This Week: Why Americans are overpaying their taxes, revitalizing money mantras, the financial fitness checklist, building an “F-you” fund, breaking bad financial habits.
As tax season hovers over us, it’s time to get the straight facts before we eagerly dive into our refunds. Last year, the IRS refunded an average of $2,782 (that’s a pretty decent amount.) A solid refund like that sounds enticing but there’s a problem that arises – most people who got the tax refunds couldn’t actually afford to pay that money up front.
Whether you’re a middle earner or even a high earner it’s important to keep one guideline in mind:
Aim to get more of your money from paychecks as you earn it, rather than just waiting until tax season for your refund each year.
The fact is, that money is yours, to begin with, and when you get a refund you are essentially lending the government that cash for zero in return.
Pro-tip: If you are a lower earner, consider building some savings and paying (or avoiding) debt. If you are a higher earner with a solid financial outlook, think about investing that money throughout the year so you can grow it into a larger sum.
But really, why do Americans keep overpaying their taxes?
Part of the equation is simply lack of awareness, but ironically 49% of filers do believe they are paying too much on taxes during the year. So much of the tax system is really a guessing game and even if you do your best to estimate your withholding on your income, there’s no way to guarantee that you’re getting those numbers just right. Ultimately, fear plays a huge role as most people would rather overpay and get a refund than have to risk owing to the IRS by underpaying. Another important aspect to help explain the overpaying dilemma is that many of these people simply cannot risk underpaying with their very little savings account. Sadly, nearly 39% of Americans have no savings at all.
Well, what’s the solution?
Breathe easy because fear does not need to play a role in your taxes this year. The good news is that if you’ve historically received a refund, you can just adjust your withholding and get more cash in your paychecks up front. Afterwards, take that difference and add it directly to your savings account. In the end, getting your money as you earn it might be a better solution than waiting up to a year to claim what’s yours.
Pro-tip: Arrange to have that money filter into your savings account automatically so you don’t spend it. Better yet, you’ll have a source for paying that bill if you end up owing money on your taxes.
Don’t let financial resolutions become a distant memory. As a new month emerges, it’s time to get serious about those New Year’s money mantras. Whether it’s getting out of debt, saving for a nest egg, or getting a firmer grip on your personal finances, here are 5 tips to re-energize your resolutions and keep you motivated throughout the rest of the year:
Assess your current situation.
Find out where you are financially and write it down. The physical act of writing down these words on paper helps to meld your ideas into something more tangible – plus it holds you accountable to your actions.
Stand your ground.
Dig your heels in deep and determine what must happen in order for you to move forward financially. These “money musts” represent where you (and any other stakeholders) need to declare your values clearly and accurately.
Get great money gurus. Whether you investigate informative podcasts about finances, seek out top money tip apps, or simply choose to consult with a professional, find what resonates with your interests and stay in tune with the best advice out there.
Celebrate the little wins.
Don’t get so bogged down by goal setting that you forget to celebrate the little wins. When it comes to finances, we can only control our actions one moment at a time. Even a small decision to not cave into retail therapy, for example, takes you one step closer to financial freedom, and that deserves acknowledgment.
Embrace the mistakes.
Making mistakes is actually an opportunity to learn what didn’t work. If you’ve overspent your budget or failed to save this pay period, don’t beat yourself up. Each day offers a reset button – just choose to do better next time.
In many ways, our financial health is similar to our physical health. Just like eating the right foods for our unique body, and working up a sweat helps to accumulate more vitality and wellness, so do the right spending and budgeting habits help us to build better financial health. Here are 5 ways to check up on your personal finance fitness:
Setting up automatic transfers to your checking account is a great way to manage your money – effortlessly. There are even free automatic savings apps that calculate the right amount of money to set aside each day based on your income and savings.
Cut recurring expenses.
Make extra room in your budget by reducing and eliminating recurring monthly expenses, like your cable bill, cell phone plan, gym membership, or other monthly subscriptions.
Pro-tip: Review and compare price options. For your TV package or mobile data allotment, you may be able to opt for a lower-cost plan without affecting your usage level.
Eliminating bank fees is a quick and easy way to cut costs and free up extra funds that can go towards your other financial goals. Take a few minutes to look up the fees associated with your checking account because if you are being charged a monthly maintenance fee or any other fee, it’s time to switch banks!
Pro-tip: Banks like Aspiration have free ATMs and no fees.
Compare insurance rates. Raise deductibles.
Insurance rates often change so it’s important to comparison shop for coverage, especially if it’s been a few years to net the best price. Spending 10-15 minutes on this research could end up saving you hundreds of dollars. Consumers can also save by raising their deductible or dropping coverage levels.
Sell unwanted items.
Let spring cleaning come early this year and look through your closet or attic for any items that no longer serve you. Selling your old furniture, jewelry, or clothing on eBay can be a simple way to save a lot of money for the future. Technology has made this easier than ever – even Facebook provides the opportunity to sell your used items to friends.
First off, what is an “F-you” fund? Basically, it is a beefed-up emergency fund worth at least 6-8 months of expenses. This is befitting for those who are in a career slump and in the process of seeking out new job opportunities. The “F-you” fund is a humorous way to ensure you don’t feel like you’ve reached a dead-end in your career. Here’s how to get started on your financial freedom journey:
Step 1: Know your numbers.
Setting 6-8 months of expenses aside is a great amount of time so that if you ever needed to switch from careers, you wouldn’t need to desperately grasp the next available job. For example, if you know that your expenses are $3,000 per month, then you would need an $18,000 minimum in that “F-you” fund.
Step 2: Live below your means.
Forging a path in this new fund will involve a little bit of sacrifice. Whether it’s skipping out on the weekend with your friends or replacing that daily coffee run with your own french press, find small ways to save big. Living outside of what you can afford is not worth the extra time it will take to build your emergency fund.
Step 3: Pay yourself automatically.
Add money to your savings account automatically, that way you are less tempted to overindulge in unneeded purchases. An easy way to do that is to open an account in a different bank, that way you don’t see it but it’s building for you behind the scenes.
Step 4: Keep it out of reach.
Keep your F-you fund completely out of reach so you are not tempted to slip into that savings account. No matter how strong the willpower is, having access to that money could lead to an eventual cave-in spending session.
Step 5: Keep your emotions in check.
The attitude you put into your emergency savings fund is just as important as the money. Redesign your mindset to match your higher vision for personal finances. Here’s a money mantra example:
“…I want to protect myself, I want to protect my financial freedom, I want to protect my creative freedom, I just want to make sure that in the worst case scenario, I don’t feel stuck at a job.” – Ash Exantus
One of the most important steps to cultivating financial freedom is to simply create a concrete game plan for how you want to pay down debt. Considering the average American credit card balance is $6,375, it’s clear that some new money spending habits are in order. Here are several important factors to kicking debt habits to the curb:
Figure out your rate of return.
Take a look at the interest rate of your loan compared to the rate of return it could possibly earn with that cash. Ultimately, if you can earn more on that investment than you’re paying on the debt, you’re probably better off keeping the debt because you could earn more with that cash than you are paying.
Prioritize your payments.
Start out by making a list of your debts, including the balances and interest rates. After that, prioritize the loans you pay off by the interest rate (aka the avalanche method.) Essentially, you are attacking the highest cost debts first.
Pro-tip: Another popular debt payment method is the snowball method, whereby you pay off the debts from smallest to largest. This can be more expensive, however, because it does not take interest into account.
Weigh good debt vs. bad debt.
Different types of debt actually affect your life in different negative and positive ways. Your mortgage, for instance, is a debt that helps you set up for long-term goals. Other examples of positive impact debt could be home or student loans as they are ultimately there to help you build an asset. Conversely, depreciating assets that are not tax deductible like credit cards, are bad debt. Keep it simple and avoid the bad debt as much as possible.
Take your feelings into account.
Peace of mind is invaluable. Go at your own pace and pay off debt at a reasonable level. In the end, having less debt could mean a better night’s sleep, easier retirement, and more financial freedom in the future.
Photo by Alex Wong