Smart spending
Expecting a tax refund from Uncle Sam this year? According to the IRS, the average 2019 tax refund for those who received one was $2,833—a significant chunk of change.
If you do receive a refund this year, consider using it to improve your financial situation. Here are six great suggestions.
1. Pay off debt
Credit-card loans crossed the $1 trillion mark this year, reaching $1.08 trillion in the third quarter of 2019 (debt.org). Paying off outstanding bills has many benefits—it improves your credit score, reduces stress, and increases your financial security. Focus on paying off credit cards and other high interest debt.
Use our credit card pay-off calculator to see what it will take to pay off your balance. Visit our financial calculators page for this and many other helpful financial calculators.
2. Add to your retirement savings
Add to your current retirement savings plan or open an IRA. You may make contributions before tax (Traditional), after tax (Roth), or some combination of the two up to the IRA limit.
Unsure of which one to choose? Use our IRA comparison tool to determine what may be right for you.
3. Buy more coverage
Umbrella insurance, which provides liability coverage above the limits in your auto and home insurance policies, is often overlooked as an important part of your financial security. You can purchase $1 million or more of additional liability coverage very economically.
Long-term care insurance also helps protect your assets and may be worth a look. It has been called “the greatest uninsured financial risk today.” This is because the majority of costs for extended care services needed during recuperation from strokes, accidents, and illnesses are not covered by your health insurance or Medicare. The chances of needing long-term care usually increase as you age, but long-term care may be needed at any age.
4. Save, save, save
Start an Edvest or other 529 college savings plan for your kids or grandkids. Build up an emergency fund. Start a money market account with a higher interest rate to save for a vacation, a new car, or home remodel. Whatever your goal, you’ll feel better knowing you have a head start on your savings. Our savings calculator can help you understand what it will take to reach your goal.
5. Share the wealth
Consider giving some or all of your refund to your favorite charity. Often monetary donations to charitable organizations are tax deductible, and you’ll feel good knowing your money will go toward helping others in need. WEA Member Benefits Foundation supports public schools and is one way you can give back.
6. Open a Personal Investment Account
A Member Benefits Personal Investment Account offers a way to invest your money outside of a retirement account. It is an alternative to cash accounts such as savings, checking or certificates of deposit and can be registered in your name or opened jointly with anyone. There may also be tax advantages to these types of investments.
Finally, if you received a sizeable tax refund this year, you may want to consider adjusting your income tax withholding. Doing this will reduce your annual refund, but you will be taking home more money each paycheck instead of letting Uncle Sam hold on to it (interest free).
Freshen up your financial knowledge
Build a budget
A budget sets the groundwork for sprucing up your finances. Think of it as a road map for managing your money or a tool that helps you make smarter decisions as you track your monthly expenses.
Not only does it help ensure you’ll have money for the things you need and that are important to you, but having a spending plan can also help keep you out of debt (or work your way out of it).
In simple terms, a budget compares what’s coming in with what’s going out. And it’s not just for those who need to closely monitor their money—even people with large paychecks and lots of money in the bank can benefit too.
Why have a budget?
- It helps maximize your savings and investments, allowing you to make sure your hard-earned money is being used to its best purpose.
- You’ll be better prepared in case of an emergency such as a job loss, major health crisis, or extensive home repair.
- You can build in a plan to pay off debt.
- It gives you some room to splurge. That may sound counterintuitive, but having a budget can “give you permission” to buy those concert tickets or celebrate at that nice restaurant by tracking your expenses and building in an amount you choose for the fun spending.
- It can help you clarify your short- and long-term savings goals. Long-term financial goals are often too easy to put off for later. For example, depending on your age, saving for retirement may seem a long way off. However, a budget can help you discover a way to fit it in, even if it’s just a small amount at first. Starting earlier than later gives you a huge advantage by utilizing the power of compound earnings (see next page).
- You’ll be less likely to spend money you don’t have. Before credit cards, people knew easily whether or not they were living within their means. But in 2017, the average American had a credit card balance of $6,375, up 3% from the year before (Experian). Those who don’t pay attention and overuse their credit cards may not realize they’re overspending until they’re weighed down with debt.
Budgets are not just about saving and spending. One important aspect of your financial health is protecting yourself from loss with appropriate insurance coverage. We can help you assess what you need.
Budgeting options
You don’t need to be a math whiz to create and maintain a budget. Spreadsheets and online software can take care of the calculations for you. Do a search for software online, create your own spreadsheet, or go old school with a ledger—whatever works for you.
Stick with it
The point of a budget is to give you more financial freedom, not less. If you find yourself having a hard time following a budget, follow these tips:
- Keep your future top of mind and remember how your budget will help you get where you want to be.
- Make it more difficult to impulse buy. Take yourself off of retailer e-mail lists and remove your stored payment information online so you can’t just click to order.
- Find a like-minded friend or online budgeting forum to help keep you accountable.
- Use cash more often—swiping a card is less “real.”
- Reward yourself once in a while with something you enjoy.
- Educate yourself by exploring the financial resources on our website or attending one of our free financial seminars.
Creating a budget is not a “one and done” project. Once you’ve built your budget, review it regularly and make adjustments because life changes…just like the seasons.
Save for your future
Saving for retirement should be at the top of your list of long-term budget goals.
While Wisconsin public school employees are fortunate to have the Wisconsin Retirement System (WRS), WRS is not enough. And don’t count on Social Security to fill in the gap. On average, Social Security payments make up only about 14%–28% of retirement income for those who receive WRS. To build a secure retirement, you need three things: WRS, Social Security, and your personal savings.
Personal savings options
You can save with a 403(b) through your district, and if eligible, you can also open an Individual Retirement Account (IRA). With an IRA, and sometimes with the 403(b), you can choose between a pretax or Roth account (see below).
If your employer (or your spouse’s employer) offers a match in your 403(b) plan, take it. It’s free money. Added bonus: The match effectively increases your income without increasing your tax bill, since you pay no taxes on matching contributions until you withdraw them in retirement.
Most Wisconsin public school employees can expect their retirement income to come from:
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Wisconsin Retirement System
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Social Security
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Personal savings
Start sooner than later
The earlier you start, the more you can benefit from compound earnings. Compounding is when earnings on your investments are reinvested in your account. The reinvested earnings may also have earnings, and then those earnings are reinvested, and so on. This means that contributing a small amount now could benefit you more in the long run than any larger amount you contribute later on. Even modest monthly contributions can grow to several hundred thousand dollars over three or four decades.
Make it automatic
If you have an IRA, making contributions directly from your savings or checking account will make it much easier to save. With Member Benefits, you can set up SmartPlan.
If you haven’t started saving for retirement yet, give us a call. We can help you open an account or simply answer any questions you may have.
Brush up on investing terms
Now that you’ve decided to start saving for retirement, what do you need to know? Here are a few investing terms to familiarize yourself with.
Pretax vs. Roth (after-tax)
Traditional (pretax) accounts allow you to defer the taxes on your contributions and at the same time reduce your taxable income. The earnings grow tax-deferred but both the earnings and initial investment will be taxed when withdrawn.
Roth accounts allow for after-tax contributions. You pay taxes now in exchange for tax-free treatment of earnings on qualified withdrawals.
Diversification
Having a variety of investments in your portfolio helps manage risk. Historically, it also yields higher returns as the positive performance of some investments offset the negative performance of others.
Risk
Before you consider any investment, you need to understand risk and determine your personal risk tolerance. Lower risk investments have averaged modest long-term historical returns. Higher-risk investments, such as large company, small company, and foreign stocks, have averaged higher returns historically, but with more volatility or fluctuation in value. Learn your risk tolerance by using our “What kind of investor are you?” calculator.
Asset allocation
This is how you divide your money among stocks, bonds, and short-term reserves. The aim is to control risk by diversifying your portfolio. Your allocation should be based on your tolerance for risk.
Fees
The impact of fees over time on your IRA or 403(b) account can significantly reduce your nest egg. Pay attention to all of the costs, including plan fees and mutual fund expense ratios. Not all providers or funds charge the same fees. Visit weabenefits.com/fees to learn more.