Pay Your Taxes!
Last week I discussed some ideas on how you could spend your tax refund wisely. I mentioned I get a tax refund even though some financial experts consider this to be a bad financial move.
The consensus among those experts is, “tax refunds are for suckers!” Gee, sorry we’re not all suck-less like you, Señor Perfect – I’m assuming they are all men because ladies are nice and they don’t call other people suckers. A little pandering never hurt anybody.
Getting a tax refund means that we overpaid our taxes and the government is giving us our change back… after 12 months. It is like giving the government a loan without earning any interest on that loan.
Instead, we should adjust our withholdings so that we pay just enough taxes to come out even. This means more money on our paycheck, which could be used for something else rather than have the government hold on to it.
And those financial experts are absolutely right.
However, the fact that they are right doesn’t mean that those of us who prefer a refund are suckers. I’m not a financial expert, but I can see pros and cons to both: getting a tax refund and changing your withholdings to break even.
Enjoy Your Refund!
Tax season is here and to many of us that means one thing… Tax Refund!
I know there’s a debate whether we should be getting a refund or changing our withholdings to get more on our paychecks, but that’s a discussion for a different time. Let’s not rain on anyone’s parade and let us enjoy our refund for now.
We all enjoy getting a tax refund. It feels like we just won a scratch-off. One of the reasons we love tax refunds so much is because we like to spend money and this is extra money that we can spend freely… or so I thought.
I used to buy all kinds of stuff with my tax refund – I bought my motorcycle with my tax refund – and it felt good for a few weeks.
That good feeling slowly faded when all that money was gone and I still had debt and almost nothing saved.
If this sounds familiar, here are a few suggestions on what you can do with your tax refund that makes you feel good for a long time.
Pay Yourself First
Last week I read about Ronald Read, a Vermont gas station attendant and janitor who was able to stockpile an $8 million fortune. He passed away last year at the age of 92, but very few people knew he had that kind of money. That is until a couple of weeks ago when he left most of his estate to his local hospital and library.
Mr. Read left $4.8 million to the hospital and $1.2 million to the library.
According to reports, he was a very humble person who drove a second-hand Toyota Yaris and who never splurged except on a daily cup of coffee and an English muffin with peanut butter at the Brattleboro Memorial Hospital.
Can myRA help?
We know about traditional IRAs and Roth-IRAs, but what is a myRA? myRA is a new government-backed retirement account. Last year, President Obama asked the United States Department of Treasury to create a new form of retirement account that could be used as a “starter” account for low and middle-income Americans who don’t have access to employer-sponsored retirement plans.
The program is not really designed to be your only form of retirement account, but a stepping stone towards start saving for retirement.
How Does myRA Work?
myRA works in a similar fashion as a Roth-IRA in which all contributions are made after taxes, and withdrawals are tax free. Contributions are invested in a United States Treasury security, which means you never lose your contributions. The U.S. Treasury security earns interest at the same variable rate as the Thrift Savings Plan‘s (TSP) Government Securities Investment Fund.
This is a safe way to save for retirement, but it also means that the rewards are low. The average annual rate of return for this fund over the ten year period of December 2003 and December 2013 was 3.39%.
These returns are better than having your money in a savings account, but not better than investing in index mutual funds. However, you can lose your money investing in index mutual funds, which is not the case when investing in TSPs.
Be ready for the next Enron
The other day I was on Netflix scrolling though all the options and trying to figure out what to watch. I like watching series on Netflix because I know exactly what I’m going to watch and I don’t have to waste time scrolling through the options. But I had just finished watching the last season of Peaky Blinders – which is awesome btw – and I like to give movies and/or documentaries a chance before jumping into another series binge.
This quest lead me to a documentary about Enron titled, “Enron: The Smartest Guys in The Room.” I have to admit that even though I had heard about Enron – I knew it was a large company that went bankrupt in a matter of days because of some type of corruption – I didn’t know what really happened.
I should have known this because it was such a big scandal, but I just wasn’t interested in anything related to finances, money, or investing at that time. Now I blog about personal finances, money, and investing so I decided to be more informed about these things.
I recommend everybody to watch this documentary or read more about Enron’s collapse because it taught me a few things.
Ice cream makes everyone happy
Many of us think we’re invincible and that we are going to live forever. And even though we’re living longer – around 80 years, which is about 30 years longer than people living 100 years ago – that doesn’t necessarily mean we’re going to be healthy all our lives.
We all know having health insurance is a must, but many of us don’t know that health insurance doesn’t cover long-term care.
Long-term care is not medical care, but rather a variety of services which help meet both medical and non-medical needs of people who cannot care for themselves over a long period of time due to a chronic illness or disability. Most long-term care is not medical care, but rather assistance with basic personal needs of everyday life, such as bathing, dressing, etc.
NJCU in ‘da house!
With the cost of higher education in the U.S. rising tremendously each year – over 500% since 1985 – it is no wonder students and parents get into so much student loan debt. I mentioned that there are proposals being written to try and change that, but until those proposals are put in place, we have to deal with this price gouging if we want to get a college degree.
There are a few things we can do to avoid student loans, like 529 plans and working through college, but the fact remains that we still have to pay for tuition – unless we get a scholarship.
A college education is becoming more and more of a necessity. Study after study has shown that people with a bachelor’s degree earn on average 66% more than people with only a high school diploma.
That being said, there are definitely ways to lower the cost of a college education. You could go to a in-state public school for example. But even if you go to an out-of-state school, you could potentially save a lot of money by living off campus.
Just type, type, type.
October is setting out to be the month of setting goals.
I’m usually good at sticking to my goals if they can be completed in about two weeks. If these goals require me to make a longer commitment, I have a hard time completing them. But that’s only because I wasn’t sharing my goals with others, so when I stopped there was no one to hold me accountable.
This month, however, I decided to set a few goals for myself and tell the world so you can hold me accountable – Kate certainly will on one of them. I’ll explain below. The goals are not financial per se, but if I do them right they could both save me money and also make me money in the long run.
It’s Easier Than You Think
Many people hear the word “invest” and automatically move their hands over their pockets to make sure their money is still there. I was one of these people. I was so afraid to lose my money that I never even considered the potential earnings I could gain by investing.
Investing is risky and anybody that tells you otherwise is not telling you the truth. But you can minimize that risk by knowing how to invest and where to invest. Picking the right funds or stocks and having a solid asset allocation strategy doesn’t eliminate the risk that you will lose money, but it can minimize it to the point where you can sleep soundly at night.
Should You Buy or Rent?
I always hear from people, “You should get married, have kids, and buy a house”, or “A house is the best investment you’ll ever make”, or “Why are you renting? You’re only throwing money down the drain. It is always better to buy a house.” Is it?… Is it always better to buy a house than to rent?
The answer is simply, not always.
There are many factors that should be taken into consideration before buying a house and peer pressure is not one of them. Owning a home can be emotionally gratifying, but that does not mean that it always makes financial sense.
There are many pros and cons of buying vs. renting including flexibility, job security, down payments, utilities, freedom, control, maintenance, tax benefits, etc., but we’re only going to concentrate on the financial aspect of it. Does it make financial sense to buy or rent?