Everything You Need to Know About Budgeting As a Freelancer

Could logging in to your computer from a deluxe treehouse off the coast of Belize be the future of work? Maybe. For many, the word freelance means flexibility, meaningful tasks and better work-life balance. Who doesn’t want to create their own hours, love what they do and work from wherever they want? Freelancing can provide all of that—but that freedom can vanish quickly if you don’t handle your expenses correctly.

“A lot of the time, you don’t know about these expenses until you are in the trenches,” says freelance copywriter Alyssa Goulet, “and that can wreak havoc on your financial situation.”

Nearly 57 million people in the U.S. freelanced, or were self-employed, in 2019, according to Upwork, a global freelancing platform. Freelancing is also increasingly becoming a long-term career choice, with the percentage of freelancers who freelance full-time increasing from 17 percent in 2014 to 28 percent in 2019, according to Upwork. But for all its virtues, the cost of being freelance can carry some serious sticker shock.

“There are many hats you have to wear and expenses you have to take on, but for that you’re gaining a lot of opportunity and flexibility in your life.”

– Alyssa Goulet, freelance copywriter

Most people who freelance for the first time don’t realize that everything—from taxes to office supplies to setting up retirement plans—is on them. So, before you can sustain yourself through self-employment, you need to answer a very important question: “Are you financially ready to freelance?”

What you’ll find is that budgeting as a freelancer can be entirely manageable if you plan for the following key costs. Let’s start with one of the most perplexing—taxes:

1. Taxes: New rules when working on your own

First things first: Don’t try to be a hero. When determining how to budget as a freelancer and how to manage your taxes as a freelancer, you’ll want to consult with a financial adviser or tax professional for guidance. A tax expert can help you figure out what makes sense for your personal and business situation.

For instance, just like a regular employee, you will owe federal income taxes, as well as Social Security and Medicare taxes. When you’re employed at a regular job, you and your employer each pay half of these taxes from your income, according to the IRS. But when you’re self-employed (earning more than $400 a year in net income), you’re expected to file and pay these expenses yourself, the IRS says. And if you think you will owe more than $1,000 in taxes for a given year, you may need to file estimated quarterly taxes, the IRS also says.

That can feel like a heavy hit when you’re not used to planning for these costs. “If you’ve been on a salary, you don’t think about taxes really. You think about the take-home pay. With freelance, everything is take-home pay,” says Susan Lee, CFP®, tax preparer and founder of FreelanceTaxation.com.

When learning how to budget as a freelancer it’s necessary to estimate your income and expenses before setting aside savings for tax payments.

When you’re starting to budget as a freelancer and determining how often you will need to file, Lee recommends doing a “dummy return,” which is an estimation of your self-employment income and expenses for the year. You can come up with this number by looking at past assignments, industry standards and future projections for your work, which freelancer Goulet finds valuable.

“Since I don’t have a salary or a fixed number of hours worked per month, I determine the tax bracket I’m most likely to fall into by taking my projected monthly income and multiplying it by 12,” Goulet says. “If I experience a big income jump because of a new contract, I redo that calculation.”

After you estimate your income, learning how to budget as a freelancer means working to determine how much to set aside for your tax payments. Lee, for example, recommends saving about 25 percent of your income for paying your income tax and self-employment tax (which funds your Medicare and Social Security). But once you subtract your business expenses from your freelance income, you may not have to pay that entire amount, according to Lee. Deductible expenses can include the mileage you use to get from one appointment to another, office supplies and maintenance and fees for a coworking space, according to Lee. The income left over will be your taxable income.

Pro Tip:

To set aside the taxes you will need to pay, adjust your estimates often and always round up. “Let’s say in one month a freelancer determines she would owe $1,400 in tax. I’d put away $1,500,” Goulet says.

2. Business expenses: Get a handle on two big areas

The truth is, the cost of being freelance varies from person to person. Some freelancers are happy to work from their kitchen tables, while others need a dedicated workspace. Your freelance costs also change as you add new tools to your business arsenal. Here are two categories you’ll always need to account for when budgeting as a freelancer:

Your workspace

Joining a coworking space gets you out of the house and allows you to establish the camaraderie you may miss when you work alone. When you’re calculating the cost of being freelance, note that coworking spaces may charge membership dues ranging from $20 for a day pass to hundreds of dollars a month for a dedicated desk or private office. While coworking spaces are all the rage, you can still rent a traditional office for several hundred dollars a month or more, but this fee usually doesn’t include community aspects or other membership perks.

If you want to avoid office rent or dues as costs of being freelance but don’t want the kitchen table to pull double-duty as your workspace, you might convert another room in your home into an office. But you’ll still need to outfit the space with all of your work essentials. Freelance copywriter and content strategist Amy Hardison retrofitted part of her house into a simple office. “I got a standing desk, a keyboard, one of those adjustable stands for my computer and a squishy mat to stand on so my feet don’t hurt,” Hardison says.

Pro Tip:

Start with the absolute necessities. When Hardison first launched her freelance career, she purchased a laptop for $299. She worked out of a coworking space and used its office supplies before creating her own workspace at home.

Digital tools

There are a range of digital tools, including business and accounting software, that can help with the majority of your business functions. A big benefit is the time they can save you that is better spent marketing to clients or producing great work.

The software can also help you avoid financial lapses as you’re managing the costs of being freelance. Hardison’s freelance business had ramped up to a point where a manual process was costing her money, so using an invoicing software became a no-brainer. “I was sending people attached document invoices for a while and keeping track of them in a spreadsheet,” Hardison says. “And then I lost a few of them and I just thought, ‘Oh, my God, I can’t be losing things. This is my income!’”

As you manage the cost of being freelance, consider digital tools and accounting services to keep track of invoices, payments and income.

Digital business and software tools can help manage scheduling, web hosting, accounting, audio/video conference and other functions. When you’re determining how to budget as a freelancer, note that the costs for these services depend largely on your needs. For instance, several invoicing platforms offer options for as low as $9 per month, though the cost increases the more clients you add to your account. Accounting services also scale up based on the features you want and how many clients you’re tracking, but you can find reputable platforms for as little as $5 a month.

Pro Tip:

When you sign up for a service, start with the “freemium” version, in which the first tier of service is always free, Hardison says. Once you have enough clients to warrant the expense, upgrade to the paid level with the lowest cost. Gradually adding services will keep your expenses proportionate to your income.

3. Health insurance: Harnessing an inevitable cost

Budgeting for healthcare costs can be one of the biggest hurdles to self-employment and successfully learning how to budget as a freelancer. In the first half of the 2020 open enrollment period, the average monthly premium under the Affordable Care Act (ACA) for those who do not receive federal subsidies—or a reduced premium based on income—was $456 for individuals and $1,134 for families, according to eHealth, a private online marketplace for health insurance.

“Buying insurance is really protecting against that catastrophic event that is not likely to happen. But if it does, it could throw everything else in your plan into a complete tailspin,” says Stephen Gunter, CFP®, at Bridgeworth Financial.

Budgeting as a freelancer allows you to select a healthcare plan that best suits your employment status, income and relationship status.

A good place to start when budgeting as a freelancer is knowing what healthcare costs you should budget for. Your premium—which is how much you pay each month to have your insurance—is a key cost. Note that the plans with the lowest premiums aren’t always the most affordable. For instance, if you choose a high-deductible policy you may pay less in premiums, but if you have a claim, you may pay more at the time you or your covered family member’s health situation arises.

When you are budgeting as a freelancer, the ACA healthcare marketplace is one place to look for a plan. Here are a few other options:

  • Spouse or domestic partner’s plan: If your spouse or domestic partner has health insurance through his/her employer, you may be able to get coverage under their plan.
  • COBRA: If you recently left your full-time job for self-employment, you may be able to convert your employer’s group plan into an individual COBRA plan. Note that this type of plan comes with a high expense and coverage limit of 18 months.
  • Organizations for freelancers: Search online for organizations that promote the interests of independent workers. Depending on your specific situation, you may find options for health insurance plans that fit your needs.

Pro Tip:

Speak with an insurance adviser who can help you figure out which plans are best for your health needs and your budget. An adviser may be willing to do a free consultation, allowing you to gather important information before making a financial commitment.

4. Retirement savings: Learn to “set it and forget it”

Part of learning how to budget as a freelancer is thinking long term, which includes saving for retirement. That may seem daunting when you’re wrangling new business expenses, but Gunter says saving for the future is a big part of budgeting as a freelancer.

“It’s kind of the miracle of compound interest. The sooner we can get it invested, the sooner we can get it saving,” Gunter says.

He suggests going into autopilot and setting aside whatever you would have contributed to an employer’s 401(k) plan. One way to do this might be setting up an automatic transfer to your savings or retirement account. “So, if you would have put in 3 percent [of your income] each month, commit to saving that 3 percent on your own,” Gunter says. The Discover IRA Certificate of Deposit (IRA CD) could be a good fit for helping you enjoy guaranteed returns in retirement by contributing after-tax (Roth IRA CD) or pre-tax (traditional IRA CD) dollars from your income now.

Pro Tip:

Prioritize retirement savings every month, not just when you feel flush. “Saying, ‘I’ll save whatever is left over’ isn’t a savings plan, because whatever is left over at the end of the month is usually zero,” Gunter says.

5. Continually update your rates

One of the best things you can do for yourself in learning how to budget as a freelancer is build your costs into what you charge. “As I’ve discovered more business expenses, I definitely take those into account as I’m determining what my rates are,” Goulet says. She notes that freelancers sometimes feel guilty for building business costs into their rates, especially when they’re worried about the fees they charge to begin with. But working the costs of being freelance into your rates is essential to building a thriving freelance career. You should annually evaluate the rates you charge.

Because your expenses will change over time, it’s wise to do quarterly and yearly check-ins to assess your income and costs and see if there are processes you can automate to save time and money.

“A lot of the time, you don’t know about these expenses until you are in the trenches, and that can wreak havoc on your financial situation.”

– Alyssa Goulet, freelance copywriter

Have confidence in your freelance career

Accounting for the various costs of being freelance makes for a more successful and sustainable freelance career. It also helps ensure that those who are self-employed achieve financial stability in their personal lives and their businesses.

“There are many hats you have to wear and expenses you have to take on,” Goulet says. “But for that, you’re gaining a lot of opportunity and flexibility in your life.”

The post Everything You Need to Know About Budgeting As a Freelancer appeared first on Discover Bank – Banking Topics Blog.

Source: discover.com

The “Cashless” Cash Envelope System

The post The “Cashless” Cash Envelope System appeared first on Penny Pinchin' Mom.

You have probably heard people talk about how to use a cash envelope budget to save money and help you get out of debt. But, what if you don’t want to use cash? Does that mean you can’t use envelopes? Nope. Not if you follow one of the cashless cash envelope methods available.

Cash Envelope system without cash

If you follow any money advice, you are usually taught about using cash and implementing the cash envelope system.  That is what I recommend here on our site.

As much as this is the perfect solution for our family (and one of the catalysts to help us kick-start our debt pay-off plan), I also understand this is not an option for everyone.  Even if you don’t use cash, you still should budget and spend as if you do.

If you are just learning about budgeting, you will want to check out our page — How to Budget. There, you will learn everything you want to know about budgets and budgeting.

The way to do this is by using a cashless envelope system.  It is how to use cash envelopes without using cash.  The idea is simple, but there different ways to track it.

 

HOW DOES A CASHLESS CASH ENVELOPE SYSTEM WORK?

The idea is the same as the regular cash envelope method.  You have a budget and need to ensure you don’t spend more than what you should.

Each pay period, you record the amount budgeted for each category onto your “envelope.”  As you spend, you keep track of it.  When you are out of money, you can’t spend anything else.

Using the cash envelope system without using cash can work – if you want it to.

 

WHY IS THIS METHOD BETTER?

When you are trying to get control of your finances, you need to know where you spend.  The best way to do this is to track your spending.  Not tracking after you spend – but as you purchase.

Most of the time, you swipe your card without worry.  This action can easily throw your budget out of balance.

While using cash has emotion attached to it, tracking every purchase requires awareness.  You are always watching what you spend and where.  There are no surprises that you spent $250 on groceries when the budget was $200.  You see it happening right in front of you.

The cashless envelope system works because:

  1. You don’t have to worry about carrying or getting cash.
  2. It forces you to track of your spending in real time.
  3. You can see exactly where your money goes and make budget adjustments as needed.

The cashless envelope system forces you to be more responsible for your spending without the hassle of carrying money.

 

CASHLESS CASH ENVELOPE SYSTEMS TO TRY

When you are ready to try a cashless system, you need to determine which is the best for you.  You can find one on your phone, or there is also a printable option.

 

CASHLESS CASH ENVELOPE APP

There are several apps that claim they can help you keep track of your spending with virtual envelopes. If you have found one that works well for you, then I say keep using it!  But, if you are new to this idea – or want something new – the one I recommend is Mvelopes.

Mvelopes has three different plan levels, starting as low as $4 a month.  You can use the one that best suits your needs.  If you are new to the platform, I recommend starting out with the basic plan.

To start, you will add the app to your phone  — or you can use their online site (which I love).  Once you do that, you sync your various accounts.  Make certain to include the cards you will use for your various categories.

For example, you may charge every purchase to your credit card to earn rewards or cash back.  If this is you, you will connect your credit card.  Some may use the debit card for some purchases and a credit card for others.  Those of you who do this will connect both cards to your account.

Once that is done, you set up your online envelopes and add budgeted amounts to each.  Then, you just swipe as usual.  Every time you make a purchase, the purchase amount is deducted from your online envelope.  With a couple of swipes, you see not only how much you have left to spend, but even where you spent your money.  There is no guessing.

This system helps you give every dollar a job.  You know where it will go even before you spend it.  Using Mvelopes puts you back in control.

If you want or need even more help, Mvelopes has other plans that you can purchase.  They offer the Mvelopes PLUS plan for $19 per month.  This service includes all of the services available under the basic plan but also helps you tackle your debt.  You even receive you a personal finance trainer who will visit with you once per quarter.  This plan helps you set and achieve your financial goals.

Should you need more one-on-one help, you may want to consider the Mvelopes Complete package instead.  You get all of the benefits of the Plus plan but receive your own, one-on-one finance trainer.  This coach works with you to help you achieve your financial goals.  You aren’t left alone to figure things out as there is someone right there, guiding you along the way.

As I said you don’t need to purchase one of the larger plans as the basic plan will meet most people’s needs. However, it is great to have these options available at your fingertips.

Related:   The Best Apps for Your Budget

 

CASHLESS ENVELOPE PRINTABLE

Apps are great, but there are times when you would rather have the simplicity of writing something down rather than having to pull it up on your phone.  That’s where the printable cashless envelopes come in handy.

These work in the same way as regular envelopes — just without cash.  Print them off and keep them handy.  Record the budgeted amount for that category at the top.  Then, as you spend, keep track of it.  Jot down every purchase and keep a running total of how much you have left to spend.

I get that it is a pain to keep track of “cents”, so I recommend you round up.  For example, if your grocery budget is $200 and you spend $105.74, record that you spend $106 and have $94 left to spend.  That is MUCH easier than keeping track down to the penny.  (Truth be told, this is what I do with our cash envelopes too).

Once you reach your spending limit, then you are done with that category!  If you budget $100 for dining out and there is just $5 left, don’t pick up that coffee and cake for $7 – or you will have just busted your budget!  If you find that you are always out of money for select categories, or often have money left over for others, then it may be time to make adjustments to your budget.

printable cashless cash envelopes

Grab your cashless envelope printables.  Now, I don’t recommend you print this onto regular paper, as that is really thin and will tear easily. Purchase card stock to use to print out your cashless envelopes as they will be more durable.

Related:  How to Figure Out How Much Money to Budget For Groceries

 

Even if you don’t want to use cash, it is still essential that you continue to track your spending, so you never exceed your budget.

cashless envelope system

The post The “Cashless” Cash Envelope System appeared first on Penny Pinchin' Mom.

Source: pennypinchinmom.com

16 Small Steps You Can Take Now to Improve Your Finances

Pretty brunette with moneybox in hands

You have all kinds of financial goals you want to achieve, but where should you begin? There are so many different aspects of money management that it can be difficult to find a starting point when trying to achieve financial success. If you’re feeling lost and overwhelmed, take a deep breath. Progress can be made in tiny, manageable steps. Here’s are 16 small things you can do right now to improve your overall financial health. (See also: These 13 Numbers Are Crucial to Understanding Your Finances)

1. Create a household budget

The biggest step toward effective money management is making a household budget. You first need to figure out exactly how much money comes in each month. Once you have that number, organize your budget in order of financial priorities: essential living expenses, contributions to retirement savings, repaying debt, and any entertainment or lifestyle costs. Having a clear picture of exactly how much is coming in and going out every month is key to reaching your financial goals.

2. Calculate your net worth

Simply put, your net worth is the total of your assets minus your debts and liabilities. You’re left with a positive or negative number. If the number is positive, you’re on the up and up. If the number is negative — which is especially common for young people just starting out — you’ll need to keep chipping away at debt.

Remember that certain assets, like your home, count on both sides of the ledger. While you may have mortgage debt, it is secured by the resale value of your home. (See also: 10 Ways to Increase Your Net Worth This Year)

3. Review your credit reports

Your credit history determines your creditworthiness, including the interest rates you pay on loans and credit cards. It can also affect your employment opportunities and living options. Every 12 months, you can check your credit report from each of the three major credit bureaus (Experian, TransUnion, and Equifax) for free at annualcreditreport.com. It may also be a good idea to request one report from one bureau every four months, so you can keep an eye on your credit throughout the year without paying for it.

Regularly checking your credit report will help you stay on top of every account in your name and can alert you to fraudulent activity.

4. Check your credit score

Your FICO score can range from 300-850. The higher the score, the better. Keep in mind that two of the most important factors that go into making up your credit score are your payment history, specifically negative information, and how much debt you’re carrying: the type of debts, and how much available credit you have at any given time. (See also: How to Boost Your Credit Score in Just 30 Days)

5. Set a monthly savings amount

Transferring a set amount of money to a savings account at the same time you pay your other monthly bills helps ensure that you’re regularly and intentionally saving money for the future. Waiting to see if you have any money left over after paying for all your other discretionary lifestyle expenses can lead to uneven amounts or no savings at all.

6. Make minimum payments on all debts

The first step to maintaining a good credit standing is to avoid making late payments. Build your minimum debt reduction payments into your budget. Then, look for any extra money you can put toward paying down debt principal. (See also: The Fastest Way to Pay Off $10,000 in Credit Card Debt)

7. Increase your retirement saving rate by 1 percent

Your retirement savings and saving rate are the most important determinants of your overall financial success. Strive to save 15 percent of your income for most of your career for retirement, and that includes any employer match you may receive. If you’re not saving that amount yet, plan ahead for ways you can reach that goal. For example, increase your saving rate every time you get a bonus or raise.

8. Open an IRA

An IRA is an easy and accessible retirement savings vehicle that anyone with earned income can access (although you can’t contribute to a traditional IRA past age 70½). Unlike an employer-sponsored account, like a 401(k), an IRA gives you access to unlimited investment choices and is not attached to any particular employer. (See also: Stop Believing These 5 Myths About IRAs)

9. Update your account beneficiaries

Certain assets, like retirement accounts and insurance policies, have their own beneficiary designations and will be distributed based on who you have listed on those documents — not necessarily according to your estate planning documents. Review these every year and whenever you have a major life event, like a marriage.

10. Review your employer benefits

The monetary value of your employment includes your salary in addition to any other employer-provided benefits. Consider these extras part of your wealth-building tools and review them on a yearly basis. For example, a Flexible Spending Arrangement (FSA) can help pay for current health care expenses through your employer and a Health Savings Account (HSA) can help you pay for medical expenses now and in retirement. (See also: 8 Myths About Health Savings Accounts — Debunked!)

11. Review your W-4

The W-4 form you filled out when you first started your job dictates how much your employer withholds for taxes — and you can make changes to it. If you get a refund at tax time, adjusting your tax withholdings can be an easy way to increase your take-home pay. Also, remember to review this form when you have a major life event, like a marriage or after the birth of a child. (See also: Are You Withholding the Right Amount of Taxes from Your Paycheck?)

12. Ponder your need for life insurance

In general, if someone is dependent upon your income, then you may need a life insurance policy. When determining how much insurance you need, consider protecting assets and paying off all outstanding debts, as well as retirement and college costs. (See also: 15 Surprising Insurance Policies You Might Need)

13. Check your FDIC insurance coverage

First, make sure that the banking institutions you use are FDIC insured. For credit unions, you’ll want to confirm it’s a National Credit Union Administration (NCUA) federally-covered institution. Federal deposit insurance protects up to $250,000 of your deposits for each type of bank account you have. To determine your account coverage at a single bank or various banks, visit FDIC.gov.

14. Check your Social Security statements

Set up an online account at SSA.gov to confirm your work and income history and to get an idea of what types of benefits, if any, you’re entitled to — including retirement and disability.

15. Set one financial goal to achieve it by the end of the year

An important part of financial success is recognizing where you need to focus your energy in terms of certain financial goals, like having a fully funded emergency account, for example.

If you’re overwhelmed by trying to simultaneously work on reaching all of your goals, pick one that you can focus on and achieve it by the end of the year. Examples include paying off a credit card, contributing to an IRA, or saving $500.

16. Take a one-month spending break

Unfortunately, you can never take a break from paying your bills, but you do have complete control over how you spend your discretionary income. And that may be the only way to make some progress toward some of your savings goals. Try trimming some of your lifestyle expenses for just one month to cushion your checking or savings account. You could start by bringing your own lunch to work every day or meal-planning for the week to keep your grocery bill lower and forgo eating out. (See also: How a Simple "Do Not Buy" List Keeps Money in Your Pocket)

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With the new year here, it’s time to take control of your financial goals. From creating a household budget, to calculating your net worth, or setting a monthly savings amount, we’ve got 16 small steps you can take to improve your finances. | #personalfinance #moneymatters #budgeting


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What Are Mutual Funds? Understanding The Basics

If you’re one of those investors with very little time to research and invest in individual stocks, it might be a good idea to look into investing in mutual funds.

Whether your goal is to save money for retirement, or for a down payment to buy a house, mutual funds are low-cost and effective way to invest your money.

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What is a mutual fund?

A mutual fund is an investment vehicle in which investors, like you ad me, pool their money together. They use the money to invest in securities such as stocks and bonds. A professional manages the funds.

In addition, mutual funds are cost efficient. They offer diversification to your portfolio. They have low minimum investment requirements.

These factors make mutual funds among the best investment vehicles to use. If you’re a beginner investor, you should consider investing in mutual funds or index funds.

Investing in the stock market in general, can be intimidating. If you are just starting out and don’t feel confident in your investing knowledge, you may value the advice of a financial advisor.

Types of mutual funds

There are different types of mutual funds. They are stock funds, bond funds, and money market funds.

Which funds you choose depends on your risk tolerance. While mutual funds in general are less risky than investing in individual stocks, some funds are riskier than others.

However, you can choose a combination of these three types of funds to diversify your portfolio.

  • Stock funds: a stock fund is a fund that invests heavily in stocks. However, that does not mean stock funds do not have other securities, i.e., bonds. It’s just that the majority of the money invested is in stocks.
  • Bond funds: if you don’t want your portfolio to fluctuate in value as stocks do, then you should consider bond funds.
  • Money market funds: money market funds are funds that you invest in if you tend to tap into your investment in the short term.
  • Sector funds. As the name suggests, sector funds are funds that invests in one particular sector or industry. For example, a fund that invests only in the health care industry is a sector fund. These mutual funds lack diversification. Therefore, you should avoid them or use them in conjunction to another mutual fund.

Additional funds

  • Index funds. Index funds seek to track the performance of a particular index, such as the Standard & Poor’s 500 index of 500 large U.S. company stocks or the CRSP US Small Cap Index. When you invest in the Vanguard S&P 500 Index fund, you’re essentially buying a piece of the 500 largest publicly traded US companies. Index funds don’t jump around. They stay invested in the market. 
  • Income funds: These funds focus invest primarily in corporate bonds. They also invest in some high-dividend stocks.
  • Balance funds: The portfolio of these funds have a mixed of stocks and bonds. Those funds enjoy capital growth and income dividend.

Related Article: 3 Ways to Protect Your Portfolio from the Volatile Stock Market

The advantages of mutual funds

Diversification. You’ve probably heard the popular saying “don’t put all of your eggs in one basket.” Well, it applies to mutual funds. Mutual funds invest in stocks or bonds from dozens of companies in several industries.

Thus, your risk is spread. If a stock of a company is not doing well, a stock from another company can balance it out. While most funds are diversified, some are not.

For example, sector funds which invest in a specific industry such as real estate can be risky if that industry is not doing well.

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Professional Management.

Mutual funds are professionally managed. These fund managers are well educated and experienced. Their job is to analyze data, research companies and find the best investments for the fund.

Thus, investing in mutual funds can be a huge time saver for those who have very little time and those who lack expertise in the matter.

Cost Efficiency. The operating expenses and the cost that you pay to sell or buy a fund are cheaper than trading in individual securities on your own. For example, the best Vanguard mutual funds have operating expenses as low as 0.04%. So by keeping expenses low, these funds can help boost your returns.

Low or Reasonable Minimum Investment. The majority of mutual funds, Vanguard mutual funds, for example, have a reasonable minimum requirement. Some funds even have a minimum of $1,000 and provide a monthly investment plan where you can start with as little as $50 a month.

Related Article: 7 Secrets Smart Professionals Use to Choose Financial Advisors

The disadvantage of mutual funds.

While there are several benefits to investing in mutual funds, there are some disadvantages as well. 

Active Fund Management. Mutual funds are actively managed. That means fund mangers are always on the look out for the best securities to purchase. That also means they can easily make mistakes.

Cost/expenses. While cost and expenses of investing in individual stocks are significantly higher than mutual funds, cost of a mutual fund can nonetheless be significant.

High cost can have a negative effect on your investment return. These fees are deducted from your mutual fund’s balance every year. Other fees can apply as well. So always find a company with a low cost. 

How you make money with mutual funds.

You make money with mutual funds the same way you would with individual stocks: dividend, capital gain and appreciation.

Dividend: Dividends are cash distributions from a company to its shareholders. Some companies offer dividends; others do not. And those who do pay out dividends are not obligated to do so. And the amount of dividends can vary from year to year.

As a mutual fund investor, you may receive dividend income on a regular basis.

Mutual funds offer dividend reinvestment plans. This means that instead of receiving a cash payment, you can reinvest your dividend income into buying more shares in the fund.

Capital gain distribution: in addition to receiving dividend income from the fund, you make money with mutual funds when you make a profit by selling a stock. This is called “capital gain.”

Capital gain occurs when the fund manager sells stocks for more he bought them for. The resulting profits can be paid out to the fund’s shareholders. Just as dividend income, you have the choice to reinvest your gains in the fund.

Appreciation: If stocks in your fund have appreciated in value, the price per share of the fund will increase as well. So whether you hold your shares for a short term or long term, you stand to make a profit when the shares rise. 

Best mutual funds.

Now that you know mutual funds make excellent investments, finding the best mutual funds can be overwhelming. 

Vanguard mutual funds.

Vanguard mutual funds are the best out there, because they are relatively cheaper; they are of high quality; a professional manage them; and their operating expenses are relative low. 

Here is a list of the best Vanguard mutual funds that you should invest in:

  • Vanguard Total Stock Market Index Funds
  • Vanguard 500 Index (VFIAX)
  • Total International Stock index Fund
  • Vanguard Health Care Investor

Vanguard Total Stock Market Fund 

If you’re looking for a diversified mutual fund, this Vanguard mutual fund is for you. The Vanguard’s VTSAX provides exposure to the entire U.S. stock market which includes stocks from large, medium and small U.S companies.

The top companies include Microsoft, Apple, Amazon. In addition, the expenses are relatively (0.04%). It has a minimum initial investment of $3,000, making it one of the best vanguard stock funds out there.

Vanguard S&P 500 (VFIAX)

The Vanguard 500 Index fund may be appropriate for you if you prefer a mutual fund that focuses on U.S. equities. This fund tracks the performance of the S&P 500, which means it holds about 500 of the largest U.S. stocks.

The largest U.S. companies included in this fund are Facebook, Alphabet/Google, Apple, and Amazon. This index fund has an expense ration of 0.04% and a reasonable minimum initial investment of $3,000.

Vanguard Total International Stock Market

You should consider the Vanguard International Stock Market fund of you prefer a mutual fund that invests in foreign stocks.

This international stock fund exposes its shareholders to over 6,000 non-U.S. stocks from several countries in both developed markets and emerging markets. The minimum investment is also $3,000 with an expense ratio of 0.11%.

Vanguard Health Care Investor

Sector funds are not usually a good idea, because the lack diversification. Sector funds are funds that invest in a specific industry like real estate or health care. However, if you want a fund to complement your portfolio, the Vanguard Health Care Investor is a good choice.

This Vanguard mutual fund offers investors exposure to U.S. and foreign equities focusing in the health care industry. The expense ration is a little bit higher, 0.34%. However, the minimum initial investment is $3,000, making it one of the cheapest Vanguard mutual funds.

Bottom Line

Mutual funds are great options for beginner investors or investors who have little time to research and invest in individual stocks. When you buy into these low cost investments, you’re essentially buying shares from companies.

Your money are pooled together with those of other investors. If you intend to invest in low cost investment funds, you must know which ones are the best. When it comes to saving money on fees and getting a good return on your investment, Vanguard mutual funds are among the best funds out there.

They provide professional management, diversity, low cost, income and price appreciation.

What’s Next: 5 Mistakes People Make When Hiring A Financial Advisor

Speak with the Right Financial Advisor

  • If you have questions beyond knowing which of the best Vanguard mutual funds to invest, you can talk to a financial advisor who can review your finances and help you reach your goals (whether it is making more money, paying off debt, investing, buying a house, planning for retirement, saving, etc).
  • Find one who meets your needs with SmartAsset’s free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.
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What Happens to Mortgage Rates When the Fed Cuts Rates?

Just about everybody with a wallet is impacted by the Federal Reserve. That means you—homeowners and prospective buyers. Whether you’re already nestled in to the house of your dreams or still looking to find it, you’ll probably want to track what happens to mortgage rates when the Fed cuts rates. When the Fed (as it’s commonly referred to) cuts its federal funds rate—the rate banks charge each other to lend funds overnight—the move could impact your mortgage costs.

The Fed’s overall goal when it cuts the federal funds rate is to stimulate the economy by spurring consumers to spend and borrow. This is good news if you are carrying debt because borrowing tends to become less expensive following a Fed rate cut (think: lower credit card APRs). But in the case of homeownership, what happens to mortgage rates when the Fed cuts rates can be a double-edged sword.

What happens to mortgage rates when the Fed cuts rates depends on many factors.

The connection between a Fed rate cut and mortgage rates isn’t so crystal clear because the federal funds rate doesn’t directly influence the rate on every type of home loan.

“Mortgage rates are formed by global market forces, and the Federal Reserve participates in those market forces but isn’t always the most important factor,” says Holden Lewis, who’s been covering the mortgage industry for nearly 20 years and is also a regular contributor to NerdWallet.

To understand which side of the sword you’re on, you’ll need an answer to the question, “How does a Fed rate cut affect mortgage rates?” Read on to find out if you stand to potentially gain on your mortgage in a low-rate environment:

How a fixed-rate mortgage moves—or doesn’t

A fixed-rate mortgage has an interest rate that remains the same for the entire length of the loan. If the Fed cuts rates, what happens to mortgage rates if you are an existing homeowner with a fixed-rate mortgage? Nothing should happen to your monthly payments following a Fed rate cut because your rate has already been locked in.

“For current homeowners with a fixed-rate mortgage set at a previous higher level, the existing mortgage rate stays put,” Lewis says.

If you’re a prospective homebuyer shopping around for a fixed-rate mortgage, the news of what happens to mortgage rates when the Fed cuts rates may be different.

For prospective homebuyers: If the Fed cuts its interest rate and the 10-year Treasury yield is similarly tracking, the rates on fixed-rate mortgages could drop, “and you could lock in interest at a lower fixed rate than before.”

– Holden Lewis, mortgage expert and NerdWallet contributor

The federal funds rate does not directly impact the rates on this type of home loan, so a Fed rate cut doesn’t guarantee that lenders will start offering lower mortgage rates. However, the 10-year Treasury yield does tend to influence fixed-rate mortgages, and this yield often moves in the same direction as the federal funds rate.

If the Fed cuts its interest rate and the 10-year Treasury yield is similarly tracking, the rates on fixed-rate mortgages could drop, “and you could lock in interest at a lower fixed rate than before,” Lewis says. It’s also possible that rates on fixed mortgages will not fall following a Fed rate cut.

How an adjustable-rate mortgage follows the Fed

An adjustable-rate mortgage (commonly referred to as an ARM) is a home loan with an interest rate that can fluctuate periodically—also known as variable rate. There is often a fixed period of time during which the initial rate stays the same, and then it adjusts on a regular interval. (For instance, with a 5/1 ARM, the initial rate stays locked in for five years and then adjusts each year thereafter.)

So back to the burning question: If the Fed cuts rates, what happens to mortgage rates? The rates on an ARM typically track with the index that the loan uses, e.g., the prime rate, which is in turn influenced by the federal funds rate.

If the Fed cuts rates, what happens to mortgage rates? If you have an adjustable-rate mortgage, you may see your rate change.

“If the Fed drops its rate during the adjustment period, you could see your interest rate go down and, in turn, see lower monthly payments,” says Emily Stroud, financial advisor and founder of Stroud Financial Management.

Since ARMs are often adjusted annually after the fixed period, you may not feel the impact of the Fed rate cut until your ARM’s next annual loan adjustment. For instance, if there is one (or more) rate cuts during the course of a year, the savings from the rate reduction(s) would hit all at once at the time of your reset.

If the Fed cuts rates, what happens to mortgage rates for prospective homebuyers considering an ARM? An even lower rate could be in your future—at least for a specific period of time.

“If you’re looking for a shorter-term mortgage, say a 5/1 ARM, you could save considerably on interest,” Stroud says. That’s because the introductory rate of an ARM is usually lower than the rate of a fixed-rate mortgage, Stroud explains. Add that benefit to lower rates fueled by a Fed rate cut and an ARM could be enticing if it supports your financial goals and plans.

“If the Fed drops its rate during the adjustment period, you could see your interest rate go down and, in turn, see lower monthly payments.” 

– Emily Stroud, financial advisor and founder of Stroud Financial Management

Benefits of other variable-rate loans following a rate cut

If you have a Fed rate cut and mortgage rates on your mind and are a borrower with other types of variable-rate loans, you could be impacted following a Fed rate cut. Borrowers with variable-rate home equity lines of credit (HELOCs) and adjustable-rate Federal Housing Administration loans (FHA ARMs), for example, may end up ahead of the curve when the Fed cuts its rate, according to Lewis:

  • A HELOC is typically a “second mortgage” that provides you access to cash for goals like debt consolidation or home improvement and is a revolving line of credit, using your home as collateral. A Fed rate cut could result in lower rates for variable-rate HELOCs that track with the prime rate. If you are an existing homeowner with a HELOC, you could see your monthly payments drop following a Fed rate cut.
  • An FHA ARM is an ARM insured by the federal government. If you’re wondering about a Fed rate cut and mortgage rates, know that this type of mortgage behaves much like a conventional variable-rate loan when the Fed cuts it rate, Lewis says. Existing homeowners with an FHA ARM could see a rate drop, and prospective homebuyers could also benefit from lower rates following a Fed rate cut.

When it comes to a Fed rate cut and mortgage rates, refinancing to a lower rate could be an option for existing homeowners.

Refinancing: A silver lining for fixed rates

When it comes to a Fed rate cut and mortgage rates, refinancing to a lower rate could be an option if you have an existing fixed-rate loan. The process of refinancing replaces an existing loan with a new one that pays off your old loan’s debt. You then make payments on your new loan, so the goal is to refinance at a time when you can get better terms.

“If someone buys a home one year and a Fed rate cut results in a mortgage rate reduction, for example, it presents a real refinance opportunity for homeowners,” Lewis says. “Just a small percentage point reduction could possibly trim a few hundred bucks from your monthly payments.”

Before a refinancing decision is made based on a Fed rate cut and mortgage rates, you should consider any upfront costs and fees associated with refinancing to ensure they don’t offset any potential savings.

Managing your finances as a homeowner

You might be expecting some savings in your future now that you’re armed with information on what happens to mortgage rates when the Fed cuts rates. Whether you’re a homebuyer and financing your new home is going to cost you less with a lower interest rate, or you’re an existing homeowner with an ARM that may come with lower monthly payments, Stroud suggests to use any uncovered savings wisely.

“Invest that cash back into your property, pay down your home equity debt or borrow with it,” she says.

Understanding the connection between the Fed rate cut and mortgage rates can help you better manage your finances as a homeowner.

While news of a Fed rate cut may entice you to analyze how your mortgage will be impacted, remember there are many factors that help to determine your mortgage rate, including your credit score, home price, loan amount and down payment. The Fed’s actions are only one piece of a larger equation.

Even though the Fed’s rate decisions may dominate headlines immediately following a rate cut, your home is a long-term investment and one you’ll likely maintain for years. To best prepare for what happens to mortgage rates when the Fed cuts rates is to always manage your home finances responsibly and be sure to make choices that will lead you down the right path based on your financial goals.

*This should not be considered tax or investment advice. Please consult a financial planner or tax advisor if you have questions.

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