by Jean Miller | Accounting News, Financial goals, News, Newsletter
What you choose to do with your tax refund can significantly impact your long-term financial health. Instead of splurging, consider using this extra cash to strengthen your finances. Smart strategies, such as building an emergency fund, paying off high-interest debt, investing, and addressing maintenance costs, can set you up for greater financial stability in the future.
Boost Your Emergency Fund
An emergency fund should house at least three to six months’ worth of living expenses in a liquid savings account. If you have yet to create an emergency fund, consider using your tax refund to establish a solid foundation. If you already have an emergency fund but you’re short of the recommended goal, your refund can provide the funds to top it off.
In the case of unexpected expenses, such as medical bills, car repairs, or job loss, an emergency fund provides a financial cushion to help avoid sinking into debt. Having this safety net can prevent you from relying on credit cards or loans, keeping you financially secure even when life throws curveballs.
Pay Down High-Interest Debt
High-interest debt, such as credit card balances, can quickly spiral out of control if left unchecked. If you have credit card debt or personal loans with high interest rates, using your tax refund to pay down your debt will lower the amount of interest you’ll pay in the long run, which saves money over time and improves your financial situation.
There are two common methods for paying off debt: the avalanche method and the snowball method. With the avalanche method, you prioritize the highest-interest debts first, potentially saving a significant amount of money in interest in the long run. The snowball method, where you pay off the smallest balance first, helps to build momentum and hit quick wins. Whichever method you choose, using your tax refund to eliminate or reduce debt is one of the smartest financial moves to make.
Invest the Extra Cash
Investing your tax refund can help grow your wealth over time. You could contribute to a retirement account such as an IRA or 401(k), which not only helps secure your future but can also provide tax advantages depending on the type of account.
If you’re looking to build wealth more actively, consider opening a brokerage account to invest in stocks, bonds, or mutual funds. If you’re unsure where to begin, low-cost index funds or ETFs can offer a balanced, diversified option for investing. Be sure to analyze your risk tolerance and investment goals before making any decisions.
Spend Your Refund to Get Tax Benefits
Another smart way to use your tax refund is by spending it in ways that could generate future tax benefits. For example, contributing to a tax-deferred retirement account like an IRA or 401(k) not only boosts your long-term savings but can also reduce your taxable income for the current year, potentially lowering your tax burden. The key is to focus on moves that align with your long-term financial and tax planning strategies, ensuring that the money works for you now and in the future.
Address Maintenance Costs (Home or Car Repairs)
Cars and homes often generate unexpected maintenance costs, which can put a dent in your finances if not planned for. Whether it’s fixing a leaking roof or replacing worn-out tires, using your tax refund to cover these expenses can prevent financial stress down the road.
Addressing these maintenance costs will help you avoid larger, more expensive problems in the future, and you’ll have peace of mind knowing that your home and car are in good working order.
Your tax refund is more than just a chance to splurge. It’s an opportunity to strengthen your financial foundation and set yourself up for future success.
by Daniel Kittell | Budget, Credit Card Debt, Debt, News, Newsletter
A combination of rising living costs, high inflation, unexpected financial emergencies, and reliance on credit has created a perfect storm for personal debt. In fact, American household debt increased from 16.9 trillion in 2022 to 17.05 trillion in the first quarter of 2023 and rose again to 17.69 trillion at the beginning of 2024. It might seem hopeless, but eradicating debt is achievable with the right strategies. In the following article, we discuss common mistakes to avoid when climbing your way out of debt.
Not Changing Spending Habits
One of the biggest mistakes people make when trying to get out of debt is continuing to spend beyond their means. If you create a budget, track expenses, identify non-essential spending, and cut back wherever possible, you’ll have more money to put towards tackling debt. This disciplined approach will also help you build smart spending habits to keep you from falling back into debt.
Not Keeping Credit Cards Open After Paying Them Off
While it may seem logical to close credit cards once they’re paid off, doing so can actually hurt your credit score. Credit utilization, the ratio of your credit card balances to your credit limit, is a significant factor in your credit score. Closing a credit card reduces your available credit, which can increase your credit utilization rate and negatively impact your score. Instead, keep the account open, use it sparingly, and pay it off in full each month.
Not Funding an Emergency Account
Neglecting to build an emergency fund is a major mistake. Without a financial cushion, any unexpected expense can throw you back into debt. The first step to building an emergency fund is to save $1,000. Once that goal is met, work toward a goal of saving at least three to six months’ worth of living expenses in a high-yield savings account. This fund will provide a safety net, allowing you to handle emergencies without relying on credit cards or loans.
Effective Debt Repayment Strategies
Avoiding mistakes when paying off debt is just one piece of the puzzle. Understanding the best methods to pay off debt is another significant piece of the puzzle to your payoff journey. Here are two of the most common and effective strategies:
Debt Snowball Method
The debt snowball method involves paying off your smallest debt first while making minimum payments on the rest. Once the smallest debt is paid off, you move on to the next smallest, and so on. This approach can provide quick wins and build momentum, keeping you motivated as you see you check off each debt.
Debt Avalanche Method
The debt avalanche method focuses on paying off debts with the highest interest rates first. By tackling high-interest debt, you save money on interest over time, which can lead to quicker debt elimination. This method might not provide the immediate psychological boost of the debt snowball, but it’s more cost-effective in the long run.
Refinance or Consolidate Debt
Another option to pay off debt is to refinance or consolidate your debt. This can lower your interest rates and simplify your payments. Look for options like balance transfer credit cards, personal loans, or home equity loans with lower interest rates. Just make sure to read the fine print and understand the terms before committing.
Set Aside Raises and Bonuses for Debt
Allocating raises, bonuses, and windfalls to debt repayment can make a significant dent in your balances and reduce the time it takes to become debt-free. It’s a powerful way to accelerate your debt repayment journey without affecting your everyday budget.
Boost Income and Reduce Expenditures
Boosting your income and cutting back on expenses are two sides of the same coin in your debt repayment strategy. Consider taking on a side hustle, freelance work, or part-time job to generate additional income. At the same time, look for ways to decrease money going out, such as negotiating bills, canceling unused subscriptions, and getting comfortable with a more frugal lifestyle.
Finally, accelerate your debt payment by paying more than the minimum monthly payments whenever possible. Throw any excess cash at your debt, no matter how small the amount. It may seem futile in the beginning, but the more you can do this, the faster you’ll dig your way out of debt.
by Jean Miller | Accounting News, Credit Card Debt, Debt, Financial goals, News, Retirement Savings
Saving for retirement should be a critical component of any financial plan, but it can be challenging if you’re also working toward debt repayment. The good news is that it’s possible to do both at the same time. The key is to be consistent and disciplined, and in time you’ll see the benefits of your efforts. Read on for strategies you can use to save for retirement while tackling debt.
Prioritize High-Interest Debt
High-interest debt, such as credit card debt, can quickly accumulate interest and make paying it off even more challenging. By addressing this debt first, you can reduce the amount of interest you’ll pay over time. The amount of money you’ll rescue from credit card interest can be applied to remaining debt payments. Once your highest interest debt is paid off, move onto the debt with the next highest interest rate. This is known as the avalanche method of paying off debt.
Build an Emergency Fund
Establishing an emergency fund will help you cover unexpected expenses without having to rely on credit cards and thereby adding to your debt. Aim to save at least three months’ worth of living expenses in your emergency fund before you start allocating more funds toward retirement savings.
Increase Your Cash Flow
Increasing your monthly cash flow will provide you with more cushion in your budget to save for your emergency fund, meet your debt repayment plan, and save for retirement. In order to increase your cash reserves, think about requesting a raise, making a career change, or taking on a side hustle.
Consider a Balanced Approach
A balanced approach involves allotting a portion of your income toward paying off debt and a portion toward saving for retirement. You’ll need to decide what percentage of your income should go toward each goal, but this approach can help make progress toward both debt repayment and retirement savings without neglecting one for the other.
Cut Expenses and Establish a Budget
If you’re struggling with debt and saving for retirement, it’s probably time to take a closer examination at your income and expenses. Where is your money going each month? What can you do to build better financial habits? Look for areas where you can cut back, such as dining out, shopping, and entertainment. Even small slashes in costs can have an impact on your finances. When you begin to pay attention to where your money is actually going, you can make informed decisions that will help you redirect more funds toward your savings goals.
Automate Savings
Automating savings is an ideal way to ensure that you’re on track to meet your retirement goals. If your employer offers a retirement plan that allows you to contribute a percentage of your paycheck toward retirement savings, be sure you’re taking advantage of it. You can also set up automatic transfers from your checking account to a retirement savings account like an IRA. Automating savings is a set-it-and-forget-it approach that provides consistent progress in saving for retirement.
by Jean Miller | Accounting News, Budget, News
With record high inflation and rising interest rates, an economic recession has been the subject of many conversations lately. Now with two consecutive quarters of a drop in GDP (gross domestic product)—the benchmark many economists use to gauge a recession—the possibility of a serious economic downturn isn’t just fodder for conversation anymore. It’s time to get serious about protecting your finances for a recession. Here’s how you can make sure you’re prepared.
Build Up Your Emergency Fund
It’s widely recommended to have enough savings to cover three to six months of living expenses. The specific amount will depend on your circumstances. For instance, in today’s uncertain economy, you might feel it worthwhile to aim for more than six months. It might seem daunting, but don’t undervalue the effectiveness of small contributions on a regular basis. You can also think about automating your savings contributions for a set-it-and-forget-it approach. Whichever way you go about it, consistent contributions to an emergency fund help to build positive saving habits that will carry into the future.
Pay Down Credit Card Debt
Focus on paying down any high-interest debt. Not only will this help you be more prepared should you get laid off during a recession, but credit card APRs are rising in response to the Federal Reserve’s rate hikes. Knocking out debt could free up critical breathing room in your budget that you could use to boost your emergency fund.
Identify Ways to Reduce Expenses
Start looking at all the ways you spend money, and identify ways you can scale back on discretionary spending (services or items that aren’t necessities—vacations, dining out, cable, spa treatments, etc.). Typically, the guidance is to spend no more than 30 percent of your net income on discretionary purchases. Think about creating a monthly budget in order to stick to this guideline and ensure you’re not overspending.
Stay Invested
It’s tempting when the market is as volatile as it’s been recently to think about cutting back on 401(k) contributions or selling stock investments. Keep in mind, however, that you’re investing for the long term. Stocks rise and fall all the time, and history has proven that bull markets (rising market conditions) last longer than bear markets (falling market conditions).
Rebalance Your Portfolio
While you want to stay invested for the duration of a recession, you might consider rebalancing your investments. Depending on your age, risk tolerance, and investment goals, it may make sense to shift more investments into growth funds, which could potentially experience greater gains when the market rebounds. Be sure to keep in mind that money needed in the short term should not be allocated to these funds as they are high risk.
by Daniel Kittell | Accounting News, Budget, Financial goals, News
The beginning of a new year has long been associated with starting from a blank slate and setting new goals for the year ahead. While 2020 taught us that plans and goals can quickly veer off course through no fault of our own, maybe 2021 can teach us the value of planning anyway—even in the face of the unknown. The financial tasks set forth below will help you pay down debts, save money, and better prepare you for whatever 2021 has in store.
File Your Tax Return ASAP
Not only does filing early help stave off refund-hungry thieves, but, generally, the sooner you file the sooner you get your refund. If you’re planning on owing the IRS, it’s better to know early and make arrangements for payment.
Given the unemployment plunge of 2020, keep in mind that unemployment checks are typically taxable, so if you received extended jobless benefits, be prepared to face a potentially greater-than-expected tax bill.
Check Your Withholding
You can use an online income tax calculator to estimate how much you’ll owe in federal taxes. Use your prepared 2020 tax return and your first pay stub from 2021 to check that you’re on track with tax withholding. If not, the calculator can help work out adjustments to your paycheck, and you can contact your employer if you need to make changes.
If you’re a business owner, you may need to make estimated quarterly payments. Tax professionals can help you work out amounts and details.
Get Organized
There’s no time like the present to organize your financial life. All those paper receipts and statements scattered on desktops or tossed into random drawers? Corral them into labeled file folders, baskets, or envelopes. If you want to shed the paper clutter all together, go digital with an accounting software like QuickBooks. A digital snapshot of your finances will help you gain a better grasp for where you are financially before setting new goals.
Commit to Saving in a Realistic Way
Instead of just thinking about saving, commit to establishing a habit of saving by striving for a concrete goal. Set the amount and time frame for your goal, then come up with actionable steps on how you’re going to reach it. For instance, set up an automatic draft from checking into savings, take on a side hustle, and/or comb through your budget to see where extra funds could be found. In order to set yourself up for success from the get-go, be sure to be realistic. A goal of $100,000 in five years might be realistic for some people, while beginning with a goal to save $50 a month will be more on par for others.
Create a Budget
First, look back over bank and credit card statements from last year to help identify spending patterns and areas of improvement. Next, set a budget. Think of your budget as a roadmap of how you’ll save and spend your money, starting with essentials, such as mortgage, food, utilities, and healthcare; then move to recreation and savings. Keep in mind that your budget has movable parts, meaning life circumstances can change, even month to month.
Start an Emergency Fund
An emergency fund is exactly what it sounds like—funds set aside for an unexpected cost like car or home repairs. At the minimum you should aim for $1,000 to be put into an emergency fund, and try to work your way to saving three months’ worth of income.
Spend Your Medical FSA Early Rather than Later
If you have an employer-provided flexible spending account, spending it as early in the year has possible has a few advantages, including:
- Acquiring medical expenses early in the year can help you meet insurance deductibles, so the rest of your health care can cost less.
- If you leave your job at any point during the year, you can spend the full amount you had planned to contribute—up to $2,750—and aren’t required to finish making the full FSA contribution.
- You mitigate the risk of not using the full amount by the deadline and potentially losing money.
Consult a Financial Advisor
Contrary to popular belief, you don’t have to be a millionaire to seek professional guidance from a financial advisor. Whether you’re looking for a one-time consultation or on-going advice, someone in the know can help set you on the path for long-term planning.
