How to create a passive income stream

If you’re worried your salary is not enough to help you save a deposit for your first property or prepare you for retirement, building wealth through passive income is a strategy that might appeal to you.

What is passive income?

Passive income is a source of revenue that continues even after the work is complete, for example, royalties from a book or film.

We’re not suggesting you go out and write a book (not very passive) or make a blockbuster movie (not very savvy), but some of the below options do require a little effort in the beginning to then pay you in the long-term without you needing to lift another finger.

What we’ve tried to highlight here is how to make your money (that you’ve already earned) make more money (without you having to do much), so they do rely on you having some initial capital already behind you.

Some of these strategies involve an element of risk. If you are not fully comfortable with that, it might be more advisable to go down the slightly more labour intensive route of selling your stuff on eBay, setting up a side business or writing that bestseller after all.

What ways can I earn a passive income?

Here are eight strategies for creating a passive income stream:

1. 1. Switch your bank account
   2. Earn interest on savings
   3. Use a cashback or rewards credit card
   4. Buy via cashback websites
   5. Try out robo-investing
   6. Rent out a room (or parking space)
   7. Invest with peer-to-peer lending
   8. Purchase dividend-yielding stocks

1. Switch your bank account

Loyalty to your bank is a thing of the past, and banks know it. That’s why so many offer cash switching incentives (the current highest is £200 from HSBC) for current accounts, many of which link with savings accounts, some with interest as high as 5%.

Not all banks are part of the switching scheme, but those that are guarantee all direct debits and standing orders are transferred to your new account within seven days.

If they fail to do this and you wind up with a late payment charge from your old account, your new bank should cover it.

Most bank accounts have a minimum pay-in and a two direct debits requirement – make sure you meet them to reap the full benefits of the switching rewards.

Some charge a monthly fee, so watch out for that when you switch over as you do not want to pay out more than you earn.

2. Earn interest on savings

In today’s low interest climate, the best rates on savings are often reserved for fixed-rate accounts or bonds. These are savings accounts that lock away your money for a set period of time. Generally speaking, the longer it’s locked away, the higher the rate.

Only use these if you are comfortable with not having access to your money. If you suddenly realise you need it before the bond is up, you will most likely have to pay an early withdrawal fee.

One way to avoid this is to get a current account with a high interest rate as we mentioned above.

Today, the best returns on savings are from Lifetime and Help to Buy ISAs where the government pays you a 25% bonus on your funds. The Help to Buy ISA pays this on withdrawal, whereas the Lifetime ISA pays in the bonus annually.

3. Use a cashback or rewards credit card

If you are going to spend on a credit card anyway (which you may need to do to build up your credit history), you might as well get one that gives you cash bonuses to do so.

There are a few cards out there that offer cashback or that operate reward schemes that could give you discounts in certain stores or earn you air miles.

However, always approach credit cards with caution – they are a debt product after all. If you do not think you will be able to pay it back in full every month, your interest repayments will very quickly outpace any cashback or rewards.

4. Buy via cashback websites

Cashback websites are essentially third party portals that you visit before clicking through to a website from which you were already going to buy something.

Using the cashback site’s link rewards them with money, some of which they pass on to you. How much you could get is usually shown as a percentage of the total amount you spend, but you are not always guaranteed to get that amount.

Like with a cashback credit card, only use a cashback site if you were planning to spend that money anyway – that way, you really could be getting something for nothing.

5. Try out robo-investing

Robo-investing is one of the slightly riskier ways to make a passive income, especially as you cannot specify where your funds get invested.

Unlike with traditional savings accounts where your money just sits there earning (or not earning much) interest, here it gets invested so you could reap bigger financial rewards. Remember, you could also experience a loss, so proceed with caution.

Robo-investing, open banking apps like Moneybox round up your spending and invest the difference.

For example, if you bought something costing £2.80, Moneybox rounds it up to £3 and invests the spare 20p. You can pick from three levels of risk: cautious, balanced, or adventurous.

The idea is, the amounts are so nominal you do not notice them not being there – it’s like putting your spare change in a piggy bank rather than having it jangle around in your pocket.

However, if you are someone who likes to keep an eye on every penny, this may not be the best way for you to earn a passive income.

6. Rent out a room (or parking space)

Buying and then renting out an entire property is a good way to earn a passive income, but it’s an expensive one and requires a lot of work.

For starters, you’ll have to pay an extra 3% in stamp duty (if it’s your second home, otherwise you pay the normal stamp duty rates), need a 25% deposit and – if you’ve already exceeded the tax-free income threshold (£12,500 in 2019/2020) – you’ll have to pay income tax on any earnings.

However, if you have a spare room in your current property or have an empty parking space in an area where parking is an absolute premium, you can rent it out.

Again, this is something you will need to report to the tax man, but if you are not using the space, it could be a great way to earn passive income.

7. Invest with peer-to-peer lending

Peer-to-peer (P2P) lending consists of a personal loan made between you and a borrower, facilitated through a third-party intermediary such as Zopa or Funding Circle.

As a lender, you earn income via interest payments made on the loans. But because the loan is unsecured, you face the risk of the borrower defaulting on payments.

To minimise that risk, you should do two things:

• Diversify your lending portfolio by investing smaller amounts over multiple loans
• Analyse the historical data on the borrowers to make informed picks

It takes time to master the metrics of P2P lending, so it’s not entirely passive and because you’re investing in multiple loans, you’ll need to pay close attention to payments received.

Whatever you make in interest should be reinvested if you want to build income.

8. Purchase dividend-yielding stocks

A dividend is a sum of money paid to shareholders out of a company’s profits. Shareholders in companies with dividend-yielding stocks receive payments at regular intervals from the company.

Since the income from the stocks is not related to any activity other than the initial financial investment, owning dividend-yielding stocks can be one of the most passive forms of making money.

The tricky part is choosing the right stocks. To try and minimise loss, thoroughly investigate the company you’re thinking of investing in. Do not rush into anything!

If you are unsure of what to do, it might be worth speaking to a financial advisor. They will explain the risks meaning you can make an informed decision about the best course of action.

Did you find this useful?

Last updated: 18 April, 2019

What happens to bank accounts after death?

Dealing with the death of a loved one is always going to be hard. Here we explain what happens to their bank accounts and what steps you need to take to get their financial affairs in order.

When someone dies, it is illegal to access their bank accounts unless you are a joint account holder on that particular account.

How to manage the finances of a deceased person

Aside from arranging the funeral, there are a number of steps you need to take before you can deal with the deceased’s financial affairs:

1. Register the death
2. Apply for probate
3. Remember inheritance tax!
4. Contact banks, utility companies and insurers

1. Register the death

When someone dies, you should register the death within five days.

This is the only way to get a death certificate which you must have in order to access bank accounts of the person who died.

2. Apply for probate

If the deceased left a will, they should have named an executor or administrator who will be in charge of handling the estate – that’s property, savings and belongings.

Once the executor has the original copies of the will and the death certificate (no photocopies allowed), they can apply for probate – the legal right to deal with the deceased’s estate.

If someone dies without a will, the application process is the same, but you’ll get ‘letters of administration’ rather than a ‘grant of probate’.

3. Remember inheritance tax

You’ll need to estimate the value of the estate and report your findings to HMRC to determine whether or not inheritance tax (IHT) is owed.

IHT won’t be charged if the inheritance is left to a spouse, civil partner, charity, or amateur sports club – otherwise, IHT will apply on any estates valued at over £325,000.

For the 2019/2020 tax year, the minimum tax-free threshold increases to £475,000 if the estate was left to children or grandchildren, including step and adopted children.

It is usually the estate – not you as the executor and/or inheritor – who pays inheritance tax, which is due six months after the death.

4. Contact banks, utility companies and insurers

Now you have the official will, death certificate and grant of probate (or letters of administration if there was no will), you can inform any banks, building societies, utility companies and insurers of the death.

Current and savings accounts

Bank accounts remain open until all the money is retrieved and the account formally closed. However, direct debits and standing orders will be cancelled.

Remember, it is illegal to withdraw money from an open account of someone who has died (unless you are the other person named on a joint account) before you have informed the bank of the death and been granted probate. This is the case even if you need to access some of the money to pay for the funeral.

As the executor, it is down to you withdraw any money and distribute it to the beneficiaries according to the will. A solicitor will be able to help you with the process.

If someone died without leaving a will, rules of intestacy apply.

There is, of course, the real possibility you do not know the details of all the deceased’s bank accounts or that some details have been lost. In that case, there are online tools that can help you discover lost accounts.

Debts

Debts such as mortgages, loans or credit cards are not passed on to the inheritors, but must be paid off before the remainder of the estate is distributed as per the instructions laid out in the will.

If you are unsure of what or how much money is owed, you’ll need to place a notice in The Gazette – the official public record of deceased estates. If you fail to do this and a creditor later comes forward with a claim against the estate, you might personally be liable for the unidentified debt.

Two months and one day after the notice is published and provided no other creditors have come forward, you can distribute the remaining estate amongst the beneficiaries.

Any debts taken out in a joint name become the sole responsibility of the survivor when one of you dies.

Insurance companies

Any open insurance policies need to be cancelled – remember, unless a claim is made, insurance companies do not pay out, so you will not recoup any payments the deceased made as part of their policies.

However, if they had any kind of life insurance (including mortgage life insurance and PPI) you can make a claim and the policies end.

Pensions

If the deceased was receiving their State Pension before they died, contact the Pension Service to stop the payments.

You may be able to claim their personal or workplace pensions (if they had any), but how much you’re entitled to largely depends on the type of pension they had.

Trusts

If a bank account is held in a lifetime trust, the successor trustee named in the trust document can present the death certificate and a copy of the trust to the bank to take it over.

How to get your affairs in order today

While much of the advice in this article is about how to manage someone else’s finances once they have died, there are several small things you can do for yourself or the person you are caring for now.

Special counsel at Foley & Lardner, Jamil G. Daoud, offers the following tips:

• Get hard copies of bank statements. Online statements have become the norm for current and savings accounts. Try to obtain detailed records by printing off online statements or requesting paper ones.
• Consolidate accounts. This might not be possible if the person has created a complicated web of savings accounts, but if there is a savings account here and a current account there, merging them could simplify matters.
• Add names to individual accounts. Determine exactly how the account is titled while the person is still alive. If you have power of attorney for someone, consider the following steps if your powers allow: Add one or more joint owners to the account; designate one or more payable-on-death beneficiaries for the account; transfer the account to the owner’s revocable trust.
• Pre-plan your funeral, if you can. One of the main reasons people need quick access to a person’s bank account after they have died is to cover the arrangements. Planning ahead alleviates that stress during an emotional time.

Did you find this useful?

Last updated: 18 April, 2019

How to spot and avoid financial scams

Online fraud and cyber crime has cost people and businesses in the UK an estimated £28 million in just six months, according to figures from Action Fraud.

It received over 12,000 reports of cyber crime between October 2017 and March 2018, with hacking of social media and email accounts the biggest problem.

Katy Worobec, the economic crime chief at UK Finance, said the finance industry prevented £1.4 billion in unauthorised financial fraud in 2017.

However, she said criminals were now targeting individual customers, and £236 million was lost to authorised push payment scams where customers were duped into making payments.

“We have a trust reflex,” she said. “It makes us forget things and it makes us lose control.”

This is particularly problematic when it comes to financial scams, with criminals changing their tactics to prey on that trust reflex.

“The line is that there is suspicious activity on your account and you need to move your money to a safe account,” she explained. “It might involve having to make a transfer.”

When our judgement is faulty

Dr Jane Cox, an international human performance specialist, and wealth psychology expert, says when it comes to money and trust, we walk a thin line.

“Of course at some stage we have to trust people with our money in order to be able to make investments, or know where our money is more likely to grow,” she says. “We also need to trust people to get into business with them, and very often our ‘gut instinct’, which is where a lot of our trust is based, will be a good guide when it comes to figuring out the type of people you can connect with, work with, make decisions alongside.”

However, the big harm with the trust reflex when it comes to finances is that often we are desperate to make more money, especially when things have been tight. It is then that criminals are most able to exploit our weaknesses, she says.

“This is where our desire to hear something positive, or believe something has come along that will get us out of our financial constraints, does tend to exert an influence.”

When you are desperate for some cash, it is very easy to hear what you want to hear. You dismiss any doubt or use of common sense to temper that initial reflex. This can cost us dearly.

Are some people more susceptible to scams than others?

Some people are more trusting than others, particularly those who may have been a little more sheltered and exposed to less fraud, or deceit, during the course of their lives.

“Unfortunately the ‘school of hard knocks’ plays a big role for many people when it comes to making more discerning financial choices,” Cox says.

“Very often that comes after a few wrong choices have been made, or the wrong people were trusted.”

Some people are more vulnerable than others. The elderly may be less knowledgeable about the prevalence of financial fraud and how it is conducted.

Young people might have the belief that they are the ones who will be able to make their millions before they turn 30, and that they will be able to do it quicker and easier than anyone else.

The cost of the cons

UK Finance estimates that people who are duped into transferring money to fraudsters lose an average of £3,000 each.

A total of £236 million was lost last year, with banks unable to return nearly three-quarters (74%) of it.

One of the most popular and effective scams involves tricking people into thinking they are moving money into a solicitor’s bank account for a house purchase, or to a builder. The criminals hack into genuine email accounts and send out false requests for payment.

By the time the people who have made the payment have discovered their mistake, the money has disappeared and the account into which they made the transfer has been closed down.

UK Finance said that in 2017 there were 43,875 reported cases of these scams, with 20% of the victims being businesses who lost an average of £24,355 per case.

Now read our digital banking guide

Make yourself harder to scam

Before you make a large payment, it is important to double-check the details, and you can do this by ringing the payee and confirming their bank details.

When it comes to all aspects of your finances, it is important to stay alert and think things through, says Cox.

“Do your due diligence when it comes to making a big financial decision,” she says. “Don’t believe everything you hear.”

Remain involved with your money and keep an eye on how it is working for you. Hands off investors are very vulnerable to losing out. If it sounds too good to be true it probably is too good to be true.

“Small risks tend to reap small returns, whereas riskier investment reap the bigger returns,” she says. That’s why it can be tempting to take a big risk, especially if you are down on your financial luck.

“However keep a balance, and always try and spread your investments over lower and higher risk returns. Never risk more money than you can afford to lose.”

How to prevent being scammed: Stop and think

Take Five to Stop Fraud is a government initiative to help you spot and prevent a financial scam.

It recommends you are vigilant in the following situations:

1. Requests to move money: Your bank, utility providers, and other big companies will never contact you directly to ask for your PIN, password, or to move money to another account. You should only ever provide personal or financial details when you actively consent to it – when you sign up for a new service, for example – or when you are expecting to be contacted by someone from a financial institution or service provider.
2. Clicking on links or downloading files: Never click on a link or download a file from an unexpected email or text. Odds are, a criminal is trying to load malware onto your device that will give them access to your personal and financial details. If in doubt, phone up the person who messaged you and ask if they really sent it.
3. Personal information: Likewise, be very wary of unexpected requests for any kind of personal info via phone, email, or text. Instead, contact the company or person directly using a known email or phone number and confirm that they need your personal info.

Now read our guide to staying safe online

Did you find this useful?

Last updated: 12 July, 2018

Which Type Of CD Is Best For You?

Hero Images/Getty Images

The traditional certificate of deposit account remains the most popular type of CD. However, it’s far from the only option. Financial institutions offer a variety of non-traditional CD products. These specialized CDs can: give savers more flexibility to benefit from rising rates, provide early access to their funds or offer better-than-average rates of return. If you’re willing to sacrifice some yield or tolerate some additional risk, you might find a CD better suited to meet your financial needs.

But first, what is a CD account?

A certificate of deposit is a time deposit account. A bank agrees to pay interest at a certain rate if savers deposit their cash for a set term, or period of time.

11 types of CD accounts

1. Traditional CD

With a traditional CD, you deposit a fixed amount of money for a specific term and receive a fixed interest rate. You have the option of cashing out at the end of the term or rolling over the CD for another term. Most institutions don’t allow you to add additional funds before your traditional CD matures.

Penalties for early withdrawal can be quite stiff and will cause you to lose interest, and possibly principal. Federal regulation — Regulation D, specifically — sets only the minimum early withdrawal penalty for traditional CDs. There is no law preventing an institution from enacting tougher penalties, but the institution must disclose those fees when the account is opened.

Before you pick a CD, it’s important to calculate how much interest you could earn by the end of your term.

2. Bump-up CD

A bump-up CD helps you benefit from a rising-rate environment. Suppose you buy a two-year CD at a given rate, and six months into the term the bank offers an additional quarter-point on the same investment.

A bump-up CD gives you the option of telling the bank you want to get the higher rate for the remainder of the term. Institutions that offer this CD option usually allow only one bump-up per term.

The drawback is you may get a lower initial rate on a bump-up CD than on a traditional CD. The longer it takes interest rates to rise, the longer it will take to make up for the earlier, lower-rate portion of the term.

Be sure you have realistic expectations about the interest-rate environment before buying a bump-up CD. See how bump-up CD deals stack up against traditional CD rates.

3. Step-up CDs

In a rising-rate environment, you might also want to consider a financial institution that offers a step-up CD.

It’s not uncommon to see a step-up CD and a bump-up CD lumped together. Both of them will help you move up into a higher yield. However, they are different products. Rather than requiring you to ask the bank for a higher rate as bump-up CDs do, step-up CDs will automatically increase their rates throughout their terms at certain intervals.

They are not too common, however. Moreover, there is a big caveat: There is no guarantee that you would end up better off than you would have if you had parked your money in a traditional CD. The blended APY could be less than you would make with a traditional CD. As such, you’ll want to evaluate the starting APY as well as how much the rate is increasing before making a decision.

4. Liquid CD

Liquid CDs, or no-penalty CDs, offer investors the opportunity to withdraw their money without incurring a penalty. However, these types of CDs may come with strict withdrawal limits and large minimum investment requirements.

You can generally expect the interest rate on a liquid CD to be higher than that of a savings or money market deposit. But it’s usually lower than the rate on a traditional CD of the same term. You’ll have to weigh the convenience of liquidity against whatever return you’re sacrificing.

A key consideration when purchasing a liquid CD is how soon you can make a withdrawal after opening the account. Most banks require that the money stay in the account for at least seven days before it can be withdrawn without penalty, but banks can set the first penalty-free withdrawal for any time period. It’s important to read the fine print before picking up a liquid CD.

5. Zero-coupon CD

These CDs are similar to zero-coupon bonds. As with the bond, you buy the CD at a deep discount to its par value (or the amount you’ll receive when the CD matures).

“Coupon” refers to a periodic interest payment. “Zero-coupon” means there are no interest payments.

So, you might buy a 12-year, $100,000 CD for $50,000, and you wouldn’t receive any interest payments over the course of the term. You’d receive the $100,000 face value when the CD matures.

One drawback is that zero-coupon CDs are usually long-term investments, and you take on considerable interest-rate risk. If interest rates rise during the 10-year term in question, you’ll be on the losing end of that deal.

Another potential problem is that you’re credited with phantom income each year. No money is being put in your pocket, but you’ll have to pay Uncle Sam on the earnings being accrued.

In our example, you’d earn $3,000 during the first year and would owe tax on the money, though you haven’t actually received it. Each year, you’ll have a higher base than the year before — and a bigger tax bill. Make sure you have room in your budget to cover the taxes.

6. Callable CD

With a callable CD, you could get a higher yield than with traditional CDs but with a risk: the bank that issues the CD can “call” it away from you after your call-protection period expires, and before the CD matures. For instance, if you buy a five-year CD with a six-month call-protection period, the institution could call it back after the first six months.

Just as with the zero-coupon CD, the bank is shifting interest-rate risk on to your shoulders. If it issues a five-year CD at 3 percent and six months later rates drop by a full percent, the bank will drop its rate as well. It’ll now be paying 2 percent on the five-year CD you originally got at 3 percent.

The bank can call, or take back, your CD and reissue it at the lower 2 percent. You’ll receive your full principal and interest earned. But you’re stuck reinvesting your money at lower rates.

Usually, banks pay a premium for you taking on the risk that the CD may be called. They may pay investors a quarter- or half-percent more on a callable CD than they would on a CD without the call feature.

7. Brokered CD

A brokered CD is simply a certificate of deposit sold through a brokerage firm. To qualify for one, you’ll need a brokerage account. Some banks use brokers as sales representatives to find investors willing to purchase the banks’ CDs.

Buying CDs through a brokerage can be convenient. There’s no need to open accounts at a variety of banks just to get the best CD yields. Brokered CDs may pay higher rates than CDs from your local bank because banks using brokered CDs compete in a national marketplace. But that’s not always the case.

Brokered CDs are more liquid than bank CDs because they can be traded like bonds on the secondary market. But there is no guarantee you won’t take a loss. The only way to guarantee getting your full principal and interest is to hold the CD until maturity.

Don’t assume all brokered CDs are backed by the Federal Deposit Insurance Corp. It’s up to you to do your due diligence and look for that FDIC seal on the broker’s website. You should also watch out for brokered CDs that have call options. And before you invest, check on fees and early withdrawal policies.

8. High-yield CD

Banks compete for deposits by offering better-than-average rates. High-yield CD accounts may offer two or three times the national average on a given term. These are generally traditional CD accounts that pay very generous returns. Bankrate offers the best route for finding the highest rates in the nation.

Bankrate surveys local and national institutions to find banks offering the highest yields on CDs. All accounts are directly offered to the consumer by the institution.

Take time to compare the best CD rates. Then calculate your potential earnings.

9. Jumbo CD

Just as its name implies, a jumbo CD requires a larger deposit than a traditional CD. To get one, you would typically need to make a minimum deposit of $100,000. In some instances, that deposit threshold will be somewhat lower.

While jumbo CDs could pay more than a traditional CD, they might not. A five-year jumbo CD on average pays 1.55 percent APY, while a 5-year CD rate pays 1.49 percent as of late January, according to Bankrate’s national survey of banks and thrifts.

In putting tens of thousands of dollars into a jumbo CD, there’s a risk of whether the account will keep up with the inflation rate. Also don’t forget to consider your tax bite: The interest you earn will be taxed as ordinary income.

10. IRA CD

Individual retirement accounts hold investments. IRA CDs are IRAs where you invest in CDs.

IRA CDs may appeal to the risk-averse who are preparing to pad their retirement savings with guaranteed returns – you’ll know how much you’ll make over the product’s term so long as you keep the CD until its maturity. You will also have protection of up to $250,000 from the government if you purchase IRA CDs from an FDIC-insured institution. Translation: If the bank goes bust, your money won’t.

The trade-off is that you won’t make high returns on these investments. While they can help you diversify your portfolio, IRA CDs are not generally viewed as smart retirement strategies for younger investors, who can take on more risk.

Just like with the other CD types, make sure you shop around for the best yields. To effectively use an IRA CD, fund one with money you won’t need until age 59 1/2, so you don’t have to pay a tax on early distributions.

11. Add-on CD

Most CDs let you make only an initial deposit. But add-on CDs let you make multiple deposits into the account during the CD’s term. However, how many deposits you can make into an add-on CDs varies. So, make sure you read the fine print.

These accounts are worth considering if you are saving for a goal.

Make sure you look around to find the best rates. And reminder, try not to lock up your money for too long at times when interest rates are expected to increase.

What is a money market account?

Jekaterina Nikitina/Getty Images

You are looking for a low-risk way to earn a competitive rate. Then, you stumble upon something promising: a money market account that pays a high yield. You have just one question: what in the world is a money market account?

A money market account is a financial tool for storing your savings safely, and it is quite similar to a traditional savings account. A money market account is great for when you want a low-risk way to earn a competitive rate on your cash.

Generally, a money market account pays a higher interest rate than a savings account; however, the account tends to include more restrictions, such as requiring a higher minimum balance. It wouldn’t be surprising for the financial institution to require $5,000 or more to open a money market account, for example.

You will, however, often have the ability to write checks from the account and/or a debit card to access your money. But a money market account is not a checking account, and there are limits on your ability to use these tools to move money in and out of the account. A money market account will allow up to six withdrawals or transfers a month because of a federal mandate.

Brick-and-mortar banks, online banks and credit unions offer the deposit account.

Are money market accounts FDIC-insured?

Your money is safe in a money market account if it’s offered by a bank or credit union.

At banks, the Federal Deposit Insurance Corp. insures up to $250,000. At credit unions, the National Credit Union Association insures up to $250,000.

Should the bank or credit union fail, the FDIC or NCUA guarantees your money will remain safe.

For money market accounts, banks and credit unions can use your deposits for low-risk investments, like certificates of deposit. But again, your money is still safe in these accounts.

How do I choose the best money market account?

First and foremost, shop around.

As you do your research, one of the most important factors to consider is the product’s annual percentage yield. The annual percentage yield, or APY, alerts you to how much you will earn with compound interest over the year. In other words, it’s the interest earned on your first deposit as well as the interest earned on top of other interest earnings — the higher the number is, the more your money will grow.

Next, look out for account restrictions. You’ll want to check to see whether or not the account requirements are too onerous to earn the yield or to sidestep a fee. It’s not uncommon to see hefty balance requirements. For example, BMO Harris Bank currently requires a $5,000 minimum opening deposit to earn 2.45 percent APY on its money market account.

Also, make sure you look for fees, including whether the account charges you a penalty if you close it within three months of opening it. Look out for monthly fees, transfer fees, shipping fees, inactive account fees and other penalties.

You can use Bankrate to compare money market accounts.

Should I open a money market account?

If you’re looking to earn a higher rate without taking on risk for your shorter-term goals, you should consider opening a money market account. For example, you may want to open a money market account if:

• You want relatively easy access to your savings.
• Need a place to park your emergency savings or another shorter-term financial goal.
• Want the ability to write a limited amount of checks.
• Desire a predictable APY and a federally insured account.

Can you lose money in a money market account?

A money market account is a safe place to park your money, so long as you aren’t depositing more than $250,000 — the amount FDIC-insured banks and NCUA-insured credit unions insure against losses — in a single account.

Importantly, a money market account is separate from a money market fund. The money market account is FDIC-insured; the money market fund is not.

What is a money market account good for?

If you want to park your savings somewhere but still have relatively easy access to it, a money market account is a good option to consider.

A money market account is a solid option to keep funds for your shorter-term savings goals, like a wedding or home repair. It’s also a good place to keep your emergency fund.

Are you taxed on money market accounts?

You must report all taxable and tax-exempt interest on your federal income tax return, even if it’s just a couple of dollars.

If you earn $10 on interest on an account, your bank will send you a 1099-INT for interest earned during that year. Even if you earn less than $10, you still need to report it on your tax return to the IRS. You will want to report the interest the year that you earn it.

Contact your accountant to answer your specific tax questions.

What is the difference between a money market account and a savings account?

Savings accounts and money market accounts have more in common than not: They pay interest, and they are designed to keep you saving. But there are a few distinctions that should help you choose the product that suits your needs best, including:

• Generally, you will have to park more money in a money market account than you will in a savings account.
• The money market account, on average, pays twice the savings account APY, according to Bankrate data (0.25 percent APY vs. 0.1 percent APY).
• With a money market account, you can get checks — don’t expect this tool in your savings account.

If you are deciding between a money market account and a certificate of deposit, evaluate your goals. A CD could pay you a more competitive rate than a money market account, but your money is more liquid in a money market account than a CD.

Remember, there are always exceptions. Some savings accounts pay higher yields than money market accounts, and not all money market accounts offer ATM access or check-writing privileges. Bottom line: Do your research and shop around to find the account that works best for you.

Learn more:

First-Time Homebuyer Mistakes To Avoid

Vasyl Dolmatov/Getty Images

Buying your first home comes with many big decisions, and it can be as scary as it is exciting. It’s easy to get swept up in the whirlwind of home shopping and make mistakes that could leave you with buyer’s remorse later.

If this is your first rodeo as a homebuyer or it’s been many years since you last bought a home, knowledge is power. Along with knowing what issues to avoid, it’s important to glean first-time homebuyer tips from the pros so you know what to expect and what questions to ask.

First-time homebuyer mistakes

Here are 14 common first-time homebuyer mistakes, along with first-time homebuyer tips on how to avoid them:

1. Looking for a home before applying for a mortgage

Many first-time buyers make the mistake of viewing homes before ever getting in front of a mortgage lender. In some markets, housing inventory is still tight because there’s more buyer demand than affordable homes on the market. And in a competitive market, you could lose a property if you aren’t preapproved for a mortgage, says Alfredo Arteaga, a loan officer with Movement Mortgage in Mission Viejo, California.

How this affects you: You might get behind the ball if a home hits the market you love. You also might look at homes that, realistically, you can’t afford.

What to do instead: “Before you fall in love with that gorgeous dream house you’ve been eyeing, be sure to get a fully underwritten preapproval,” Arteaga says. Being preapproved sends the message that you’re a serious buyer whose credit and finances pass muster to successfully get a loan.

2. Talking to only one lender

This one is a biggie. First-time buyers might get a mortgage from the first (and only) lender or bank they talk to, potentially leaving thousands of dollars on the table.

“A good mortgage loan officer can look at your situation and diagnose any potential roadblocks ahead to give you a clear understanding of your home-buying options,” Arteaga says.

How this affects you: The more you shop around, the better basis for comparison you’ll have to ensure you’re getting a good deal and the lowest rates possible.

What to do instead: Shop around with at least three different lenders, as well as a mortgage broker. Compare rates, lender fees and loan terms. Don’t discount customer service and lender responsiveness; both play key roles in making the mortgage approval process run smoothly.

3. Buying more house than you can afford

It’s easy to fall in love with homes that might stretch your budget, but overextending yourself is never a good idea. And with home prices still rising, this is easier said than done.

How this affects you: Buying a home that exceeds your budget can put you at higher risk of losing your home if you fall on tough financial times. You’ll also have less wiggle room in your monthly budget for other bills and expenses.

What to do instead: Focus on what monthly payment you can afford rather than fixating on the maximum loan amount you qualify for. Just because you can qualify for a $300,000 loan, that doesn’t mean you can afford the monthly payments that come with it. Factor in your other obligations that don’t show on a credit report when determining how much house you can afford.

4. Moving too fast

Buying a home can be complex, particularly when you get into the weeds of the mortgage process. Rushing the process can cost you later on, says Nick Bush, a Realtor with TowerHill Realty in Rockville, Maryland.

“The biggest mistake that I see (first-time buyers make) is to not plan far enough ahead for their purchase,” Bush says.

How this affects you: Rushing the process means you might be unable to save enough for a down payment and closing costs, address items on your credit report or make informed decisions.

What to do instead: Map out your home-buying timeline at least a year in advance. Keep in mind it can take months — even years — to repair poor credit and save enough for a sizable down payment. Work on boosting your credit score, paying down debt and saving more money to put you in a stronger position to get preapproved.

5. Draining your savings

Spending all or most of their savings on the down payment and closing costs is one of the biggest first-time homebuyer mistakes, says Ed Conarchy, a mortgage planner and investment adviser at Cherry Creek Mortgage in Gurnee, Illinois.

“Some people scrape all their money together to make the 20 percent down payment so they don’t have to pay for mortgage insurance, but they are picking the wrong poison because they are left with no savings at all,” Conarchy says.

How this affects you: Homebuyers who put 20 percent or more down don’t have to pay for mortgage insurance when getting a conventional mortgage. That’s usually translated into substantial savings on the monthly mortgage payment. But it’s not worth the risk of living on the edge, Conarchy says.

What to do instead: Aim to have three to six months of living expenses in an emergency fund. Paying mortgage insurance isn’t ideal, but depleting your emergency or retirement savings to make a large down payment is riskier.

6. Being careless with credit

Lenders pull credit reports at preapproval to make sure things check out and again just before closing. They want to make sure nothing has changed in your financial picture.

How this affects you: Any new loans or credit card accounts on your credit report can jeopardize the closing and final loan approval. Buyers, especially first-timers, often learn this lesson the hard way.

What to do instead: Keep the status quo in your finances from preapproval to closing. Don’t open new credit cards, close existing accounts, take out new loans or make large purchases on existing credit accounts in the months leading up to applying for a mortgage through closing day. Pay down your existing balances to below 30 percent of your available credit limit, and pay your bills on time and in full every month.

7. Fixating on the house over the neighborhood

Sure, you want a home that checks off the items on your wish list and meets your needs. Being nitpicky about a home’s cosmetics, however, can be short-sighted if you wind up in a neighborhood you hate, says Alison Bernstein, president and founder of Suburban Jungle, a real estate strategy firm.

“Selecting the right town is critical to your life and family development,” Bernstein says. “The goal is to find you and your brood a place where the culture and values of the (area) match yours. You can always trade up or down for a new home; add a third bathroom or renovate a basement.”

How this affects you: You could wind up loving your home but hating your neighborhood.

What to do instead: Ask your real estate agent to help you track down neighborhood crime stats and school ratings. Measure the drive from the neighborhood to your job to gauge commuting time and proximity to public transportation. Visit the neighborhood at different times to get a sense of traffic, neighbor interactions and the overall vibe to see if it’s an area that appeals to you.

8. Making decisions based on emotion

Buying a house is a major life milestone. It’s a place where you’ll make memories, create a space that’s truly yours, and put down roots. It’s easy to get too attached and make emotional decisions, so remember that you’re also making one of the largest investments of your life, says Ralph DiBugnara, president of Home Qualified in New York City.

“With this being a strong seller’s market, a lot of first-time buyers are bidding over what they are comfortable with because it is taking them longer than usual to find homes,” DiBugnara says.

How this affects you: Emotional decisions could lead to overpaying for a home and stretching your budget beyond your means.

What to do instead: “Have a budget and stick to it,” DiBugnara says. “Don’t become emotionally attached to a home that is not yours.”

9. Assuming you need a 20 percent down payment

The long-held belief that you must put 20 percent down payment is a myth. While a 20 percent down payment does help you avoid paying private mortgage insurance, many buyers today don’t want (or can’t) put down that much money. In fact, the median down payment on a home is 13 percent, according to the National Association of Realtors.

How this affects you: Delaying your home purchase to save up 20 percent could take years, and you could limit cash flow that could be put to better use maximizing your retirement savings, adding to your emergency fund or paying down high-interest debt.

What to do instead: Consider other mortgage options. You can put as little as 3 percent down for a conventional mortgage (note: you’ll pay mortgage insurance). Some government-insured loans require 3.5 percent down or zero down, in some cases. Plus, check with your local or state housing programs to see if you qualify for housing assistance programs designed for first-time buyers.

10. Waiting for the ‘unicorn’

Unicorns do not exist in real estate, and finding the perfect property is like finding a needle in a haystack. Looking for perfection can narrow your choices too much, and you might pass over solid contenders in the hopes that something better will come along. But this type of thinking can sabotage your search, says James D’Astice, a real estate agent with Compass in Chicago.

How this affects you: Looking for perfection might limit your real estate search or lead to you overpaying for a home. It can also take longer to find a home.

What to do instead: Keep an open mind about what’s on the market and be willing to put in some sweat equity, DiBugnara says. Some loan programs let you roll the cost of repairs into your mortgage, too, he adds.

11. Overlooking FHA, VA and USDA loans

First-time buyers might be cash-strapped in this environment of rising home prices. And if you have little saved for a down payment or your credit isn’t stellar, you might have a hard time qualifying for a conventional loan.

How this affects you: You might assume you have no financing options and delay your home search.

What to do instead: Look into one of the three government-insured loan programs backed by the Federal Housing Administration (FHA loans), U.S. Department of Veterans Affairs (VA loans) and U.S Department of Agriculture (USDA loans). Here’s a brief overview of each:

FHA loans require just 3.5 percent down with a minimum 580 credit score. FHA loans can fill the gap for borrowers who don’t have top-notch credit or little money saved up. The major drawback to these loans, though, is mandatory mortgage insurance, paid both annually and upfront at closing.

VA loans are backed by the VA for eligible active-duty and veteran military service members and their spouses. These loans don’t require a down payment, but some borrowers may pay a funding fee. VA loans are offered through private lenders, and come with a cap on lender fees to keep borrowing costs affordable.

USDA loans help moderate- to low-income borrowers buy homes in rural areas. You must purchase a home in a USDA-eligible area and meet certain income limits to qualify. Some USDA loans do not require a down payment for eligible borrowers with low incomes.

12. Miscalculating the hidden costs of homeownership

If you had sticker shock from seeing your new monthly principal and interest payment, wait until you add up the other costs of owning a home. As a new homeowner, you’ll pay for property taxes, mortgage insurance, homeowners insurance, hazard insurance, repairs, maintenance and utilities, to name a few.

How this affects you: A Bankrate.com survey found that the average homeowner pays $2,000 annually on maintenance services. Not having enough cushion in your monthly budget — or a healthy rainy day fund — can quickly put you in the red if you’re not prepared.

What to do instead: Your agent or lender can help you crunch numbers on taxes, mortgage insurance and utility bills. Shop around for insurance coverage to get compare quotes. Finally, aim to set aside at least 1 percent to 3 percent of the home’s purchase price annually for repairs and maintenance expenses.

13. Not lining up gift money

Many loan programs allow you to use a gift from a family, friend, employer or charity toward your down payment. Not sorting who will provide this money and when, though, can throw a wrench into a loan approval.

How this affects you: “The time to confirm that the Bank of Mom and Dad is ready, willing and able to provide you with help for your down payment is before you start home shopping,” says Dana Scanlon, a Realtor with Keller Williams Capital Properties in Bethesda, Maryland. “If a buyer ratifies a contract to purchase a home with an understanding that they will be getting gift money, and the gift money fails to materialize, they can lose their earnest money deposit.”

What to do instead: Have a frank discussion with anyone who offers money as a gift toward your down payment about how much they are offering and when you’ll receive the money. Make a copy of the check or electronic transfer showing how and when the money traded hands from the gift donor to you. Lenders will verify this through bank statements and a signed gift letter.

14. Not negotiating a homebuyer rebate

The concept of homebuyer rebates, also known as commission rebates, is an obscure one to most first-time buyers. This is a rebate of up to 1 percent of the home’s sales price, and it comes out of the buyer agent’s commission, says Ben Mizes, founder and CEO of Clever Real Estate based in St. Louis.

How this affects you: Homebuyer rebates are available in most U.S. states, but not all. Ten states prohibit homebuyer rebates: Alaska, Alabama, Iowa, Kansas, Louisiana, Mississippi, Missouri, Oklahoma, Oregon and Tennessee.

What to do instead: If you live in a state that allows homebuyer rebates, see if your agent is willing to provide this rebate at closing. On a $300,000 home purchase, this can be a $3,000 savings for you so it’s worth asking.

Learn more: