will take more than a decade.

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Personal Finance

Crypto options in 401(k) plans. Here’s what you need to know

Published

3 hours ago

January 8, 2025

Business Finance News

The rally in bitcoin and other cryptocurrency prices has generated excitement among some investors, but investment advisors are largely still skeptical that those volatile assets belong in a 401(k) plan or other qualified retirement savings plans.

Crypto was one of the fastest-growing categories of exchange-traded funds in 2024. The most popular of these funds, the iShares Bitcoin Trust ETF (IBIT), has ballooned to over $50 billion in total assets.

Although crypto is a small part of the 401(k) plan market, it could grow substantially in 2025.

President-elect Donald Trump has suggested he will create a strategic reserve of bitcoin for the U.S. and has nominated Paul Atkins, a cryptocurrency advocate, to chair the Securities and Exchange Commission. The SEC’s approval of spot bitcoin and ethereum exchange-traded funds in 2024 was a key change for the industry.

More from Your Money:

Here’s a look at more stories on how to manage, grow and protect your money for the years ahead.

The law covering 401(k) plans requires plan sponsors to act as fiduciaries, or in investors’ best interest, by considering the risk of loss and potential gains of investments. The Labor Department has cautioned fiduciaries to exercise “extreme care” before adding crypto options to a 401(k) plan’s core investments.

Labor Department officials, however, haven’t required fiduciaries to select and monitor all investment options, like those offered through self-directed brokerage windows, according to the Government Accountability Office. Nearly 40% of plans now offer brokerage windows in their 401(k) accounts, according to a 2023 survey by the Plan Sponsor Council of America.

Pros and cons of crypto in a 401(k) plan

Fernando Gutierrez-Juarez | Picture Alliance | Getty Images

Views are mixed about how much crypto to add to retirement savings or if it’s wise to allocate any at all.

Some financial advisors say crypto can work for a 401(k) plan because its movements are unconnected to the stock market and it functions even if a fiat currency is devalued.

“Crypto should be a part of a 401(k) plan because it’s a non-correlated alternative asset class,” said Ivory Johnson, a certified financial planner and founder of Delancey Wealth Management in Washington, D.C.

“With that said, investors need to ensure that they take their risk tolerance and time horizon into account which will define the target allocation,” said Johnson, who is also a member of the CNBC Financial Advisor Council. “The more volatile an asset class is, the less you need of it in the portfolio because you presumably get more bang for your buck.”

Johnson recommends cryptocurrencies range from 2% to 8% of an investor’s portfolio.

Other experts point to volatility and risk as reasons to be conservative.

“People saving for retirement should probably be even more conservative, because adding crypto to a 401(k) plan would significantly increase the risk that your retirement nest egg could suffer a large loss at the wrong time,” said Amy Arnott, a chartered financial analyst and portfolio strategist with Morningstar Research Services.

Morningstar found that since September 2015, bitcoin has been nearly five times as volatile as U.S. stocks, and ether nearly 10 times as volatile. That type of volatility adds a large risk to a portfolio even with a small amount invested.

401(k) contribution limits for 2025

Regardless of what assets are in a 401(k) plan, there are limits to how much you can contribute. For 2025, an employee can contribute up to $23,500 in a 401(k) and other employer-sponsored plans — that’s $500 more than in 2024.

People age 50 or older can make a “catch-up contribution” of up to $7,500. And those age 60 to 63 years old can supersize that, with a catch-up contribution of up to $11,250 for 2025.

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Personal Finance

Why your paycheck is slightly bigger

Published

22 hours ago

January 7, 2025

Business Finance News

Simpleimages | Moment | Getty Images

Why your take-home pay could be higher

If you’re starting 2025 with similar wages to 2024, your take-home pay — or compensation after taxes and benefit deductions — could be a little higher, depending on your withholdings, according to Long.

“When all the tax brackets go up, but your salary stays the same, relatively, that puts you on a lower rung of the ladder,” he said.

The federal income tax brackets show how much you owe on each part of your “taxable income,” which you calculate by subtracting the greater of the standard or itemized deductions from your adjusted gross income.

“Even if you make a little more than last year, you could actually pay less in tax in 2025 compared to 2024,” because the standard deduction also increased, Long said.

For 2025, the standard deduction increases to $30,000 for married couples filing jointly, up from $29,200 in 2024. The tax break is also larger for single filers, who can claim $15,000 in 2025, a bump from $14,600.

‘It ends up nearly balancing out’

Despite tax bracket changes, many Americans won’t feel the pay increase amid elevated prices for certain expenses, said Sheneya Wilson, a CPA and founder of Fola Financial in New York.

“It ends up nearly balancing out,” she said.

While inflation is no longer accelerating, there was an uptick in the cost of groceries, gasoline and new cars in November, according to the Bureau of Labor Statistics.