Amid all the festivities, it can be hard to take a moment to rest for the sake of your financial health. But we are here to help you. Eragoncred provides you with a brief financial checklist each month to help you live your best life. This month we’ll discuss inflation, tax refunds, and saving for college.
Here are the major funding changes for May.
1. Fight inflation with I-Bonds, now at 9.62%
Inflation was 8.5 percent, the highest level since December 1981, according to the Labor Department. That’s partly due to rising gasoline, housing and vehicle costs.
If skyrocketing prices for everyday items weren’t bad enough, inflation can also eat into your savings.
For example, right now the money in your savings account—perhaps at an absurd 0.06% interest rate—is rapidly depreciating in value.
The good news is that Uncle Sam offers you a safe way to protect your savings from inflation with Series I savings bonds (also known as inflation bonds or I-Bonds). And in May, I-Bonds looked more appealing than ever.
Today, the U.S. Treasury, which issues the bonds, announced a new annualized rate of 9.62 percent, the highest rate since the bond was issued in 1998. Again, this compares to the average rate on savings accounts of 0.06% (or even 0.5% if you have a high-yield savings account), and I-Bonds sounds simple enough.
To lock in the 9.62% rate for 6 months, you’ll need to buy before the last business day in October, as rates change every six months to account for inflation.
While there’s a lot to love about I-Bonds, keep in mind that there are some important considerations to weigh before buying:
I-Bonds have an annual purchase limit of $10,000 for electronic bonds and a maximum purchase limit of $5,000 for paper bonds.
While you can purchase electronic bonds at any time on TreasuryDirect.gov, paper bonds can only be purchased when filing a federal income tax return, and you must choose to use your tax refund funds to purchase them.
You cannot cash them within a year (except in emergencies). If you pay it off within five years, you will lose interest on the last three months.
2. Budget your tax refund wisely
This year’s tax rebate is especially important to people given decades of high inflation. Rising prices have made many people reluctant to buy commodities such as cars and homes. According to a recent report from Capital One, inflation has caused about one in four Americans to miss at least one bill payment.
The average refund so far this year is more than $3,000, and the agency has paid out nearly $89 million in refunds, according to the IRS.
For many, this windfall is just what they need to regain their financial footing. But when the money rolls in, you may want to avenge it after weeks, months, or even years of austerity.
While experts advise against treating refunds as in-game currency, they see the benefit of using some of that money to reward yourself—as long as it’s around 5% to 10% of total refunds.
If you’re one of the many who have fallen behind lately, one of the first things to do when a refund hits your account is to catch up on your bill. Experts then recommend one of the most important personal finance steps: Make sure you have an emergency savings fund (maybe in I-Bonds?) that can cover your expenses for three to six months. If this box is checked, pay off any credit card debt.
From there, it’s wise to put at least some of it into a 401(k) or an individual retirement account (IRA). Finally, you can use the remaining redemption funds for long-term goals – eg. Buy a house or raise money for a wedding — or use it to pay off other high-interest debt.
If you’re one of the many who have fallen behind lately, one of the first things to do when a refund hits your account is to catch up on your bill. Experts then recommend one of the most important personal finance steps: Make sure you have an emergency savings fund (maybe in I-Bonds?) that can cover your expenses for three to six months. If this box is checked, pay off any credit card debt.
From there, it’s wise to put at least some of it into a 401(k) or an individual retirement account (IRA). Finally, you can use the remaining redemption funds for long-term goals – eg. Buy a house or raise money for a wedding — or use it to pay off other high-interest debt.
3. Benefit from a 529 College Savings Plan
May 29th is National 529th—because May 29th—is a great time to celebrate education savings plans.
What exactly is a 529 plan? Simply put, it’s a tax-deferred way to save on qualifying education expenses, including tuition, books, room and board, and more. Nearly every state offers a 529, although specific plans and benefits vary from state to state.
In most states, you can deduct your contributions from your state income tax. Withdrawals are not subject to federal tax as long as they are used for eligible expenses.
While 529s are often referred to as “college savings plans,” you can also now use them to pay up to $10,000 a year for tuition related to public or private elementary and high schools, according to the IRS.
Also, anyone can open a 529 for anyone, including themselves. The beneficiary does not have to be a child.
At this time of year, many states offer special offers for opening 529 plans around the nation’s 529 days. For example, Utah residents can receive grants of up to $40 to open new accounts and set up recurring payments. Several other states offer similar incentives. Check with your state’s 529 provider for holiday deals.
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