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5 Things You Shouldn’t Do With Your Tax Refund

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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Tax season is upon us, meaning a refund might be headed your way. No doubt you’re excited by the idea of a cash influx, but this isn’t free money. “Most people think their tax return is a gift from the government,” said Paula A. Norby Krueger, owner of Norby Krueger Tax & Bookkeeping Services in Wahpeton, N.D.

Of course, this isn’t true—tax refunds are granted because too much money was withheld from your paycheck, meaning you paid more in taxes than you actually owed. Getting some of this money back is a unique opportunity to further some of your financial goals. Here’s a look at good and bad ways to spend your refund check.

5 Things You Shouldn’t Do With Your Tax Refund

1. Make big purchases that require payments. Norby Krueger said it’s unwise to purchase anything with a payment because you’re just incurring new debt. The money from your tax refund might cover the first few payments, and you’ll be on the hook for the rest.

This category is broad, but could include furniture, electronics or even installing a swimming pool in your backyard. One of the most common offenders? Cars. According to Kelly Blue Book, the estimated average of a new car is $36,978, so while your tax refund may make a nice dent, it would be a mistake to ignore your future payments.

2. Splurge. “You’re starting to see retailers push promotions with online tax preparation companies that allow consumers to roll their refunds into gift cards,” said Chris Jackson, CFP and founder of Lionshare Partners, a Los Angeles-based, fee-only financial planning firm.

It can be tempting to spend your tax refund on an expensive handbag or a big-screen TV, but think twice about that. The government is essentially returning money you earned, so don’t waste your hard-earned cash.

3. Take a carryforward. A tax carryforward allows you to save your tax refund to pay any taxes you’d owe the following year. If you pay quarterly taxes, this may be a good idea. But for most Americans, it’s not the best use of the funds.

“Unless you are incapable of not spending your money, do not carryforward the tax refund into the new year,” Jackson said. “That is an interest-free loan to the government.”

“Instead, you should pay down debt, max out retirement plans or increase emergency funds,” he said.

4. Nothing. Allowing your tax refund to sit in your checking account might seem like a responsible move, but it’s actually unwise. If it’s just sitting there, you’ll likely be tempted to use it.

Even if you have seriously impressive self-restraint, Jackson said that cash is an asset class that can and should be managed. Take advantage of high-interest savings accounts or consider a short-term bond ladder — i.e., a bond portfolio composed of different maturities.

5. Make hasty investment decisions.“Investors have to first identify what their goals are in order to select appropriate investments that make up their overall asset allocation,” said Levi Sanchez, CFP and founder of Millennial Wealth, a Seattle-based fee-only virtual financial planning firm.

Whatever you do, don’t just get caught up in investment hype, especially if you’re just entering the market. Take the time to learn about strategies that are the best for your financial situation, and consider reaching out to a financial advisor for guidance. Sanchez advises investors who don’t want to actively manage their portfolios on a weekly or monthly basis to consider passive investment vehicles, like index funds and ETFs,  i.e., electronically traded funds.

10 Things You Should Do With Your Tax Refund

“If you receive a nice windfall of cash from your tax return, consider how it can impact your financial situation if you put it to good use,” Sanchez said. “Whether that’s paying down high-interest debt, saving for a home down payment or putting [it] toward long-term investments.”

Improve your financial situation by using your tax return for one of these good causes.

1. Save for retirement. If you’re not saving as much for retirement as you’d like — or aren’t at all — take this opportunity to pad your account. In an ideal world, you’ll have 25x your annual expenses in your retirement account when you retire.

“If you are maxing out your tax-deferred vehicles — 401k and HSA — then use those tax savings to invest in a Roth IRA,” Jackson said.

2. Contribute to a 529 plan. “A lot of consumers are ignoring their retirement in lieu of college funding when they can do both,” Jackson said. “They can fund their 401k and use the tax refund to fund a 529 plan.”

If you’re not familiar with 529 plans, these tax-advantaged educational savings tools allow you to put money aside for educational expenses. Two types of plans are available — prepaid tuition plans and education savings plans — and all fifty states and the District of Columbia sponsor at least one of these options, according to the U.S. Securities and Exchange Commission.

3. Start an emergency fund. According to a report from the Federal Reserve, 40% of Americans do not have enough cash on hand to cover a $400 unexpected expense. If you’re lacking an emergency fund, or if it isn’t equipped to handle six to 24 months of expenses, Jackson recommended using your tax refund to pad your savings. Being prepared for unexpected costs will bring you peace of mind and can keep you from going into debt.

4. Invest in yourself. “Your ability to convert human capital into financial capital is the key to economic freedom,” Jackson said.

He advised boosting your human capital by improving or acquiring new skill sets. For example, you might take an online course that will give you the credentials required for a promotion at work.

5. Pay off credit card debt. In 2018, Americans paid $110 billion in credit card interest and fees, according to a MagnifyMoney analysis of FDIC data through September 2018. If you’re in debt, this is an opportunity to pay it down or maybe even eliminate it.

And once you do, stick with it. “Make a commitment to yourself not to go back to using the credit card,” Norby Krueger said. “Get out of debt and stay there.”

6. Make home improvements. Fixing up your home in a manner that adds equity can be a sound investment, Norby Krueger advised. A few projects that add value to a home include updating the kitchen, finishing the basement and making the house more energy efficient, according to Consumer Reports.

7. Save for a down payment on a home. As recommended by Sanchez, putting your tax return toward a down payment on a home can be a wise investment in your future. If you’re buying your first home, your down payment can be as low as 3.5% of the purchase price with an FHA loan. Most lenders offer conventional loans starting at 5% of the purchase price, but private mortgage insurance is required when you put down less than 20%.

8. Opt for experiences over things. If you want to use your tax refund for something fun and your finances are in good shape (well-funded emergency fund, no credit card debt, on track for retirement) consider traveling instead of shopping. Experiences create memories that last a lifetime, while most objects have a shelf life. Just make sure your vacation doesn’t exceed your budget.

9. Make charitable donations. If you truly don’t need the money, consider donating all or part of your tax refund to a charitable cause close to your heart. As an added bonus, if your contribution meets IRS requirements and you can itemize your taxes, you might even be able to write it off as a deduction.

10. Make an extra mortgage payment. Own your home outright faster than planned by using your tax refund for an additional mortgage payment. Make sure the second payment is put toward your loan principal.

Receiving a check from the IRS is exciting, but don’t forget this is money you worked hard for. Wasting money never feels good, so think long and hard about the best possible use for your tax refund.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Laura Woods
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Laura Woods is a writer at MagnifyMoney. You can email Laura here

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How to Save on Back-to-School Shopping

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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Parents often revel in the calm and quiet that comes when kids head back to school, but they aren’t likely to enjoy the excess spending that also accompanies the back-to-school season. According to the National Retail Federation, parents will set a record in 2019, spending an average of $696.70 per household on children in elementary school through high school.

 

“It was interesting to see the across-the-board increases in spending levels,” said Mark Mathews, vice president for research development and industry analysis with the NRF. “Elevated levels of consumer sentiment, healthy household balance sheets, low inflation and recent wage gains all seem to be contributing to a confident consumer who is willing to spend money on back-to-school supplies.”

If you’re planning a trip to the store before classes start, there are a few ways to curb the spending and save some bucks.

Plan ahead

No parent should set foot out the door for back-to-school shopping without first taking stock of what they already have. Plenty of old supplies from previous years might still be usable, especially arts and crafts items like crayons, pencils and pens, as well as more expensive things like backpacks, lunch boxes and calculators.

Crossing a few items off your list is a good first step when it comes to saving, but learning how to budget is also important. It’s tempting to run down the back-to-school aisle and grab every colorful notebook and snazzy pencil case in sight, but it doesn’t make a lot of financial sense. Create a realistic budget based on the items you actually need, and try your best to stick to it. If possible, do most of your shopping online, since it’s easier to keep a running tally of how much you’re spending as you shop.

Be smart about sales

Although you’re bound to run into many back-to-school sales this time of year, you don’t need to buy 12 notebooks just because they’re cheaper right now. In fact, you shouldn’t assume the sales price is the best price at all, said consumer savings expert Andrea Woroch. Instead, always comparison shop.

“Run a quick Google search online or on your phone to see if another store is selling the same or a similar item for less,” she said. “Most big box stores will price match, so you won’t even have to drive to another store to get the better deal.” For example, Target,Staples and Walmart all have price matching policies.

Clip coupons and shop discount stores

Coupons have definitely made a digital comeback, with countless apps and websites dedicated to listing all your options in one place. “Spending a few minutes looking for coupons can help you get a better discount,” Woroch said. “Use apps like CouponSherpa, for instance. Or, use the Honey browser tool, which automatically searches and applies relevant coupons to your online order.”

Many stores also offer discounts to valued customers who sign up for their rewards program, like Walgreens and CVS, while craft stores like Michaels regularly offer discounts. Don’t knock purchasing basics like paper and writing supplies from the Dollar Tree, either — you might be surprised by what you find, and those types of items are often the same quality wherever you buy them.

Tax advantage of tax-free holidays

On select dates throughout the year, different states offer state sales tax holidays, or days where you can purchase items without having to pay sales tax on them. You can find a full list of the 2019 state sales tax holidays here, but some upcoming ones include:

  • August 18-24: Connecticut, clothing and footwear
  • August 17-18: Massachusetts, specific items costing less than $2,500 per item

Split bulk purchases

You can usually save money by buying certain items — like construction paper, pens, pencils and folders — in bulk, but you can save even more by splitting those bulk items with other families. Not only is this a great way to share savings, Woroch said, but you can earn rewards faster by charging everything on your card and then having the families pay you back.

Redeem your rewards

If you have a cash back credit card, now’s the time to use it. “Most credit cards give you the best redemption value when you opt for statement credit or have the cash rewards deposited into your bank,” Woroch said. “You can set this money aside for back-to-school shopping.”

Alternatively, Woroch suggested checking to see if your particular card allows you to redeem points for gift cards to retailers where you plan to shop.

Use discounted gift cards

Besides redeeming credit card points for retailer gift cards, you can also scour the web for cheap gift cards online. Planning a trip to Target? Scan websites like Raise,Cardpool and CardCash first. These sites buy and sell unused gift cards at a discount, meaning you can save on purchases you were planning to make anyway.

Consider having your kids contribute

Depending on your child’s age, back-to-school shopping might be the perfect time to start having them contribute to their own goods, especially if they earn an allowance or have a job. Talking to your kids about money at a young age — whether about budgeting, saving or spending — will help them develop solid money habits that will pay off in the future.

Parents already seem to be catching on to this idea. “It was surprising to see how much of their own money kids are contributing towards the back-to-school bills,” Mathews said. “Teens and pre-teens will be spending $63 of their own money, which works out to $1.5 billion overall. This is significantly higher than the levels we saw a decade ago.”

Although the news about increased spending on back-to-school supplies may be alarming, these days there are more ways than ever to save. A little ingenuity, resourcefulness and research can go a long way.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Cheryl Lock
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Cheryl Lock is a writer at MagnifyMoney. You can email Cheryl at [email protected]

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Survey: Most Americans Have Raided Their Retirement Savings

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Successfully saving for retirement requires dedication and self-restraint, but more than half the country admits to robbing their future selves in order to satisfy today’s spending needs, according to a new survey by MagnifyMoney. While the economic pressures bearing down on workers today make their actions understandable, the hard truth is that many Americans are turning an already-difficult task that much harder by tapping into their retirement savings early.

Key Findings

  • Approximately 52% of respondents admit to tapping their retirement savings account early for a purpose other than retiring: 23% have done so to pay off debt, 17% for a down payment on a home, 11% for college tuition, 9% for medical expenses, and 3% for some other reason.
  • About 29% say there are some scenarios where it is a good idea to withdraw money early from a retirement savings account.
  • Around 60% of respondents do not know exactly how much they have saved for retirement. Just 40% know the exact amount, while 45% have a rough idea, and 15% have no clue.
  • Almost 25% are unhappy with their retirement savings. 47% are happy with the amount saved, and about 28% are neither happy nor unhappy.
  • Finally, 27% have never thought about how much money they’ll need in retirement.

Why are Americans tapping their retirement savings early?

The two main reasons respondents cited for withdrawing money from their retirement savings are as American as apple pie: home ownership and personal debt. According to the survey, 23% of those making an early withdrawal did so to help pay down non-medical debt, while 17% needed the money for a down payment on a home.

Although the housing market appears to be cooling off compared to just a few years ago, a down payment on a home still requires a significant chunk of change — experts recommend a down payment equaling 20% of the total mortgage to optimize your mortgage payments.

Personal debt, from credit cards to student loans, remains a fixture of everyday economic reality for millions of Americans. In other words, the stressors that cause workers to raid their retirement funds don’t look like they will decrease appreciably in the foreseeable future.

Which Americans are withdrawing money the most?

Breaking down the demographics, older savers are less likely to withdraw money from their retirement fund than younger savers. 54% of millennial savers say they’ve taken an early withdrawal from a retirement savings account, compared with 50% of Gen Xers and 43% of baby boomers. This stands to reason considering that many millennials have now entered the stage of life where they are getting mortgages, starting families and taking on bigger financial obligations while also being decades away from the traditional retirement age. Millennials are also more likely to say that raiding your retirement fund is justified under certain circumstances, as seen in the chart below:

Just one of many bad retirement savings habits

Tapping into retirement funds — whether an employer-sponsored 401(k) or a traditional IRA — before the appropriate age almost always comes with a financial penalty in the form of additional taxes and fees. What is more, you’re diminishing the principle that fuels the compound interest you need to meet your retirement savings goals.

Unfortunately the survey reveals early withdrawals are just one of the many bad habits Americans engage in when it comes to retirement savings. This list of less-than-ideal practices includes:

  • 35% of Americans are not currently saving for retirement. Of those who are, 37% started saving at age 30 or above, and 12% started saving when they were older than 40.
  • 60% of Americans do not know exactly how much they have saved for retirement. Just 40% know the exact amount, while 45% have a rough idea and 15% have no clue.
  • Nearly 1 in 5 Americans don’t contribute enough to their employer-sponsored retirement account to get the maximum company match. Maximizing a company match is one of  your best ways to maximize your retirement savings. Among those with an employer-sponsored retirement savings plan, just 17% of respondents contribute 10% or more of their take-home pay. Almost 5% contribute nothing at all, and nearly 6% are unclear about how much they contribute.

  • Approximately 42% of respondents have made the mistake of withdrawing their entire balance from an employer-sponsored retirement plan when changing jobs without rolling it over – and nearly 15% have done so more than once. A little more than 47% of millennials admit to this faux pas.

The most damning finding of all is that 27% of those surveyed have never thought about how much they’ll need in retirement. And while “ignorance is bliss” may hold true when it comes to some things in life, this expression should not apply to your retirement plans.

Methodology

MagnifyMoney by LendingTree commissioned Qualtrics to conduct an online survey of 1,029 Americans, with the sample base proportioned to represent the general population. The survey was fielded June 24-27, 2019.

Generations are defined as:

  • Millennials are ages 22-37
  • Generation Xers are ages 38-53
  • Baby boomers are ages 54-72

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

James Ellis
James Ellis |

James Ellis is a writer at MagnifyMoney. You can email James here