26:["$","$L27",null,{"category":"$28","relatedArticles":[{"id":"cG9zdDoxMDQ0Mzc=","databaseId":104437,"postId":104437,"author":{"node":{"id":"dXNlcjo5OQ==","databaseId":99,"userId":99,"avatar":{"url":"https://secure.gravatar.com/avatar/67b8e9b4ee40c2b36d23ca662b66d02f?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Ashley Kilroy is an experienced financial writer currently serving as an investment and insurance expert at SmartAsset. In addition to being a contributing writer at SmartAsset, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Ashley","fullName":"Ashley Kilroy","lastName":"Kilroy","name":"Ashley Kilroy","postCount":{"pageInfo":{"offsetPagination":{"total":530,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"achorpenning","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybTo1","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":5,"categoryId":5,"link":"https://smartasset.com/personal-finance/articles","name":"Personal Finance","postCount":{"pageInfo":{"offsetPagination":{"total":165,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"personal-finance","ancestors":null,"parent":null,"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$29","date":"2019-11-13T16:19:17","excerpt":"

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In the past two years, investors have taken an unusual interest in the Federal Reserve Bank. That’s mostly due to a Fed policy known as ‘quantitative tightening’, or QT. Effectively, QT was the Fed’s attempt to reduce its holdings after it bought huge amounts of debt during the 2008 Great Recession. While some details will interest only economists, QT may have implications for financial markets and regular investors. It’s useful to explore the backstory, but a financial advisor can be helpful if you’re concerned about how Fed activity can impact your investments,.

","

What Is Quantitative Tightening?

","

To understand quantitative tightening, it’s helpful to define another term, which is quantitative easing. To do that, we need to go back to the bad days of 2008.

","

When the Great Recession hit, the Fed slashed interest rates to stimulate the economy. But it was evident that wasn’t nearly enough to stave off the crisis. So the Fed provided another jolt of stimulus by buying Treasury bonds, mortgage-backed securities and other assets in huge volume. This combination of slashing interest rates and massive government spending was qualitative easing or QE, and fortunately, it worked. Banks had more cash and could continue to lend, and more lending led to more spending. Slowly, the economy recovered.

","

But in the meantime, QE exploded the Fed’s balance sheet, which is a tally of the bank’s liabilities and assets. Prior to the crisis, the balance sheet totaled about $925 billion. With all the purchased debt, which the Fed categorized as assets, the balance sheet ballooned to $4.5 trillion by 2017. Years past the financial crisis and with a strong economy, the Fed decided to shrink its balance sheet by shedding some of its accumulated assets, effectively reversing QE.

","

That reversal is quantitative tightening. QE had poured money into the economy, and through quantitative tightening, the Fed planned to take some of that money out again. First, it raised interest rates, which it had plummeted to zero during the financial crisis. Then, it began retiring some of the debt it held by paying off maturing bonds. Instead of replacing these bonds with new debt purchases, the Fed stood pat and let its stockpile shrink. This effectively reduced the quantity of money under bank control, thus quantitative tightening.

","

Did Quantitative Tightening Officially End?

","

There was no official beginning or end to quantitative tightening. The Fed began to ‘normalize’ its balance sheet by raising interest rates in December 2015, the first hike in nearly a decade. In October 2017, it began to reduce its hoard of bonds by as much as $50 billion per month. But after four 2018 interest rate cuts and some stock market downturns, many observers worried the Fed’s aggressive normalization was too much of a shock to the economy.

","

In response, the Fed ended the interest rate hikes and slowed down debt retirement. By March 2019, the cap on deductions was reduced from $30 billion a month to $15 billion. By October 2019, the Fed announced it would once again start expanding its balance sheet by buying up to $60 billion in Treasury bills a month.

","

However, the Fed insisted this was not another round of quantitative easing. Some market observers reacted to that announcement with skepticism. But whether this was or wasn’t a new round of QE, the Fed’s action effectively stopped quantitative tightening.

","

How Quantitative Tightening Impacts Markets

","

$\"quantitative$
Many investors worry that quantitative tightening would negatively impact markets. During the past decade, returns have shown a relatively high correlation with the Fed’s purchases. Conversely, the Fed’s selloff of assets was a contributing factor to the market dip in late 2018, which left the S&P 500 about 20% below its top price.

","

Quantitative tightening definitely made some investors nervous. That said, there are a few things to consider if the Fed shrinks the balance sheet in the future. First, it’s unlikely the balance sheet will contract to its pre-2008 level. The Fed hasn’t indicated where a ‘happy medium’ might be, but the balance sheet remained well about the pre-2008 figures when expansion began again in October 2019.

","

Additionally, it’s unlikely that quantitative tightening will reverse quantitative easing’s impact on long-term interest rates. In part, the Fed purchased long-term bonds and mortgage-backed securities to move money into other areas, like corporate bonds, and lower borrowing costs. Also, the Fed hoped this activity would encourage the productive use of capital. According to the Fed’s research, the use of quantitative easing reduced yields on 10-year treasury bonds by 50, to 100 basis points (bps).

","

While quantitative tightening may have reversed some of this impact, experts believe it will not undo long-term interest rates by 100 bps. Ultimately, it comes down to the comparative impact of the expansion and contraction of the balance sheet. In October 2019, the contraction was not nearly sufficient to reverse the expansion.

","

Other Considerations of Quantitative Tightening

","

Many investors worry that quantitative tightening will have a big impact on inflation and liquidity. This is because changes in inflation and liquidity may occur when there is a discrepancy concerning supply and demand. During the financial crisis, the Fed increased the money supply since the economic system desperately needed liquidity. A decade and strong recovery later, there’s less liquidly preference. In response, the Fed has decreased cash reserves. In a strong market, this should have no real impact on liquidity and inflation.

","

The Bottom Line

","

$\"quantitative$
Quantitative tightening is a monetary policy that increased interest rates and reduced the money supply in circulation by retiring some of the Fed’s debt holdings. After qualitative easing expanded the money supply for several years to bring the economy back on track, the Fed used qualitative tightening as a means to normalize its balance sheet.

","

While quantitative tightening did not completely reverse quantitative easing, it did shrink the Fed’s balance sheet. This strategy left many investors uneasy about future returns and interest rates. That said, balance sheet normalization did not prove to be as disruptive as many investors feared.

","

Tips for Investors

","$31","

Photo credit: ©iStock.com/drnadig, ©iStock.com/claffra, ©iStock.com/Duncan_Andison

","

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Financing your child’s education is an important milestone goal. And for California residents, 529 plans, and the state tax laws that govern them, are a big part of their education planning. Whether you’re creating a plan or making adjustments, here’s a general overview of what you need to know. For a hands-on approach to your […]

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","

How 529 Plans Work in California

","

529 plans are sponsored by states, state agencies or educational institutions and are authorized by Section 529 of the Internal Revenue Code. These plans are designed to offer tax advantages that enable families to save for future college costs in a financially efficient manner.

","

When considering a 529 plan in California, you must understand the tax laws that govern it. Unlike many other states, The Golden State does not provide a state income tax deduction for contributions made to a 529 plan. However, California’s 529 plans have generous contribution limits, allowing individuals to contribute up to $529,000 per beneficiary, over the account’s lifetime.

","

Tax Benefits of a California 529 Plan

","

California does not offer a state income tax deduction for contributions to 529 college savings plans. However, California residents can still benefit from federal tax advantages associated with 529 plans.

","

The federal tax benefits include tax-deferred growth for contributions and tax-free withdrawals when the funds are used for qualified education expenses. Here are four general ways you can benefit:

","$3f","

Qualifying Expenses for Your California 529 Plan

","

","

Qualifying educational expenses, as in other states, generally include education-related costs that meet the criteria set by the Internal Revenue Service (IRS). 529 plans typically cover:

","

Payments for tuition at eligible educational institutions.
Room and board expenses for students who are enrolled at least half-time.
The cost of books, supplies, and equipment required for enrollment or attendance.
Expenses for computer technology, software, and internet access that are used by the beneficiary while enrolled in an eligible educational institution.
Expenses for special needs services incurred in connection with the enrollment or attendance of the beneficiary.

","

Take note: If you withdraw funds from a 529 plan for non-qualified expenses, the earnings portion of the withdrawal could be subject to income tax and a 10% federal penalty.

","

As explained earlier, qualifying expenses must be directly associated with the beneficiary’s education. Additionally, expenses for K-12 education have been expanded as eligible expenses up to $10,000 per year, per beneficiary, under federal law.

","

For students living off-campus, the eligible amount for housing expenses is capped at the amount the educational institution includes in its cost of attendance for federal financial aid purposes.

","

Other Benefits of a 529 Plan

","

In addition to tax-deferred growth and tax-free withdrawals for qualified education expenses, here are four additional benefits for a 529 plan:

","$40","

Bottom Line

","

","

California’s 529 plans provide a valuable framework for families to save for educational expenses with tax advantages, despite the absence of state tax deductions. These plans offer tax-deferred growth and tax-free withdrawals for qualified expenses, which can significantly boost savings over time.

","

Tips for Saving for College

","$41","

Photo credit: ©iStock.com/Chartchai Kanthathan, ©iStock.com/skodonnell, ©iStock.com/zimmytws

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The debt ceiling is a limit that Congress imposes on how much debt the federal government can carry at any given time. When the ceiling is reached, the U.S. Treasury Department cannot issue any more Treasury bonds, bills, or notes. It can only pay bills as it receives tax revenues. If the revenue isn’t enough, […]

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If you’re concerned about inflation and stock market volatility, a financial advisor can help optimize your financial plan to protect your assets.

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What Is the U.S. Debt Ceiling?

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The U.S. debt ceiling was set in 1917 as a legislative restriction to determine how much money the government can borrow, and therefore places a limit on the level of national debt that the U.S. Treasury can accumulate.

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The government borrows money to finance various expenditures when these exceed revenues collected through taxes and other sources. Common expenditures include funding public programs like infrastructure projects, paying Social Security benefits and covering budget deficits.

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The U.S. debt ceiling has been raised multiple times in the last few decades. The legacy of the debt ceiling is rooted in fiscal control and accountability. Though, over the years, it has become politically-charged as a divisive tool that often gets used to pass other laws and pay for other things through the same bill.

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The Debt Ceiling and Politics

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The debt ceiling can hold substantial political implications, having served as a battleground for partisan politics in the U.S. Congress. Debates on whether to raise the debt ceiling have become platforms for political parties to assert their policy priorities, leading to intense negotiations and potential gridlock.

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Advocates for a debt ceiling generally believe that it is a necessary tool for ensuring fiscal responsibility and it compels the government to prioritize spending. Critics, on the other hand, say that the debt ceiling could trigger partisan politics and produce economic uncertainty that could potentially undermine the nation’s credit rating and economic stability.

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This discourse extends beyond mere fiscal concerns, encompassing broader discussions on budgetary priorities, policy trade-offs and the ideological underpinnings of taxation and government spending.

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Consequently, the debt ceiling can become not only a point of contention, but also a lens through which voters evaluate the efficacy of elected official. Therefore, it can potentially shape political campaigns and influence public opinion on matters of fiscal responsibility.

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Moreover, the political wrangling over the debt ceiling also has repercussions outside of politics. Uncertainty generated by these debates can impact economic confidence, influencing investment decisions and consumer behavior.

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What Can Happen If the U.S. Defaults on Its Debt?

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If the U.S. were to default on its debt, it could have severe and far-reaching consequences. Some potential outcomes include:

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Financial market volatility: A default could trigger significant volatility in financial markets. Investors might panic, leading to a sell-off in Treasury securities, which are typically considered one of the safest assets. This could also result in a sharp decline in bond prices and a spike in interest rates, affecting borrowing costs for the government, businesses and consumers.

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Credit rating downgrade: A default could prompt credit rating agencies to downgrade the government’s credit rating. This downgrade would make borrowing more expensive for the government, potentially leading to higher interest rates on government debt and negatively impacting investor confidence.

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Economic recession or slowdown: A default could undermine investor and consumer confidence, leading to reduced spending and investment. This could also result in an economic slowdown or even a recession, affecting businesses, job creation and overall economic growth.

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Ripple effects on interest rates: Interest rates on various financial products, including mortgages, loans and credit cards, could increase. Higher rates would make borrowing more expensive for businesses and individuals, potentially reducing spending and slowing economic activity.

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Disruption of government operations: A default could force the government to prioritize spending, leading to disruptions in various government services and payments, including Social Security, Medicare, veteran benefits, government salaries and contracts. This could have direct impacts on individuals and businesses relying on these services.

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How Can the Debt Ceiling Impact You?

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While the debt ceiling directly impacts the government’s ability to borrow money, it can also indirectly affect your personal finances. Here are six common ways:

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Interest rates and borrowing costs: If the debt ceiling isn’t raised and the government defaults on its obligations, it can lead to increased uncertainty and potentially trigger higher interest rates in financial markets. This, in turn, can affect consumer borrowing costs, such as mortgages, auto loans, and credit cards, making them more expensive for individuals.

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Financial market volatility: Uncertainty surrounding the debt ceiling can cause volatility in financial markets. Stock markets might experience fluctuations or downturns, impacting investment portfolios and retirement savings.

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Economic uncertainty and job market: A prolonged standoff over the debt ceiling or a default could harm the overall economy, potentially leading to job losses or a slowdown in hiring as businesses face uncertainty about government spending, investment and consumer confidence.

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Government services and benefits: In extreme cases where the debt ceiling is not raised and the government faces a cash crunch, there could be disruptions or delays in the payment of federal benefits like Social Security, Medicare, veteran benefits and government salaries. This can directly impact individuals who rely on these payments.

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Credit rating impact: Failure to raise the debt ceiling and a potential default could lead credit rating agencies to downgrade the country’s credit rating. A downgrade could have a cascading effect, potentially leading to higher borrowing costs for both the government and private sectors, impacting access to credit and overall economic stability.

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Retirement savings and investments: Volatility in financial markets due to uncertainty surrounding the debt ceiling can affect investment portfolios, including retirement savings accounts like 401(k)s and IRAs, potentially causing short-term losses or fluctuations in account values.

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Bottom Line

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The debt ceiling is important because it sets a legal limit on the amount of money the U.S. government can borrow to finance its operations and obligations, influencing the government’s ability to manage its finances and meet its financial commitments. The debt ceiling can also affect your finances by potentially causing increased interest rates, market volatility and economic uncertainty, which could lead to higher borrowing costs, impact investments and affect job security and economic stability.

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Tips for Growing Your Wealth

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Photo credit: ©iStock.com/Angelina Ishmukahmetova, ©iStock.com/Douglas Rissing, ©iStock.com/valentinrussanov

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If you knew working twice as hard over the next five years would net you $1 million in your savings account, would you jump at the opportunity? The number might seem impossible, but you can accomplish it. To save $1 million in five years, you will have to calculate how much you will need to save and which investments can help you reach that goal. Use the tips below to start your journey toward $1 million. You can also work with a financial advisor who can help you create a financial plan in order to achieve your goals.

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First, Create a Plan

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Setting a goal of saving $1 million allows you to orient your plan toward your target. A solid financial plan includes your income, expenses and savings deposits. However, instead of picking a random number out of the air for your monthly savings, it’s crucial to use an investment calculator to understand how your money will grow.

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For instance, say you opened an investment account today with $100 and contributed $100 per month. With a 5% interest rate, your account will grow to $83,673 after thirty years. While you might have been disciplined with your deposits, your contributions and interest weren’t sufficient to hit your goal. As a result, you’ll need to do some number-crunching to create a plan that will get you to $1 million within five years.

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Tips for Saving $1 Million in 5 Years

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It’s not an easy task to save $1 million in a short time period. Five years isn’t that long of time unless you have a significant income. With that in mind, we’ve put together a list of six tips you can utilize to help get you close to your overall goal.

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1. Capitalize on Compound Interest

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Receiving interest on your investments is vital – but getting paid interest on interest will make your account skyrocket. In other words, compound interest turns paid interest into more money to invest. So, high-interest savings accounts that compound your interest more frequently can help you earn more.

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2. Leverage Your Job

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A job paying minimum wage with no opportunities for growth probably won’t help you get to $1 million. As a result, you might need to look for a job with higher pay, growth potential, a benefits package or a combination of all three.

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Finding a suitable job might necessitate a career change. Fortunately, numerous lucrative options are available for those looking to switch jobs. For example, you can take advantage of free courses and train to be a full-stack software developer in a year. But, whatever you choose, it helps when your employer offers a 401(k), especially if they provide matching contributions.

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3. Establish Daily, Weekly and Monthly Savings Goals

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Saving $1 million can be a daunting goal, so breaking it into manageable chunks can help. Getting into the habit of saving and investing at set intervals can help get your account rolling, even if it means starting small.

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For example, if you’ve never saved money before, setting a monthly savings goal of $50 can help you get into the groove. If this number seems like too much, you can break it down further to transferring $1.67 to your savings account or IRA every day to reach your goal.

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In addition, having financial check-ins with yourself is vital to monitor your progress and make adjustments. For instance, if you get a raise or finish paying off a debt, you can direct that extra money toward your savings.

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4. Identify Ways to Increase Your Income

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Increasing your income is an excellent move if you’re already keeping your monthly expenses at a minimum but are struggling to invest. For example, if you’ve put in several years in your company and haven’t gotten a raise recently, asking for a bump in pay can put more investment money in your pocket.

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In addition, a side hustle is a surefire way to invest more. Whether you rent out your car on the weekends or start a blog, you can turn your spare time into a second income stream to boost your investments.

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5. Find Simple Investments to Grow Your Money

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Getting to $1 million requires straightforward, cost-effective investments. For example, you can find exchange-traded funds (ETFs) and mutual funds with low fees. Specifically, investment vehicles that use index funds are among the most efficient investment vehicles available.

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In other words, these accounts diversify your investments, lowering your risk while giving exposure to profitable companies. In addition, they use the passive management style, so you won’t pay exorbitant administrative costs. To assess the risk of a specific fund, you can research its past performance and choose more reliable accounts, such as an index fund for the S & P 500.

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6. Cut Expenses

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Your monthly budget likely includes excess spending that could go toward investments. For instance, that extra streaming subscription or weekly night out might cost you hundreds of dollars that could be earning compound interest instead.

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If you’re struggling to reduce spending, a helpful strategy can be to pay yourself first. In other words, deposit your target savings and investment dollars first. That way, you’ll have to make ends meet with the remainder of your paycheck and will have less room for impulse purchases.

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Focus on a Long-Term Financial Stability

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Another great mantra in dealing with your finances is to focus on long-term growth. When the going gets tough, reminding yourself of your motivation can help you continue. Remember, your goal isn’t cutting cable or eating out less; those are both means of financial freedom. Your goals are bigger than that.

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Saving $1 million in five years is a lofty goal, but doing so will allow you to live off the interest payments of your nest egg. Hitting your target means you can choose what your life looks like next, whether it’s continuing to build wealth, taking time off to travel or pursuing your dream career.

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Remember, though, that you should prioritize your long-term financial stability over any short-term financial goal. You don’t want to sacrifice all of your wealth in an effort to speed up the time it takes to save the amount of money that you need. Consider working with a professional so that they can help protect your future as well as save for it.

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The Bottom Line

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While it may be challenging to achieve, you can build a fund of $1 million by ramping up your savings and investment deposits over time while improving your income. It also requires discipline across multiple areas of life, including budgeting, working extra hours, cutting expenses and increasing your financial knowledge. It’s been said that the hardest things in life are also those worth doing. If you succeed, your endeavor will be worth $1 million.

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Tips on Saving $1 Million

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