Expecting an income tax refund this year? Use it wisely!
1. Pay down high interest lines of credit. With average annual interest rates for credit cards hovering around fifteen percent, paying off consumer debt before going on a shopping spree makes good sense.
2. Fund Your Retirement Account. Millions of working Americans have no money invested for their retirement. If you are one of them, seriously consider using your refund to make a contribution to an IRA.
3. Invest it. Many people get thousands back at the end of the year. If you invest one lump sum of $1,500 in the stock market, with a 10 percent return (the long-term market average), you could have $30,173.73 in 30 years!
4. Open an emergency account. How much money do you have set aside for emergencies? If the answer is “none,” open a savings account today. Three to six months’ worth of essential living expenses tucked away is a great goal.
5. Pay for repairs. Maintaining expensive possessions now will result in dollars saved tomorrow. Use the money to repair that leaky roof before it develops into a bigger problem; replace those dangerous bald tires with new, safe ones.
6. Start a personal endowment. Consider applying the money to your emotional, physical, intellectual, or career growth. Whether you use it for a gym membership or a cooking class, you’ll soon reap the reward of this investment.
7. Make an extra mortgage payment. Why? Doubling up on one mortgage payment now can save you months of mortgage payments later.
8. Donate to a charity. Giving back to the community is a wonderful way of supporting a cause that you are passionate about. Even better – in many cases at least a portion of your donation is tax-deductible.
9. Open a 529 College Savings Plan. A four-year college education can cost upwards of $100,000. Save for your child’s college career with a 529 plan. It works much like a Roth IRA, and withdrawals are completely tax-free when used for higher education purposes.
10. Plan a vacation. If you are in a healthy financial position, and can afford a bit of luxury, do something you’ve been dreaming of! Money is to be enjoyed as well as earned, saved, and invested. Go ahead. Book that cruise.
Certainly there are many savvy ways to spend a tax refund, but keep in mind that it’s usually best to come out even. If you’ve been getting money back each year, consider changing your withholding exemptions so less tax is withheld from each paycheck. While a refund may feel like a gift from Uncle Sam, it’s not – it’s money that you have overpaid on your income taxes.
Source: BALANCE Financial Fitness
Making money is tough, but simple. Get a job, do the job, get paid, now you have money. Keeping money is both tough and complicated. i[x] is here to help simplify things for you with this basic finance glossary.
Interest Rates: An interest rate is the amount (measured in percentage) charged to a principle. Generally, interest rates are calculated annually. So, if you borrow $1,000 (the principle) at a 5% interest rate for one year, at the end of the payment period you would have paid back just over $1,027. You can also earn interest on your money by investing it in certain types of accounts. For example, if your financial institution offered you 3% interest returns on money you keep in a savings account, and you kept $1,000 in that account for a year, you would have $1,030 after 12 months.
Checking Account: Given that the use of checks has declined in recent years, this term can be a bit of a misnomer. A checking account is your bank account that money moves in and out of with ease. This is where you keep the amount of funds necessary to pay your bills, buy groceries, and cover any other regular expenses.
Savings Account: Unlike your checking account, you should not be withdrawing money from your savings account regularly. Rather, you should be depositing excess funds so your account can grow and accrue more interest. The longer more money sits in your savings, the more money you earn in interest. While the interest rate for a savings account is not very high, it does offer you the opportunity to withdraw without penalty in case you have a surprise expense (i.e. car repair, appliance replacement, etc.)
Certificate of Deposit (CD): A CD functions much like a savings account, but with two major differences. First, you cannot withdraw funds from it without incurring a penalty. Second, the interest rate of a CD is significantly higher than that of a savings account. So if you’re looking for a safe investment and you have enough savings that you can set aside some funds for at least a year or so, a CD is a great way to earn some extra cash by just letting your money sit still.
Money Market Account: A Money Market Account (or MMDA) is similar to a CD in that it is difficult to move your funds without penalty, but it does have a high interest rate. Usually, there is a limit to the amount of transactions you can make with the account’s funds. Additionally, even if you make fewer transactions than your limit, you must maintain a relatively high level of balance in order to avoid penalty. Once again, if you have a large sum saved up that you can’t foresee needing, an MMDA is a safe investment that can yield impressive returns.
Loan: A loan, from possibly a credit union, the government, or a private lender, is a large sum of money given to a borrower up front. The borrower repays the lender as he/she acquires the funds, usually on a monthly basis. The lender makes money by charging interest on the initial amount. If you borrow $1,000 at 10% interest, you will end up paying your lender a total of $1,055. If your repayment timetable is 12 months, you would pay just over $88 per month. Most loans include additional charges for late payments, as well as collateral, or something you agree to forfeit if you cannot repay your loan. This could be your wages, car or home. When looking to take out a loan, it’s important to keep in mind what interest rate you’re borrowing at, what repayment plan you’re agreeing to, and what collateral you are offering up in exchange.
Stocks: Buying “stock” in a corporation means you are purchasing ownership of a company’s assets and earnings. Subsequently, if you buy stock in a company that increases its assets/earnings, your stock’s worth also increases. If you then sell the stock, you’ll have made a profit. Conversely, if the company begins to lose money, your stock loses its worth as well. If you sell your stock for less than what you paid for it, you’ve lost money. This is why investing in the stock market can be quite risky. However, the possible gains are far greater than any interest rate, which is why so many choose to take the risk in hopes of dramatically increasing their savings’ worth. Bonds: Like CDs or MMDAs, U.S. Savings Bonds are investments that have a guaranteed interest rate over a given period of time. While their return rates are not as high as successful stock investments, bonds are endorsed by the federal government, and are therefore incredibly low-risk.
Mutual Funds: Mutual Funds are a way for an investor with a small amount of capital (or starting money) to take advantage of diverse investment opportunities. For instance, if you only had $100 dollars to invest, but you wanted to invest 25% in stocks, and 75% in bonds, you wouldn’t have enough money to do either effectively. Many stocks cost well over $25 for one share, and no bond offers returns on a principle of only $75. But mutual funds pool lots of money from many small investors and then divide the money up between stocks, bonds, etc. So you can still put some of your money toward stocks and some towards bonds, even though you really don’t have enough money to do either on your own.
Inflation: Inflation occurs when a country prints more money without increasing its assets. So if America had 1,000 assets and 1,000 $1 bills in 2012, each dollar could buy one asset. But if America still had 1,000 assets in 2013, but printed 2,000 $1 bills, you would need $2 to buy one asset. This is an extreme, fantastical example, but if it were true, the inflation rate of 2012-2013 would be 100%. Inflation rates are important to understand and be aware of because they can affect the worth of your money even if you’re saving it. If you saved $1,000 in 2012 and put it in an account that netted a 3% interest rate of return, you would end up with $1,030 in 2013. Sounds good right? But if the inflation rate for 2012-2013 was 4%, you actually lost money in that account last year. This is because your $1,000 from 2012 is worth $1,040 in 2013 (1,000+ 4%(1,000)=1,040), but now, in 2013, you only have $1,030. You essentially lost $10 with that investment.
Making money with investments is a challenge. But with the help of a professional financial advisor and your understanding of these basic concepts, it should be a little easier.
Retirement: a word that sounds far far away, like the Star Wars Galaxy or Super Bowl LXVI. However, like the end of the year, it’s approaching faster than most care to imagine, and it’s never too soon to develop smart saving habits. Failure to do so can result in joining the 37% of American workers who have not saved for retirement, the 27% of retirees who have not paid off their mortgages, or the 14% of 64 year-olds who face retirement with negative net worth.
There are a number of savings tools available that are superior alternatives to stuffing cash under a mattress. The most basic of these is the savings account, which allows a credit union member to earn interest on the balance in the account. A savings account is different from a checking account in that it is more difficult to withdraw money, but savings accounts typically have higher interest rates that can help increase your balance. However, funds in a savings account are conditionally accessible, causing them to be deemed a “liquid,” or cash, asset.
A certificate of deposit (CD) is similar to a savings account, but earns a greater interest rate in exchange for a large, fixed balance. So while a CD generates more money than a savings account, its funds cannot be accessed without penalty, therefore it is not a “liquid” asset. So before opening a CD, it is important to make sure that there is no foreseeable need to access the money deposited before the maturation date, or the date when the bank agrees the funds can be either removed from or increased in the account.
A money market account (MMA) is almost a cross between a CD and a savings account, in that it yields a higher interest rate in exchange for a large minimum balance (like a CD), but is still relatively accessible, as it has no minimum maturation date (like a savings account). Again, in order to reap the full benefits of an MMA, it is critical to maintain the minimum balance, so make sure there is no potential for a withdrawal prior to creating the account.
Having discussed the “interest” rates of these various accounts, it is important to note the two kinds of interest rate: fixed and compounding. A fixed interest rate, say 5%, of $1000, will generate $50 in interest. Conversely, a compounding interest rate will generate 5% of the original account balance plus what the interest rate generates. The frequency at which the interest rate compounds varies depending on the terms of the account. For example, if you were to put $1000 into an account that compounds quarterly (four times a year) at 5% interest, you would earn $50 in the first three months, $52.50 (5% of $1050) over the next three months, or $57.62 (5% of $1152.50) after the subsequent quarter, etc. Frequently compounding interest rates are a great way to turn a large principle into a large profit for retirement or other long-term financial goals.
While interest rates can be extremely helpful in the aforementioned means of saving money, they can be substantially more harmful when it comes to borrowing money. The most common form of potentially risky borrowing is credit cards. Credit cards offer high credit limits with low minimum payments, which can tempt someone to spend more than they should. Combined with high interest rates, this is a recipe for accruing large amounts of debt. For example, if a customer charged a $1000 computer to a credit card and paid the monthly minimum of $30.00, but suffered a 18% interest rate on the remaining balance, it would take that customer nearly four years (47 months) to payoff the debt, and the total amount paid to the credit card company would be $1396.00, nearly 40% more than the computer’s initial worth. And that’s assuming no additional charges over those four years!
This isn’t to say credit cards should never be utilized. Building a good credit rating is a major aspect of achieving financial prosperity. Many of the best auto and mortgage rates are only available to consumers with top tier credit scores (740+). An easy way to begin building respectable credit is to charge a small amount of spending money or a cheap, fixed commodity (i.e. gasoline) and pay off the balance at the end of each month. The more on-time payments made, the higher the credit score.
Another easy way to stay out of debt and increase savings is to create a written budget. The most important (and generally the easiest) step of budgeting is to determine income. In addition to wages or salary, this could include holiday/family gifts and tax returns. The trickier and more tedious part of the process is determining expenses. A quick distinction when calculating costs is needs versus wants. Within needs is another important determining factor: fixed versus variable expenses. Fixed can include things like rent, car payments, and insurance policies. Variable expenses are generally expenses that, through fiscal practices, can be kept to a minimum: food (eating in), utilities (efficient energy/water use), clothing (sales, infrequent shopping). Other costs you need to account for include car repairs, medical bills, additional insurance policies (renter’s, dental, health), etc.
Once the various “needs” have been accounted for, you can use any leftover funds to divide between “wants” and additional savings. It is recommended that at least 10-15% of monthly income should be designated as savings, however; in case of that “emergency need” cost, it is also suggested that you have three to six months’ salary already be saved up, so if such an amount is not already set aside, perhaps more than 15% of the monthly income should go towards savings. Whatever is leftover can then be put towards monthly “want” costs: cable, entertainment, road trips, etc.
If smart saving habits, responsible borrowing practices, and precise monthly budgeting can be established early, the chances of ending up a college graduate with insurmountable debt, a parent unable to afford adequate childcare, or a senior citizen looking at retirement with insufficient funds is greatly diminished. With these and other sound fiscal approaches, you’ll be watching Super Bowl LXVI in style.
So I wanted to let everyone know some exciting news from Georgia’s Own. GOCU and i[x] are proud to announce your newest benefit of membership: BALANCE Financial Fitness Program.
BALANCE is a free and confidential money management tool to help you stay on the path to financial freedom. Whether you’re interested in developing an easy spending and savings plan, getting out of debt, taking a look at your credit report, or buying a home, i[x] and BALANCE can help. They have chapters for you to look over and even provide a quiz to allow you to test your knowledge of the subject.
BALANCE also has counselors available throughout the day to answer any questions you might have. To use the program, visit BALANCEpro.net or call 888-456-2227 to begin taking advantage of this FREE resource!
Should I invest? How do I invest? Who do I invest with? These are all tough and scary terms and questions! Before you decide if investing is or isn’t for you, let’s learn a few basic elements of the stock market.
Think of buying and selling shares as a trip to the grocery store. Instead of buying directly from the shelf, someone else, an authorised broker, buys and sells stock for you. The broker buys a share for you- a part ownership of a publicly-listed company. The company usually pays out some of its profits, known as a dividend. Prices for stock are dictated by supply and demand. The main drivers of the share price are the outlook for profits and the risk associated with the investment.
So if you have heard talk of stocks and shares, but have never taken the time to study up on the stock market or you think it is a foreign language, these are the very basics to get you on the road to buying and selling. To get a more detailed explanation of investing, try searching on google. There are tons of articles that will put you on the right track!
Like a wardrobe, figuring out what financial portfolio looks best for you takes time, money and experience. Financial portfolios are also unique, in that not every outfit works for every body. One thing is for sure, just like a great outfit, a great financial portfolio can really pay off.
A few guidelines:
1. Set aside some money. You don’t want to put all your eggs in one basket. Investing isn’t risk-free, so it’s good have a stash to use for this particular financial vehicle (not the money you have to pay rent with next month).
2. Research. Know the difference between different investment vehicles, i.e. savings certificates, IRAs, stocks, bonds, money market accounts, etc. Some are higher risk than others, so you want to make sure you determine the best place to invest your money depending on the risk factor you’re willing to accept.
3. Get Started. There are primarily three ways people begin investing: through a full-service broker, a discount broker or through a financial institution. Here at Georgia’s Own Credit Union, we offer investment services for our members. For more information on that last option, contact Thad Guyton at 1-800-533-2062.
The million dollar question is why you, why now? Why worry about money and saving and finances? You’re young, you’ve got your whole life ahead of you and plenty of time later to save and start investing in your financial future, right? Wrong.
The truth is, the sooner you start investing and saving, the better your accounts will look down the road. And let’s face it, it wouldn’t hurt to learn a little about APRs, loans, lines of credit and things like that because whether you are 16 or 26, soon enough you’ll be buying a car or a house or getting a credit card or looking to rent.
So…why you, why now? Because your financial future depends on it. The bottom line is that when it comes to your money, ignorance is not bliss…it’s financial suicide.