Make Your Money Work for You: The Ultimate Guide to Setting Financial Goals

Saving money is all well and good in theory.

It’s pretty hard to argue having more cash in your pocket could ever be a bad thing.

But what are you saving for? After all, money is just a tool. If you don’t have solid financial goals, all those hoarded pennies might end up floating in limbo when they could be put to good use.

Figuring out where your money should go might seem daunting, but it’s actually a lot of fun.

You get to analyze your own priorities and decide exactly what you think you should do with your hard-earned cash.

Talk about adulting, right?

But to make the most of your money, follow a few best practices while setting your goals.

After all, even if something seems like exactly what you want right now, it might not be in future-you’s best interest. And you’re playing the long game… that’s why they’re called goals!

What to Do Before You Start Writing Your Financial Goals

To keep yourself from deciding your financial goals are “buy the coolest toys and cars, get deeply into debt and watch my credit score plummet” — all super easy to do — we’ve compiled this guide.

It’ll help you set goals and create smart priorities for your money.

That way, however you decide to spend your truly discretionary income, you won’t leave the 10-years-from-now version of you in the lurch.

First Things First: How Much Money Do You Have?

You can’t decide on your short- or long-term financial goals if you don’t know how much money you have or where it’s going.

And if you’re operating without a budget, it can be easy to run out of money well before you run out of expenses — even if you know exactly how much is in your paycheck.

So sit down and take a good, hard look at all of your financial info.

A ton of great digital apps can help you do this — here are our favorite budgeting apps — but it can be as simple as a spreadsheet or even a good, old-fashioned piece of paper. It just takes two steps:

1. Figure out how much money you have. It might be in checking or savings accounts, including long-term accounts like IRAs. Or, it might be wrapped up in investments or physical assets, like your paid-off car.
2. Assess any debts you have. Do you keep a revolving credit card balance? Do you pay a mortgage each month? Are your student loans still hanging around?

Take the full amount of money you owe and subtract it from the total amount you have, which you discovered in step one. The difference between the two is your net worth.

That’s the total amount of money you have to your name.

If it seems like a lot, cool. Hang tight and don’t let it burn a hole in your pocket. We’re not done yet.

If it seems like… not a lot, well, you’re about to fix that. Keep reading.

Create a Budget

Once you’ve learned your net worth, you need to start thinking about a working budget.

This will essentially be a document with your total monthly income at the top and a list of all the expenses you need to pay for every month.

And I do mean all of the expenses — that $4.99 recurring monthly payment for your student-discounted Spotify account definitely counts.

Your expenses probably include rent, electricity, cable or internet, a cell phone plan, various insurance policies, groceries, gas and transportation; and other looser categories like charitable giving, entertainment and travel.

Pro Tip

Print out the last two or three months of statements from your credit and debit cards and categorize every expense. You can often find ways to save by discovering patterns in your spending habits.

It’ll depend on your individual case — for instance, I totally have “wine” as a budget line item.

See? It’s all about priorities.

Start by listing how much you actually spent in each category last month. Subtract your total expenses from your total income. The difference should be equal to the amount of money left sitting in your bank account at month’s end.

It’s also the money you can use toward your long-term financial goals.

Want the number to be bigger? Go back through your budget and figure out where you can afford to make cuts. Maybe you can ditch the cable bill and decide between Netflix or Hulu, or replace one takeout lunch with a packed version.

You don’t need to abandon the idea of having a life (and enjoying it), but there are ways to make budgetary adjustments that work for you.

Set the numbers you’re willing to spend in each category, and stick to them.

Congratulations. You’re in control of your money.

Now you can figure out exactly what you want to do with it.

How to Set Your Financial Goals

Before you run off to the cool-expensive-stuff store, hold on a second.

Your financial goals should be (mostly) in this order:

1. Build an emergency fund.
2. Pay down debt.
3. Plan for retirement.
4. Set short-term and long-term financial goals.

We say “mostly” because it’s ultimately up to you to decide in which order you want to accomplish them.

Many experts suggest making sure you have an emergency fund in place before aggressively going after your debt.

But if you’re hemorrhaging money on sky-high interest charges, you might not have much expendable cash to put toward savings.

That means you’ll pay the interest for a lot longer — and pay a lot more of it — if you wait to pay it down until you have a solid emergency fund saved up.

1. Build an Emergency Fund

Finding money to sock away each month can be tough, but just starting with $10 or $25 of each paycheck can help.

You can make the process a lot easier by automating your savings. Or you can have money from each paycheck automatically sent to a separate account you won’t touch.

You also get to decide the size of your emergency fund, but a good rule of thumb is to accumulate three to six times the total of your monthly living expenses. Good thing your budget’s already set up so you know exactly what that number is, right?

You might try to get away with a smaller emergency fund — even $1,000 is a better cushion than nothing. But if you lose your job, you still need to be able to eat and make rent.

2. Pay Down Debt

Now, let’s move on to repaying debt. Why’s it so important, anyway?

Because you’re hemorrhaging money on interest charges you could be applying toward your goals instead.

So even though becoming debt-free seems like a big expense and sacrifice right now, you’re doing yourself a huge financial favor in the long run.

There’s lots of great information out there about how to pay off debt, but it’s really a pretty simple operation: You need to put every single penny you can spare toward your debts until they disappear.

One method is known as the debt avalanche method, which involves paying off debt with the highest interest rates first, thereby reducing the overall amount you’ll shell out for interest.

For example, if you have a $1,500 revolving balance on a credit card with a 20% APR, it gets priority over your $14,000, 5%-interest car loan — even though the second number is so much bigger.

Pro Tip

If you’re motivated by quick wins, the debt snowball method may be a good fit for you. It involves paying off one loan balance at a time, starting with the smallest balance first.

Make a list of your debts and (ideally) don’t spend any of your spare money on anything but paying them off until the number after every account reads “$0.” Trust me, the day when you become debt-free will be well worth the effort.

As a bonus, if your credit score could be better, repaying revolving debt will also help you repair it — just in case some of your goals (like buying a home) depend upon your credit report not sucking.

3. Plan for Retirement

All right, you’re all set in case of an emergency and you’re living debt-free.

Congratulations! We’re almost done with the hard part, I promise.

But there’s one more very important long-term financial goal you most definitely want to keep in mind: retirement.

Did you know almost half of Americans have absolutely nothing saved so they can one day clock out for the very last time?

And the trouble isn’t brand-new: We’ve been bad enough at saving for retirement over the past few decades that 20% of today’s seniors can’t afford to retire.

If you ever want to stop working, you need to save up the money you’ll use for your living expenses.

And you need to start now, while compound interest is still on your side. The younger you are, the more time you have to watch those pennies grow, but don’t fret if you got a late start — here’s how to save for retirement in your 20s, 30s, 40s and 50s.

If your job offers a 401(k) plan, take advantage of it — especially if your employer will match your contributions! Trust me, the sting of losing a percentage of your paycheck will hurt way less than having to work into your golden years.

Ideally, you’ll want to find other ways to save for retirement, too. Look into individual retirement arrangements (IRAs) and figure out how much you need to contribute to meet your retirement goals.

Future you will thank you. Heartily. From a hammock.

4. Set Short-Term and Long-Term Financial Goals (the Fun Part!)

Is everything in order? Amazing!

You’re in awesome financial shape — and you’ve made it to the fun part of this post.

Consider the funds you have left — and those you’ll continue to earn — after taking care of all the financial goals above. Now think: What do you want to do with your money?

What experiences or things can your money buy to significantly increase your quality of life and happiness?

You might plan to travel more, take time off work to spend with family or drive the hottest new Porsche.

Maybe you want to have a six-course meal at the finest restaurant in the world or work your way through an extensive list of exotic and expensive wines. (OK, I’ll stop projecting.)

No matter your goals, it’s helpful to categorize them by how long they’ll take to save for.

Make a list of the goals you want to achieve with your money and which category they fall into. Then you can figure out how to prioritize your savings for each objective.

For example, some of my goals have included:

• Short-term financial goal: Save spending money for a trip overseas.
• Medium-term financial goal: Pay off my car within a year, or sell it — and its onerous loan — and buy an older car I can own free and clear.
• Long-term financial goal: Buy a house I can use as a home base and increase my income by renting it out while I travel. This will probably take me through the rest of my 20s.

By writing down my short- and long-term financial goals and approximately how long I expect it will take to achieve each, I can figure out what to research and how aggressively I need to plan for each goal.

It also offers me the opportunity to see what I prioritize — and to revise those priorities if I see fit.

I’m happy to see my goals revolve around gaining new experiences and increasing my financial freedom, rather than buying fancy-but-expendable new stuff.

You get to figure out what makes you happy to spend your money on… which is figuring out what kind of person you want to be.

Told you this was gonna be fun.

Jamie Cattanach (@jamiecattanach) has written for VinePair, SELF, Ms. Magazine, Roads & Kingdoms, The Write Life, Barclaycard’s Travel Blog, Santander Bank’s Prosper and Thrive and other outlets. Her writing focuses on food, wine, travel and frugality.

This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.

source The Penny Hoarder http://bit.ly/2X3oACs

Buy Stocks and Learn From Other Investors in This App

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The idea of buying and selling stocks can be pretty intimidating. If you’re a beginner — or even if you’re not — the stock market can seem absolutely mystifying.

Matador demystifies it. It’s an easy-to-use investing app with a community built into it. It lets you learn about the stock market by watching what other investors are doing. And it’s commission-free.

Once you sign up, you can connect to Facebook friends who are on Matador. You can also follow other amateur or professional investors. You can see what stocks they’re buying or selling, and how their investments are doing.

The app makes it easy to track the ups and downs of each stock’s price, or to see which stocks are growing more or less popular with the entire Matador community.

Once you can see what everyone else in the community is doing with their stocks, it might help you decide where to put your money. Your cash will earn 2.5% interest (25 times the national average for money market accounts reported by  Bankrate*) as you build out your portfolio.

You can create an account and start following the community even if you’re not ready to start investing yet. And once you’re ready, you’ll pay no commissions.

*Rates accurate as of May 21, 2019.

This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.

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Here’s How to Get $32.25 the Next Time You Go to Publix

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Publix is my happy place.

When I was a kid, I lived for those free cookies. Sometimes an employee would even tie a balloon to my wrist, and it would make my day. Today, I live for Pub Subs. And the BOGO deals. And the rotisserie chicken. And the employees, who are still so genuinely nice.

You get the point: I’m a Publix patriot.

But I’m also a fan of saving money, so in addition to using digital coupons through the Publix app and capitalizing on those awesome BOGO deals, I also use Ibotta, a free app that pays you to shop.

Call Publix Your Second Home? Here’s Our Favorite Way to Save

Listen. I have no patience for complicated apps. Or for anything that’s going to take me more than five minutes to figure out. Let me tell you: Ibotta is super easy to use.

Here’s how it works: Before heading to the store, search for items on your shopping list within the Ibotta app. When you get home, snap a photo of your receipt, and scan the items’ barcodes.

Bam. Cash back.

And if you have a Publix account? Earning cash back is even easier. Just connect your Publix account to Ibotta, add offers to your queue and earn automatically. You don’t even have to fiddle with barcodes and receipts.

How to Earn $30+ Next Time You Shop at Publix

If you haven’t yet discovered the joys of Ibotta, don’t worry. It’s offering new users a $20 sign-up bonus when you redeem 10 offers within the first 14 days of downloading the app. (Ugh, I’m jealous.)

No. We’re not encouraging unnecessary spending to earn that $20 bonus, but Ibotta has so many cash-back deals that, chances are, you’ll be able to easily stock up on your go-to essentials to earn that bonus.

Here are 10 offers available right now that we’re into:

• 50 cents back on Ragu Simply Pasta Sauce (because it keeps well in the pantry and who doesn’t love throwing together a last-minute pasta dish during the week?)
• 50 cents back on Fage Total Split Cup (claim this offer up to three times per receipt on any flavor)
• $1 back on Rainier Fruit Company Pink Lady apples (1 pound bag or larger; an apple a day…)
• $2 back on Secret aluminum-free deodorant (because you always run out of deodorant at the most inopportune time)
• 75 cents back on a 30-ounce jar of Hellmann’s Real Mayonnaise (or, because Ibotta knows this is a highly personal preference, you can also get 70 cents back on Duke’s or 85 cents back on Miracle Whip)
• $2.25 back on a Perfect Bar (which makes it free after purchase, so why not try a new snack?)
• 50 cents back on Pacific Foods organic broth and stock (another pantry essential)
• $1 back on any three Lean Cuisines (that’s three days of lunch)
• 75 cents back on Cottonelle toilet paper (another one of those items you always run out of at the most inopportune time…)
• $2 back on a 6-pack of Lagunitas, any variety (because you deserve it)

Just by stocking up on some of these staples, you’ll get $11.25 in cash back and claim that $20 bonus, which means you just earned an easy $31.25 to go toward your next Publix run.

Pro Tip

If you really want to get savvy? Stack your Ibotta cash-back deals with Publix’s weekly ad offers and digital coupons to save even more money.

Oh, and Ibotta has a ton of “any brand” deals, which we love. For example, you can earn 25 cents back on any brand of chocolate bar, any brand of baby food or any brand of frozen chicken. Unfortunately, those offers won’t go toward qualifying for the bonus — but you’ll still get paid!

To claim your $20 bonus, sign up with Ibotta, peruse the cash-back deals and make your grocery list for tonight’s Publix run.

Because you know it’s inevitable.

Carson Kohler (carson@thepennyhoarder.com) is a staff writer at The Penny Hoarder. When she moved out of the South for school, she had a hard time coping without Publix.

This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.

source The Penny Hoarder http://bit.ly/2WUcviV

4 Ways Community College Can Save You $12K or More on a Bachelor’s Degree

We found a way to shave more than $12,000 off your college bill.

And it’s as easy as 2+2.

That’s the name of the strategy in which a student spends their first two years earning an associate’s degree from a community college and then transferring to a university to complete their final two years and earning a bachelor’s degree.

Before you groan and launch into stereotypes about community college, let’s look at the numbers.

Including tuition and applicable fees, the cost per credit hour at a four-year institution is $301.23, whereas a two-year community college costs $108.10, according to a Penny Hoarder analysis of National Center for Education statistics.

So if an average bachelor’s degree requires 120 credit hours, the four-year education comes with a $36,148 price tag.

But if you complete the first 64 hours at a community college, you’ll pay $6,918 to earn an associate’s degree, then $16,869 to complete your bachelor’s degree at the four-year college for a total of $23,787.

That’s a savings of $12,361.

Considering the current American student loan debt burden tops $1.5 trillion, you might want to reconsider shelling out the cash to enjoy two extra years of cafeteria food and ultimate Frisbee tournaments.

We used our average credit hour cost analysis to calculate your savings to help you decide whether two years at community could be worth your time and money.

4 Ways to Know if a Community College Transfer Will Help You Save Money

If you recognize these four traits about yourself before you start applying to schools, you could save thousands by starting your college career closer to home.

1. You (Generally) Know What You Want to Do

You don’t need to have your 10-year career trajectory outlined, but if you have a general field of interest — fine arts vs. physics, for instance — community college can offer a good start and allow you to save money on changing majors… again.

Finding your focus at the community college level can also help you avoid excess credit hour fees, which some states charge for credit hours taken beyond the total number required to complete a degree.

Pro Tip

To ensure your credits transfer, pick a community college that partners with the four-year school you ultimately would like to attend. You can find partner lists on the admissions websites.

And here’s the thing, If you do change your mind — whether you decide to change majors or decide higher education isn’t for you after all — it’s two years of community college costs vs. the university costs. And you have an associate degree to show for you time.

How Much Can You Save: You’d save $12,361 by discovering higher ed wasn’t for you during your first two years at the community college as opposed to four years at a university.

2. High School Wasn’t Your Best Subject

Not the star student in high school? Walking into a university’s lecture hall with 300 other freshmen for your first general education class could be daunting.

And considering an estimated 30% of college freshmen drop out after the first year, you wouldn’t be the only student to fail a class.

With their smaller class sizes, community colleges present a less intimidating introduction to collegiate coursework along more personalized instruction.

Besides helping you complete your general education requirements, an improved community college transcript can give you a second chance at getting into the four-year institution you didn’t get accepted into the first time.

Pro Tip

Have your heart set on a school? Ask about transfer options before you apply — some universities guarantee admission if you earn an associate’s degree from one of their community college partners.

And don’t assume your past performance necessarily predicts your future success.

Community college students graduate at equal to higher rates from the 100 most selective colleges as students who enrolled directly from high school or those who transferred from other four-year institutions, according to a study by the Jack Kent Cooke Foundation.

You’ll also have additional opportunities to snag funding when you make the leap with one of these 25 transfer scholarships.

How Much Can You Save: If the average school year consists of 30 credit hours, that’s $9,037 you’d save by not dropping out after your first year.

3. Work-Study Won’t Pay the Bills

If you need to work full time while you attend school, starting locally provides a two-fer benefit.

First, a community colleges afford more flexibility because they cater to non-traditional students — and because many of the professors have day jobs besides teaching. Schedules typically include night and weekend classes.

Pro Tip

Don’t be lulled into complacency if you can afford the first two years of community college on your own. Use that time to build savings you can draw on when you’re at the pricier university.

Second, you can use your associate degree to command higher pay at the job you take when you go on to complete your bachelor’s degree.

How Much Can You Save: By working a full-time job while completing your associate degree, you’d make $75,920 on average, according to the Bureau of Labor Statistics. Compare that to working 10 hours per week at minimum wage ($7.25/hour nationally) while attending the first two years at a university, which would earn you a total of $7,540. That’s a difference of $68,380 over those two years.

4. You Like Your Parents (or at Least Your Town)

This is kind of a personal question. How much do you like your parents? And perhaps just as important: How much do your parents like you?

Living at home for the first two years after high school — whether you attend a community college or a university close enough to home for a cheap commute — can help you save on rent, utilities and even food. (But please clean up after yourself. Your mom is not your maid.)

And sure, you don’t get the full “campus life” experience by foregoing your dorm years, but keep in mind the distractions — and costs — of on-campus living and meal plans add to your student loan debt.

How Much Can You Save: Even if you aren’t living at home, room-and-board estimates for a commuter college are $8,660, compared to $11,140 at a public university, as reported in the College Board’s Annual Survey of Colleges. So staying close to home would save you $4,960 over two years.

Tiffany Wendeln Connors is a staff writer at The Penny Hoarder. Data journalist Alex Mahadevan contributed to this story.

This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.

source The Penny Hoarder http://bit.ly/2WmZu4g

Why Spending Less Doesn’t Reduce Your Quality of Living

One of the biggest mental obstacles that most people face when it comes to turning around their financial life is the perception that if they cut into their spending, they’re going to reduce their quality of life.

Typically, a person’s mind flashes to the non-essential things that they care about most. So, for me, when you talk about cutting spending, I imagine cutting into my hobby spending. I imagine cutting into my quality food spending. I imagine cutting into family vacations.

To tell the truth, that’s a pretty unpleasant vision. Those are the things I care about in my life. I don’t want to cut them out. I don’t want to lose those things that really bring a lot of joy and value to my life.

Most people who consider cutting their spending go through a similar thought process. Their mind immediately flashes to the things in their life that they spend money on that bring them genuine lasting value and joy, and unsurprisingly they don’t want to cut that. Thus, the prospect of spending less seems like it directly leads to a lower quality of living and thus misery, and thus people often avoid frugality or enter into it with severe trepidation.

Here’s the catch: if I’ve learned anything from our own financial turnaround, which led us to being debt free with a paid-off mortgage by our early thirties and well on our way to early retirement as soon as our youngest leaves the nest, it’s that cutting back on your spending is really ineffective when you cut the core things you most care about, but it’s brutally effective if you aim it at everything else. That’s the secret of frugality – cut back on the things you don’t care about, don’t expand your spending on the things you do care about, and the leftover money will make a huge difference in your financial state without reducing your quality of life one bit.

That sounds simple enough at a glance, but it’s actually got some pretty serious pitfalls.

First of all, it requires a strong sense of what things you actually care about and which things you’re spending money on out of routine or to impress others or from bad advice or from media influence. The things that you really care about are worth spending money on. The things that you spend money on because it’s just how you do things or because you want your friends to be envious or because someone suggested it to you or because you heard about it on social media or the news are not worth spending money on, because they contribute almost nothing positive of value to your life.

The trick is to distinguish between the two groups, and that’s harder than you think because those things that aren’t worth spending money on often do give you a little momentary burst of pleasure, and we do remember those bursts. We end up associating that burst of pleasure with it being a “good” thing. The catch, of course, is that lots of things give us a little momentary burst of pleasure, and many of them don’t require us to spend money. I get a burst of joy when I’m working and my wife walks by me and puts her hand on my shoulder for a moment. I get a burst of joy when I’m done with my work an hour early and can curl up for a few unexpected chapters of a book. I get a burst of joy when I’ve been hiking for an hour and reach an amazing vista. I get a burst of joy from making a really good family dinner and savoring that first bite and seeing my children dig into it.

Life offers us so many little bursts of joy for free that it’s silly to pay for more of them. Instead, we should save our money for the things that are more deeply meaningful. Often, they provide a burst of joy, but some element of it lasts and lasts over time because it’s tied to something that we truly value.

So, that’s our challenge, laid bare. The real key to spending less without reducing quality of life is to spend money on things that bring lasting value into our life while not spending (much) money on things that are merely little bursts of pleasure and instead finding those mostly for free. The closer we can get to that ideal, the less we spend while maintaining the same quality of life.

That dividing line is different for everyone. The line between the things in my life that are really worth spending money on versus the things that really don’t matter to me is different than your line between those two groups.

Thus, I can’t actually suggest to you which items are on which side of the line. All I can really share is how I went about (mostly) figuring them out and putting that knowledge to work.

One thing that helped me was to cut certain types of spending out of my life entirely and see how I reacted to that. Quite often, once I was able to adjust my daily routine a little bit, there was no real lasting impact. I found that cutting off regular coffee shop visits didn’t really alter my quality of life. The same with regular book store visits. Those were things that I felt pretty confident were “core” things that really mattered to me, but by cutting them out and finding a somewhat different life routine, I learned that they really didn’t matter that much. I use thirty day challenges for this, meaning that I do it for thirty days and evaluate the results afterwards.

Another thing that helped, and this might seem strange at first, was to reorganize my schedule so I could spend more blocks of time on my hobbies. Often, I find that when I’m passionate about something but my schedule doesn’t afford me the time to explore it like I want to, I throw money at that passion. If I’m really missing playing board games and I don’t have a window to play, I’m more prone to spend hobby money on a board game. It’s a “substitute” impulse because I don’t have time for the thing I really want. Giving blocks of focused time to my hobbies takes away that “substitute” impulse.

Another strategy is to consciously go through every bit of your spending and trim spending on things that are obviously unimportant. For example, I switched almost all of my food staple and household staple buying to store brands because, honestly, my quality of life is not tied to whether I buy name brand hand soap for the bathroom or whether I buy name brand sugar. I negotiated for better insurance rates and shopped around for better policies because my quality of life is not tied to what my insurance carrier is. I eliminated our satellite service because I realized that the content on there wasn’t really adding to my quality of life in a world where much content is available elsewhere.

If you find yourself regretting something you cut out of your spending, don’t hesitate to bring it back. This follows the same principle as any significant life change – if it’s making you feel miserable, dial it back. You’re far better off finding a more moderate change that makes you feel good and empowered than a radical change that you’re going to eventually fall back on. Don’t view this as a failure or a loss. Instead, view it for what it actually is: setting yourself up for sustainable long term success.

My final suggestion is to recognize that not buying something is often more empowering than buying something. Spend the money and it’s often just a burst of joy that’s forgotten quickly. Keep the money and it actually becomes something, a piece of the life that you want to be leading. At this point, I’d almost always choose the little piece of the better life than the quick treat I’ll forget about tomorrow, but it took me a long time to genuinely begin to feel that way. Just remember what not spending actually means – it’s a genuine step toward your goal, especially if you use that money well by throwing an extra $5 toward debt repayment or an extra $20 into savings. That’s empowering. That feels good in a wholly different way.

Remember, the quality of your life doesn’t have a whole lot to do with spending. There are many great things in your life that don’t have a financial cost at all. Don’t spend your money chasing the things that aren’t great; rather, use that money so you can find even more greatness.

Good luck.

The post Why Spending Less Doesn’t Reduce Your Quality of Living appeared first on The Simple Dollar.

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This Free Checking Account’s Interest Rate Is 3,000% Higher Than Average

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If you bank at a traditional brick-and-mortar bank, your money probably isn’t growing there.

That’s because traditional banks — with their thousands and thousands of physical locations — typically offer annual percentage yields (APYs) as low as 0.01% on their checking accounts. That’s pretty puny.

Online banks, on the other hand, can offer their customers higher interest rates, because they have less overhead. They have fewer employees and zero physical locations. They don’t have to pay for all those buildings — and all that air conditioning.

One of the highest interest rates we’ve found for an online checking account is from SoFi Money. That checking account earns you 2.25% APY, the percent in interest (including compound interest) you’ll earn on your money in a year.

Frankly, that’s practically unheard of. According to the FDIC, the average checking account earns 0.06% APY — which makes SoFi’s rate of 2.25% more than 37 times higher. Heck, it’s better than the rate on a lot of savings accounts.

Sure, you might be able to find a savings account with a slightly higher yield. But SoFi offers a one-stop checking-and-savings account, with the best of both worlds. You can keep all your moolah in the same place and get all the benefits of checking and savings without having to shuffle your money between accounts.

Checking and savings combined. You might think that’s like oil and water. But maybe it’s more like peanut butter and jelly, and it works. It’s like bacon and eggs. Like macaroni and cheese. Like Batman and Robin!

No Fees for This Account

SoFi (which is short for “Social Finance”) is an online personal finance company that first made its name as an affordable option for refinancing student loans. It has since expanded into mortgages, personal loans — and now banking.

And here’s another big plus for SoFi’s checking-slash-savings account: There are no fees.

There are no account fees, no monthly fees and no overdraft fees. And SoFi will automatically reimburse you for ATM fees at about half a million ATMs that are in the Visa, Plus or NYCE networks.

You can open an account with no minimum balance.

Making the Switch to an Online Account

Even though online banking is growing in popularity, brick-and-mortar banks still dominate the industry.

But keeping your money in an online account might make sense for you if, like a lot of us, you pretty much do your banking on your computer or your phone, anyway.

SoFi Money takes a number of steps to make the transition easy:

• ATMs: With the automatic reimbursement of ATM fees, you can use just about any ATM anywhere for free.
• Checks: If you occasionally need a physical check — to pay your landlord or whatever — you can get checks from SoFi for free.
• Website: SoFi’s website and mobile apps have detailed FAQs, and they make it simple and easy for you to see any information you want to see.

Should You Switch to an Online Bank?

Here at The Penny Hoarder, overdraft fees are one of our pet peeves. About 30% of checking account holders pay overdraft fees each year, according to the Consumer Financial Protection Bureau. And the average overdraft fee got higher in 16 out of the last 17 years, and is now approaching $35.

SoFi Money won’t charge you overdraft fees. Instead, it cancels transactions when your account balance drops to zero.

Here’s an upside: Your account comes with a handy spending tracker called Relay, which gives you a useful, high-level view of your finances — which should make it easier to avoid a zero balance.

If you don’t already use an online bank, you’ll have to get used to having no physical branches to visit. That means you can’t make cash deposits or get face-to-face customer service from a bank teller. You can, however, talk to someone on the phone.

That could be a change from what you’re used to. But you might find it’s worth it for a free checking account with one of the highest interest rates we’ve ever found.

Mike Brassfield (mike@thepennyhoarder.com) is a senior writer at The Penny Hoarder. He’s trying to go digital.

This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.

source The Penny Hoarder http://bit.ly/2QiTfcd

This Artist Raised His Credit Score by 175 Points — Without a Full-Time Job

Is Loan Protection Insurance Worth the Cost?

When signing on for a loan, whether it’s a mortgage for a new home or a personal loan to consolidate credit card balances, you’re often offered insurance that promises to make the debt payments should anything happen to you.

At first blush this sounds like a great idea, right?

After all, such insurance is designed to step in and cover monthly loan payments and protect you from default in the event of anything from job loss to debilitating illness and even death.

While there are benefits to this type of protection, there’s also a long list of reasons to think carefully before signing on the dotted line, including the fact that there are better options out there that will protect you and your family more directly and thoroughly in the event of the unexpected.

The Types of Loan Insurance Policies Available

As the Federal Trade Commission (FTC) explains, there are several types of loan insurance (also known as credit insurance) available to consumers. Options include credit life insurance; credit disability insurance; involuntary unemployment insurance and finally credit property insurance.

None of these should be confused with private mortgage insurance, otherwise known as PMI, which is typically a requirement for homebuyers who put less than 20% down on a home purchase.

Decreasing Terms

Among the drawbacks of loan or credit insurance is the decreasing value of the policy, says Kathleen Fish, a certified financial planner and president of Fish and Associates.

What does that mean exactly?

In the simplest sense, it means that you will always pay the same amount for your monthly premium despite the fact that the face amount or benefit offered by the policy decreases with each subsequent payment, explained Fish. She suggests that level term policies, which pay the policy’s full-face value for the life of the policy term, are often a better option.

Zhaneta Gechev of One Stop Life Insurance offers similar criticism of loan insurance and says she’s passionate about educating consumers regarding the drawbacks of such policies.

“For example, you start off with a $200,000 policy and you’re always paying the same premium. However, in X numbers of years, your policy could be worth half of what you started off with,” said Gechev. “Why pay the same price for lower coverage?”

Policy Beneficiary

Yet another important distinction to understand about loan insurance is who benefits from the policy. The answer is the bank or the lender, not you, and not your family members.

In other words, with a standard life insurance policy, for instance, you get to select the beneficiaries. “You get to name the beneficiary who can in turn pay off the loan and keep the difference,” said Fish.

But with loan insurance, the bank or lender is the sole beneficiary. To make this point clearer, if you pass away before your mortgage is paid off, for example, mortgage insurance will pay the balance owed on the home. That’s it.

“But this may not be what your family needs at that particular moment,” explained Gechev. “Your spouse or parents or children will need money to pay for your funeral. And as we all know, they are not cheap.”

Surviving family members may also need to pay medical bills and other expenses.

“To me, as a consumer, I want to keep control of the decision about how the money is spent,” continued Gechev. And by opting for loan insurance rather than a traditional life insurance or disability policy, you lose that control because the beneficiary is the lending institution.

• Read more: Six Things to Look for in a Life Insurance Policy

Post-Claim Underwriting

For all the money you pay into loan insurance, there’s no guarantee it will actually cover you in a time of need, says Angela Bradford, of World Financial Group.

“The companies decide at the time of the claim if the person was insurable. They don’t always pay out,” she said. “Most are set up this way. At the time of something happening is when the company decides if they’re going to pay out the loan or mortgage… If the client had past health problems, the companies get away without paying out.”

To help avoid this pitfall, before signing up for a policy ask about the company’s underwriting procedures, specifically whether policies are underwritten when applied for or when claims are filed, said Sarah Jane Bell, a financial advisor with Sun Life Financial.

“Often it’s underwritten after a claim, so if you had a medical issue not disclosed upon applying, the claim can be denied even after paying premiums along,” Bell said.

You May Already Have the Coverage You Need

Many consumers fail to realize that they already have the coverage necessary to pay a mortgage or some other loan in the event of an emergency.

This coverage comes in the form of other policies (think: life insurance, disability insurance) and often, those other policies have the added benefit of not requiring the funds be used solely to pay off your loan, as already discussed.

“When shopping for loan protection insurance, first review your current life insurance, disability insurance, and other coverage to see if you really need additional coverage for your loan,” suggests Kathryn Casna, an insurance specialist with TermLife2Go.com.

Most employers, for example, offer employees the option to sign-up for short-term disability and unemployment insurance during the on-boarding process, and may offer long-term disability policies as well, Casna said.

• Read more: 11 Benefits You Should Be Taking Advantage of at Work

At a Minimum, Shop Around

If you still decide that a loan protection policy is the best approach for you, it’s important to shop around, identifying the best price and the right coverage for your situation.

Many loan protection insurance plans cost around 0.2% to 0.3% of the loan or mortgage, said Jared Weitz, CEO and founder of United Capital Source.

“The price will vary based on the duration of the plan, the size, and the level of coverage,” Weitz explained.

Also, as part of your research process, make sure you’re getting the right type of policy, said Casna.

“Credit life insurance pays out only if you die. Credit disability pays out only if you can’t work due to a disability, while involuntary unemployment insurance pays out if you lose your job for any reason that’s not your fault,” Casna explained.

Review your policy carefully to ensure it will cover your concerns. Some credit disability policies, for instance, won’t pay out if you work part-time, are self-employed, or your inability work is due to a preexisting health condition.

“Read the fine print before signing up, you need to be aware of what the policy actually covers and under what grounds you’re able to file a claim,” said Weitz.

Mia Taylor is an award-winning journalist with more than two decades of experience. She has worked for some of the nation’s best-known news organizations, including the Atlanta Journal-Constitution and the San Diego Union-Tribune. 

Read more:

• Best Life Insurance Companies
• The Ultimate Guide to Choosing a Term Life Insurance Policy
• Best Personal Loans

The post Is Loan Protection Insurance Worth the Cost? appeared first on The Simple Dollar.

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Can I remortgage without proving I can repay the loan?

Question

I have an interest-only £200,000 mortgage ending in 14 years. I cashed out the endowment about 10 years ago, so have no insurance to pay the mortgage off when it’s due. That said, I have £150,000 equity in the house, and will probably want to downsize in the future anyway.

I am a self-employed web designer, so can work for ever if I want to and also have an option to move to a lovely place in the country that is owned by my mother-in-law, who is very comfortably off, as are my parents.

I recently contacted my mortgage lender to increase my mortgage by £20,000. Though I don’t have debts and earn enough to pass the criteria, when asked if I have any way to pay back the mortgage, it got a bit awkward.

So my question is: if I tell my lender that I have no means to pay back the debt, would it have the right to stop the mortgage in some way?

I would also like to know if this would also be the case when applying for a fixed-rate mortgage. I’m currently on a 3.7% interest rate, and the lender has a deal on offer of 2.5% for two years fixed.

From

JF/via email

Lenders will need to be able to demonstrate that a borrower can afford any new mortgage. That will require an assessment not only of income but also of the borrower’s outgoings and ongoing commitments.

Affordability tests will also consider whether the mortgage is affordable now and will remain so in the future, so lenders will apply a stress-test as well.

When it comes to interest-only lending, the lender will also need to assess the borrower’s repayment strategy to cover the capital. Lenders have tightened their requirements over what they deem an acceptable repayment strategy. The original endowment policy would have been designed to meet those requirements, but other acceptable repayment vehicles could include Isas or a pension if the investment levels are adequate.

The questions about the repayment vehicle are to ensure that borrowers not only understand that they’re not making inroads into their mortgage balance each month, but also to ensure that there is a plausible repayment strategy in place.

You mention that you expect to downsize your property, and some lenders can consider that as a repayment strategy. There is also likely to be limitations to the maximum loan to value [how much mortgage you have in relation to how much your property is worth] and some lenders will have minimum income requirements as well for interest-only lending.

So you should expect to be asked about the repayment vehicle, and lenders will need you to meet their criteria when you are increasing the borrowing or switching to a new lender.

Different lenders will take a different approach, so it’s worth shopping around. If you are switching on a like-for-like basis, your existing lender may be able to offer an option without reassessing the repayment vehicle or affordability.

Of course, it makes sense to consider how you will plan to repay the mortgage in the longer run, to give yourself options rather than potentially face the need to sell at a time when you may prefer not to. Having cashed in your endowment policy, you will no longer have the life cover that it provided, so it is also a good idea to revisit your protection requirements.

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This article was written in response to a reader’s question. If you have a financial or work/career question that has left you scratching your head ask our panel of experts who will aim to shine some light on the matter.

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The pros and cons of taking a 40-year mortgage

It is beginning to look as if the 25-year mortgage has had its day.

The average cost of a first-time buyer home has gone up by 21% over the past 10 years from £172,659 in 2008 to £208,741, according to Halifax.

Meanwhile, the average first-time buyer deposit has shot up by 71% since 2008, to £33,127 now.

Tougher affordability checks from lenders have also made it increasingly difficult for first-time buyers with smaller deposits to get a mortgage.

As such, first-time buyers struggling to get on the housing ladder are increasingly taking out mortgages for longer terms to meet tougher affordability checks.

The rise of the 40-year mortgage

Just over half of all residential mortgage products currently available have a standard maximum mortgage term of up to 40 years, up from 40% five years ago, according to financial data firm Moneyfacts.

The biggest advantage of stretching out the mortgage term is that you can reduce your monthly repayments as they are spread out over a longer timeframe. However, this means you end up paying interest for longer, which increases the ultimate cost of your loan.

For example, a £200,000 repayment mortgage at a rate of 2.5% over 25 years equates to a monthly repayment of £897.23 and total interest payable would be £69,169 over the term.

However, the same mortgage taken over a 40-year term would reduce the monthly repayments down to £659.56 but increase the total interest to be paid to £116,588, resulting in an additional £47,419 in interest.

“Stretching your mortgage term means you can reduce monthly payments”

Work the system

One way of getting around this is by overpaying on your mortgage, then when you come to remortgage you can reduce the term of the loan. However, make sure your lender allows you to overpay it penalty-free first.

However, if you opt for a longer-term mortgage you significantly reduce the number of lenders you can borrow from.

One of the best deals out there for first-time buyers looking to take out a longer-term mortgage is from Sainsbury’s Bank.

For a first-time buyer with a 10% deposit looking to buy a £200,000 property over 40 years, Bank of Ireland is offering an initial rate of 2.2% on a two-year fixed rate mortgage. This comes in at an annual cost of £6,571, or £564 in monthly repayments.

In recent years, mortgage providers have also been extending the maximum age a borrower may be at the end of a mortgage.

According to Moneyfacts 71% of all residential mortgages can end when the borrower is 75 years of age or older, whereas five-years ago this figure stood at 52%.

However, the longer a borrower extends their mortgage term the older they will be when they have finally repaid their mortgage. This could seriously affect your retirement plans and mean you have to work longer than you initially planned.

The City watchdog the Financial Conduct Authority has warned that 40% of all first-time buyers could be paying off their mortgage when they retire.

FEATURED PRODUCT

Bank of Ireland two-year fixed-rate mortgage 2.2%

Bank of Ireland's two-year fix comes with a rate of 2.2% for buyers with a 90% LTV.

Based on a £180,000 mortgage repaid over 40 years on a £200,000 property, this mortgage costs £564 a month – £6,571 a year over the fixed period – with no fees and £400 cashback.

 

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Investment sectors: your no-nonsense jargon buster

Get a better understanding of the different investment sectors to help you pick the right funds

Without any form of classification, picking the right fund for you could be like finding the proverbial needle in the haystack. To help you narrow down your choices and make meaningful comparisons, the 3,000 or so funds available to retail investors are divided up into groups – or sectors – according to how and where they invest your money.

This could be according to the assets they hold – for example, equities (shares), fixed interest (mainly bonds), or both, the country or region they focus on, or the fund’s objective. The sectors have been created by the Investment Association (IA), the trade body for investment managers.

Here, Moneywise explains everything you need to know about the principal sectors.

FIXED INCOME

£ Corporate bonds

Corporate bonds are loans to companies that pay a fixed rate of interest to investors. They can be a useful way of diversifying your portfolio away from equities to reduce risk and volatility. “Funds in this sector invest predominantly (80%) in the debt of companies, with two distinct and important factors,” explains Adrian Lowcock, head of personal investing at Willis Owen.

“Firstly, the debt, or bond, is sterling denominated or hedged back to sterling so the investor doesn’t have exposure to currency risk.

“Secondly, the debt is of a certain level of risk, so BBB- or above (as measured by Standard & Poors). This means the debt is a quality bond and not high yield or higher risk.”

He adds: “To decide which fund is right for you, you need to decide if income or capital return are more important as some managers focus one over the other. If it’s income you seek, then it’s critical to make sure income yields are reliable and not sought at the expense of your capital. Given that this asset class is often used to reduce risk of a portfolio, it’s important to make sure the managers are taking the risks that you want for your investment.”

£ Strategic bonds

Strategic bond funds invest in a greater variety of fixed-interest investments, so fund managers have more options.

Patrick Connolly, chartered financial planner at independent financial adviser (IFA) Chase De Vere, says: “This sector has become hugely popular over the past decade, and many investors now use it as the default way to get exposure to fixed-interest investments, such as government and corporate bonds. Funds in this sector often invest in a wide range of bonds both in the UK and overseas, and fund managers can have a great deal of flexibility.”

Global bonds

“This sector is for investors who want exposure to overseas fixed-income markets,” says Gavin Haynes, managing director of Whitechurch Securities.

“Taking a global approach to bond investing can help diversify a balanced portfolio and provide opportunities that are not available in the UK.”

However, while funds in this sector can invest across the globe there are no rules governing how much should be invested in specific regions and you may find that the bulk of holdings are in one particular market, such as the US.

So it is vital potential investors ensure they are comfortable with how their money will be invested.

Mr Haynes adds: “This sector offers a wide range of international bond funds with differing risk/reward profiles, so you cannot compare constituents on a like-for-like basis.”

Investors must also be able to accept the inherent risk of currency fluctuations that comes with a global fund.

MIXED ASSETS

Mixed investment 0-35% shares

“Funds in this sector are only able to invest up to 35% in shares,” explains Mr Connolly. “The rest of the fund is typically held in fixed interest and cash. This means that funds in this sector are most suited to cautious investors who want a return that will beat cash, but are nervous about stock-market volatility.”

He adds: “Because of the high level of fixed interest in some of these funds, they may also be suitable for those income investors who want a steady income, but who don’t necessarily need capital growth.”

jargon-2.png

Mixed investment 40%-85% shares

“This used to be called the balanced managed sector but was renamed to illustrate how much of the fund is invested in stock markets,” explains Mr Haynes. As the funds are invested in both fixed-interest, cash and equities they do provide investors with a degree of diversification, however the greater weighting in stock-market investments means they do present an above-average risk.

Mr Haynes adds: “The funds with the best performance at the current time are those with high stock-market exposure, but this doesn’t mean they are best if you are looking for a more balanced multi-asset approach.”

Make sure you are happy with the level of stock-market exposure in your chosen fund.

EQUITY

UK Equity Income

This sector is useful for those who want an income from their investments, as funds focus on UK companies paying strong dividends.

Sarah Coles, personal finance analyst at Hargreaves Lansdown, says: “Funds place varying emphasis on firms with strong, consistent dividends and those that look for companies that can grow their dividends over time. Investors should therefore check the objectives of any fund they are considering. This informaton should be easy to find online, in the research provided by any number of investment companies.”

The nature of these funds means they are popular among retired investors who want to generate an income from their pension savings.

However, they can also be a useful core holding for those investors who are still focused on growing their capital.

Moira O’Neill, head of personal finance at interactive investor, says: “Chosen well, UK Equity Income funds can be a jewel in the crown of a portfolio, given their focus on large, income-generating companies with stable cash flows.

“With a significant chunk of profits coming from overseas, they aren’t as UK-centric as some might think and since investors can reinvest dividends, they don’t need to be the reserve of income seekers, either. Tellingly, equity income funds consistently top our Isa tables of most popular funds.

“Albert Einstein nailed it when he reportedly called compounding the eighth wonder of the world, because dividend reinvestment is a major component of stock-market returns.”

Beware risk labels

In any of the Mixed Investment categories, 22% of multi-asset funds have risk-related labels in their name, according to research from interactive investor, the investment platform and parent company of Moneywise.

Dzmitry Lipski, investment analyst at interactive investor, explains: “Across 805 multi asset funds, 22% are using risk labels in their name, whether it is ‘Balanced’, ‘Moderate’, ‘Conservative’, ‘Adventurous’, or ‘Cautious’. But what does it actually mean? One person’s idea of a ‘balanced’ fund can be another’s definition of ‘adventurous’, and fund management groups can be just as prone to varying interpretations.

“Investors with funds using names such as these might want to review them to make sure the name matches their own definition of risk. For example, in the IA Mixed Investment 40%-85% shares sector, 59 funds have labels such as these. The majority have ‘Balanced’ in their name, but their risk profiles are likely to span a broad spectrum, and within the same sector there are also three funds with ‘Adventurous’ and one with ‘Cautious’ in the name. Ultimately, it’s best to treat fund names with a pinch of salt.”

Global equity income

At least 80% of these funds must be invested in global equities and diversified across regions.

Mr Haynes says: “The vast proportion of dividends generated from the UK stock market are attributable to a small number of stocks and sectors, and a large proportion of the most popular UK equity income funds will have a high commonality.

“In contrast, taking a global view provides an extended universe, through stock, sector and not being so reliant on the domestic economy.”

Sector requirements stipulate that 80% of the fund is invested in global equities and be diversified across regions.

UK EQUITIES

UK All Companies

This sector is an obvious starting point for many investors, offering exposure to world-class companies and household names including BP, HSBC, Royal Dutch Shell, Unilever and Vodafone. However, it’s also a large and hugely diverse sector, and that means investors must be careful not to compare apples with pears. While one fund might seek out predictable companies that are regarded as best in class, others will seek out unloved firms where the manager believes a change of fortunes is due.

“It’s best to treat fund names with a pinch of salt”

jargon-3.png

OVERSEAS EQUITIES

Asia Pacific ex Japan

“These funds invest in Asia-based companies of all sizes, but avoid those listed in Japan,” explains Darius McDermott, managing director of Chelsea Financial Services. This includes larger developed economies such as Hong Kong, Singapore and Australia as well as less developed markets like China, India, Thailand, Malaysia and the Philippines.

Mr McDermott says: “Investments can vary widely from fund to fund, given the range of countries on the continent. There may also be a mix of developed and emerging market equities as Asia is home to both types of market. The sector will include funds that are focused purely on growth as well as some funds that are dividend focused and provide an income.”

Many of the countries included in this sector have undergone massive economic growth and industrialisation in recent decades with a growing middle class that is expected to carry on driving consumption. However, slower growth in China will continue to provide a challenge to the region as a whole.

Europe ex UK

Funds in this sector can invest anywhere across Europe. This is not limited to members of the European Union or the Eurozone, and can also include some emerging European countries. Rebecca O’Keeffe, head of investment at interactive investor, says: “There are more than 1,000 companies listed on the main markets in Europe, plus hundreds more in smaller developing European economies, which makes Europe a fascinating place to invest.

“Investors can choose from larger companies in mainstream markets such as Germany, France and Switzerland, ranging to small companies in Eastern Europe – making it full of opportunities for potential investors depending on how much risk you want to take.

“This range of different markets means that you do need to pay close attention to the underlying objective of funds you are interested in, as this is one of the most diverse sectors available,” adds Ms O’Keeffe. “The diverse nature of Europe means there are occasionally conflicting objectives between different member states, as well as tensions between countries in and out of the European Union, and that can lead to greater uncertainty in the region – but good fund managers should be able to identify relevant opportunities and threats.”

Global

To qualify for this sector funds must have 80% of their assets invested overseas – however if they were also able to qualify for another sector, such as Europe or Global Emerging Markets, then they would be excluded on those grounds.

Global funds will typically focus on developed economies, and often with a bias towards the US, the world’s largest economy.

“A global fund tends to look for the best companies wherever they might be. Some managers, though, will follow benchmarks and invest according to the country’s market weight.” Global funds are often recommended as good starter funds for beginner investors because they offer instant diversification.

However, it is important investors know how and where the manager will invest their money. Mr Lowcock says: “Do they follow a benchmark, so have a certain percentage in Germany, UK and Japan? Or are they stock picking and finding the best pharmaceutical or best bank no matter where it is listed?”

Global emerging markets

Funds in this sector must be 80% invested in emerging market economies including regions such as China, India and Latin America. Only 20% of the total fund can be invested in so-called frontier markets, which are less developed still, such as Bangladesh, Nigeria and Botswana. The companies that these funds invest in are likely to be at an early stage of growth, which means that while they can reward investors handsomely, they are likely to be volatile.

Mr Haynes says: “For investors looking for exciting growth opportunities, then I believe having an exposure to emerging markets is justified as part of a well-diversified portfolio. However, enduring higher levels of risk is a necessary evil of investing in emerging markets.

“To get exposure it is important to find good fund managers who can find opportunities through diversifying across different sectors and markets.”

He adds: “Taking a long-term perspective is essential and drip-feeding money into this area can also help smooth short-term volatility.”

Global funds are often good starter funds for beginner investors

Japan

Japan, the third largest economy in the world, is famous for its technological innovation and is home to big global brands including electronic giants Panasonic, Hitachi and Toshiba and car manufacturers like Mitsubishi, Honda and Nissan. However, as far as investors are concerned, it’s a region that divides opinion.

“The region has been beset by economic problems over the decades but its stock market has performed well in recent times and many investors are very keen on its future prospects,” says Mr Connolly.

Much of this recent confidence is down to so-called ‘Abenomics’. Japan’s Prime Minister Shinzo Abe – who was elected in 2012 – has been on a mission to stimulate economic growth through quantitative easing (to boost wages and spending) and negative interest rates (to encourage investment).

In 2015, he also introduced broad ranging corporate governance reforms to increase investor confidence. Despite recent stock market gains, it’s too soon to tell if these policies will pay off. With a sizeable amount of debt to repay, coupled with the pressures associated with an ageing population, Japan still has plenty of economic challenges ahead.

Mr Connolly adds: “This is a high-risk area in which a small weighting is suitable for most investors.”

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North America

An investment in this sector offers exposure to some huge global brands and cutting-edge tech firms including Apple, Microsoft, Facebook and Alphabet, the parent company of Google.

America is also home to oil giants Exxon Mobil and Chevron, as well as consumers goods groups such as Johnson & Johnson and Proctor & Gamble. However, it is not the easiest market to make money from, as Mr Haynes explains.

He says: “Many UK investors have little exposure, despite it being the largest and most influential stock market containing global leading companies across a wide range of sectors. Because it is such a well-researched stock market, it can therefore be very difficult to outperform, so many investors prefer a low-risk, passive approach.”

Active managers will often find better opportunities in small- and mid-cap stocks, but these are likely to be higher risk.

OTHERS

Property

Confusingly this sector is home to two very different types of fund – they must either invest at least 60% of their holdings directly into property (known as direct property or bricks and mortar funds) or be 80% invested in property shares (a property securities fund).

“Property is another and different asset class to shares and bonds and so behaves differently,” says Mr Lowcock. “It is not as liquid [easy to sell] as the other two and because of the longer-term focus on the investment, the income stream (rent) is less volatile and tends to protect against inflation as rents are reviewed upwards only.”

Yet while rising income is appealing to many investors the liquidity issue can present problems. “If the market sells off as it did after the Brexit vote in 2016, investors could become forced sellers of property – and that is never a good place to be,” he adds.

As they perform differently to other asset classes, bricks and mortar funds can be a great diversifier in a portfolio. They are also regarded as lower risk and less volatile (except in extreme situations). Nonetheless Mr Lowcock says investors still need to commit to five years at the least. Funds that buy property shares do not provide the same degree of diversification.

Mr Lowcock adds: “Property securities funds invest in shares of property companies and so, like property funds, they will provide diversification over the longer term. But in the short term they will be more akin to equities and could easily fall in an equity market sell-off.”

Specialist

Often referred to as ‘the cupboard under the stairs’, the specialist sector provides a home to those funds that cannot be accommodated by other sectors. This might mean a specific region – such as Latin America – or a specific theme such as healthcare or agriculture. The sector also increasingly holds mixed-asset funds, where the level of flexibility required by the manager means it cannot be accommodated by any of the mixed asset sectors.

Mr Haynes says: “This is a sector for investors who are looking to pursue a specialist investment theme, to add diversification to their portfolio. Funds in this sector will have a narrow remit, and it’s difficult to compare funds against others in the sector given that there is such a wide range of very different strategies.”

“Property acts in a different way to shares and bonds”

Targeted absolute return

Rather than seeking to beat an index, funds in this sector use a raft of complex strategies (including derivatives and money market instruments) to generate a positive return, irrespective of what is happening in the market.

If stock markets collapse, these funds will still seek to pay a return, although this cannot be guaranteed.

“Each fund will take a different approach,” explains Mrs Coles. “You need to check the objective of the fund because they may aim to achieve something more demanding than simply not making a loss. They will also state a time frame over which they aim to meet their objective – which cannot be more than three years.”

Owing to the breadth of strategies employed by managers in this sector, it is hard to make meaningful comparisons between funds. Each should be considered on its own merits and on whether it achieves its stated objective.

For a full list of sectors and their sub-groups, visit: theinvestmentassociation.org.

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Source Moneywise http://bit.ly/2HwOrNV