KNS Financial

Personal Finance From a Biblical Perspective

8 Things You Can Do With Your Tax Refund

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Many people will be receiving (or have already received) a tax refund in the near future. Most people that I know plan to blow it on something that will not provide a benefit for their lives. Instead of wasting your refund and regretting your decision, try one of these 8 tips!

Tax Refund

What To Do With Your Tax Refund

Start An Emergency Fund

Probably the most common characteristic of a financially stable household (besides the idea of living within their means) is an emergency fund. The point of this emergency fund so you can have money stashed away when something unexpected comes up.

If you are not financially prepared for emergencies, then you may be forced to rely on high-interest credit cards, or tap into your retirement savings in order to get by.

Pay Down Debt

Another great use of your tax refund is to pay off debt. This may seem like a boring option (especially when compared to how most people use their tax refund), but it will automatically earn a rate of return that is equal to the interest rate on your debt.

For instance, if you pay off a credit card that had an interest rate of 20%, then that is equivalent to earning 20% on an investment!

If you use it to pay off/down an installment loan (such as a mortgage or car loan), then you may have to specify that your extra payment should be applied to the principal.

Consider Paying Infrequent Expenses

Many times it can be difficult to remember those expenses which only come once or twice each year. Instead of being taken by surprise and sent scrambling for extra cash at the last minute, either pay or put aside money for these expenses using your tax refund.

Some of these can include your car insurance premium, a maintenance fee on a timeshare (don’t get me started on this one) or other property, roadside assistance fee, and any other types of subscriptions.

Save For Retirement

You can easily fund a retirement account, such as an IRA with your tax refund. If you have more than the current IRA contribution limits, then you can fully fund your account while taking advantage of one of these other options.

If for some reason you are not reaching the 401k contribution limits at work, you can use this extra money as a way to increase what you currently contribute. Of course, you can’t add outside money into a 401k; however, if you fall short of the contribution limit due to other expenses, you can use your tax refund to pay those other expenses and increase the amount that goes into your 401k!

Save For A Large Purchase

If you are looking to purchase a car (learn how to save money on car costs), new laptop, vacation, or any other large purchase, this may be your chance. Instead of going into debt to buy the item, you can use your tax refund.

Even if the amount of your refund isn’t enough for you to purchase the item outright, it can greatly reduce the time it will take to save up for it. You can also pad the account with bonuses, raises, and future tax refunds.

Give

Giving is a very important part of any financial plan – especially for a Christian (we are commanded to give). I know many people who have a strong desire to give, but are not able because things are too tight for them financially.

If you are in a situation like this, a large tax refund can provide you with the perfect opportunity to give. There are plenty of organizations that are looking for donations in order to fulfill their mission such as, your local church, a missionary, food banks and homeless shelters, and any other charity that is fighting for a worthy (to you) cause, and has proven to be reliable!

 

Start A “Blessing Fund”

One of the things that my wife and I want to do (once we are out of debt) is to establish a savings account that will only be for the purpose of providing financial blessings to others. By having a separate account for this, we never have to worry about depleting our emergency fund or any other “dedicated” savings when we come across someone in need.

If you have a desire to help people out at various times, but don’t always have the means when these times come up, use your tax refund to start a “blessing fund”.

Spend Your Tax Refund

I’ve talked before about celebrating small victories during your financial journey.  Use some or all of your tax refund and do something that you have wanted to do, but couldn’t. Maybe go out to a fancy restaurant, or buy a New iPad or some clothes!

No matter what you choose to buy, use all or a part of your tax refund to treat yourself. Then take the rest and put it toward your highest financial priority. This way, you can celebrate achieving a financial milestone, without diverting funds away from your current plan.

Reader Questions

  1. Did you receive a tax refund this year? If so, how did you spend/save it?
  2. Do you purposely have excess taxes withheld during the year so you can have a large refund?
  3. Do you regret how you’ve spent a previous tax refund, bonus, or other “windfall”?

5 Things To Do With A Windfall

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Even though tax season has come and gone for some, many people are still facing the prospect of getting a lump sum of money in the near future. Events such as graduations, birthdays, and unfortunately, deaths can lead to one getting their hands on a decent amount of money at one time.

Here are 5 great ways to put those windfalls to use…

Pay Off High Interest Debt

I think this one is at the top of my list because we, like many Americans, are dealing with a great deal of debt (just a hair under $90k at our last update).

If your debt carries interest, then it most likely makes sense to use any extra money to pay off debt. That is because you will probably not be able to earn more interest with your money than you are paying in debt. Also, for a number of reasons, having debt is akin to financial bondage, so even if your interest isn’t 30%, it can still weigh you down financially, emotionally, and psychologically.

Pile of Money

Save For Retirement

This is one of the most overlooked areas in finance. Yes, we hear a lot about saving for retirement with various commercials from the big money managers, and as the “baby boomers” generation moves into retirement age, we are constantly hearing about how they failed to save for their retirement.

However, every time I talk to someone younger than 45, they have very little saved for retirement and it’s not even on their radar! So, with this in mind, take the extra money and add it to your IRA, or throw it in the bank and use it to offset your income as you increase your 401k contributions.

Pay Down Your Mortgage

I listed mortgage separately from other debt, because they are usually taken out at much lower interest rates than credit cards, so people don’t consider their mortgage in their list of debts (which is a mistake in my opinion). Anything you can do to pay less interest overall and be in debt for a shorter period of time is a good thing!

Take your windfall and pay down the principal of your mortgage, as long as you don’t have any other debt that is charging a higher interest rate.

Save Money For A Big Expense

Many people are not able to save a large amount of money for certain large expenses such as, a new car, vacation, new computer, or some other big expense that’s expected in the future.

Since this isn’t part of most financial plans, it makes sense to use this extra cash to save for one or more of these expenses.

Build Your Emergency Fund

I have written plenty of times about the importance of an emergency fund. For most people, and emergency fund is a must! If you are out of debt, stash away at least 9 months worth of living expenses in a high-yield savings account (My suggestion is that you open a new Checking or Savings account with Capital One 360 [Full Disclosure: this link contains my referral code]), and don’t touch it unless you have a true emergency.

The purpose behind this account is to prevent the need to using credit cards or taking out other loans when an unexpected, but necessary, expense comes up.

What is the Best Age to Begin Saving for Retirement?

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The best age to begin saving for retirement will be different for each person. Some are in a position to do it earlier in life, while others are unable to start until years later. You will be better off if you can start as early in life as possible, but that doesn’t mean that delaying contributions will prevent you from having a comfortable level of retirement savings.

Let’s take a look at the pluses and minuses of beginning retirement savings at various benchmark ages.

Save Money Retirement

Right Out Of school

This is the time in life that most financial planners would say that you should begin saving for your retirement. And in a perfect world, this is when everyone would start saving for retirement. Alas, this is not a perfect world, and whether or not you actually begin saving at this point will depend on where you are in life.

Plusses: There’s no doubt that the earlier you start the more successful your retirement savings will be. For example, if you are right out of school (age 22), earning $30,000 per year on your first job, you contribute 10% of your pay – or $3,000 per year – into your retirement plan, and assuming a 3% annual increase in pay for your lifetime and 8% annual rate of return on investment, by the time you’re 65 years old you will have nearly $1.5 million saved.

In addition, you’ll be getting into a good savings habit early and putting away enough money that if you do have to take a break from retirement savings at some point in the future your retirement will still be covered.

Minuses: As good as that all sounds, beginning your retirement savings right out of high school or college won’t work for a lot of people. For one thing you probably have some debts that needs to be paid and they’re cutting deep into your cash flow.

For another, there are probably a lot of things you need to buy to get started in life, in addition to the need to build up some non-retirement savings at least for emergencies. And sometimes when you’re just starting out in a career field you don’t have the kind of job stability that easily tolerates long-term savings plans. Also, at this very early stage in life, many people just aren’t thinking too much about retirement!

Around 25

This is the age where you really need to start thinking about getting into a retirement plan. You may have missed a few years of contributions that would’ve helped in the long run, but it’s still not nearly too late.

Plusses: At this point life, you’re still not completely comfortable with your position in life but you’re definitely out of the starting gate. You’ve probably pay off some debt, put away some money for emergencies and you’re probably making more money than you did right out of school.

Again let’s assume that you will earn an average of 8% on your money, your income will grow at a rate of 3% per year during your career and you’ll begin putting away 10% of your income each year for the next 40 years. The only difference is that you’re now making $40,000 per year. By the time you turn 65 you will have accumulated more than $1.5 million. The delayed start has caused you to lose nothing up to this point.

Minuses: If you came out of school with larger than average student loan debts you’re probably still paying them off and not a position to make substantial contributions to your retirement plan. This is also a time in life for some when marriage, children and buying a home enter the picture. All can compete with retirement when it comes to divvying up your paycheck

Around 30

For many people this is the best time to begin saving for retirement.

Plusses: For many people, this is the age at which life begins to settle down into long-term patterns. This is especially true if you married and had children and bought your first home when you were in your 20s. You’ve already absorbed the cost shock of those additions to your life and you’ve gained some control over your budget.

Let’s take the same retirement savings assumptions that we used the two previous examples, but now you’re earning $60,000 per year. If you save 10% of your annual pay, by the time you’re 65 you will have nearly $1.5 million in your retirement plan. Because of the higher income that you’re earning at this age, the delay in retirement savings still hasn’t hurt you.

Minuses: By the time you’re 30 it may be difficult to establish the savings habit now that you’re spending patterns are largely set. This will be especially true if you have a family and own your home. Though you’re making more money than you were earlier in your life, your expenses have risen in step.

Around 35

Many people are financially well established at age 35 making it the ideal age to begin saving for retirement.

Plusses: Your biggest advantage here is that you’ve entered the peak earning years of your life. Using the assumptions that we used in the previous examples except that now your making $75,000 per year, if you contribute 10% of your pay annually you’ll have more than $1.8 million by the time you reach 65. Clearly the delay has not hurt you up to this point.

Minuses: It’s ironic that it’s when you enter your peak earning years that you also become vulnerable to job losses. The retirement savings amount we determined above is entirely dependent upon your maintaining that income level (and progressively better) for the next 30 years. If that doesn’t happen, you’ll have less saved than what we’re projecting, only you won’t have the large established balance that you would have had if you would started your retirement contributions earlier in life. Final analysis: you can still do it, but there’s less room for error as you get older.

Right Now

What if you’re 40 years old or older and haven’t done anything about retirement savings thus far? Does that mean that there’s no hope for you? Not at all!

You’ll probably need to lower your expectations. You may not have as comfortable a retirement as you might want, but the situation is far from hopeless.

Let’s say you’re 50 years old, you’re earning $50,000 per year, and you decide to save 15% of your income each year, and delay your retirement to age 70. By the time you reach that age you will have nearly $450,000 saved. That, plus Social Security income, and some income from a part-time job or business venture can provide a very comfortable semi-retirement.

Not the retirement you may have envisioned, but far from a bad outcome nonetheless.

What do you think is the perfect age to begin saving for retirement?

401k Advice – Stop Passing Up Free Money!

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There are many things that we do in life that revolve around money. Much of the time we are working hard to earn more. Unfortunately, this desperation surrounding money doesn’t carry over to claiming our 401k employer match. People will do things out of character, work past the point of exhaustion, and even fall for obvious scams, all in pursuit of money.

Turning Down Free Money?

However, it seems like many of us are passing up free money with every paycheck! According to a recent study by Financial Engines, “39 % of [401 (k)] participants [are] not saving enough to receive the full employer match”! One of the most basic things that you can do is to quality for your 401k employer match.

The situation looks even worse for younger workers. The study reports that, “of participants under age 40, 47% failed to save enough to receive the full employer match.”

Most companies that offer 401 (k) plans will also offer a 401k employer match. What this means is that these companies will match the amount that you put into your plan up to a certain percentage of your salary. Let’s look at an example:

Let’s assume that your gross salary is $52,000 and you are paid every two weeks.You employer promises to match any contribution that you make to your 401 (k) dollar-for-dollar (100%), up to 6%!

You have more pressing concerns than saving for retirement, so you decide to start off slow at 1%. That means that with each paycheck you put aside $20 for retirement, and your company matches – giving you a total of $40!

Sounds pretty good, right? However, you just threw away $100 of FREE MONEY!!! How? Well, let’s take a look:

If you contributed 6% instead of just 1%, then your employer would match your $120 with $120 of FREE MONEY! Sounds a lot better than $20, huh? So, failing to contribute enough to receive the employer match (and only saving 1%), costs you $2,600 per year! Even more if you get a bonus, raise, or commissions!

I don’t know about you, but I would hate to have someone offer me $2,600 and I just light it on fire.

So, I guess you can see that I am in favor of everyone contributing enough in their 401 (k) plan to get the full employer match. If not, then you’re turning down FREE MONEY!!!

Actually, I’d go a step further and have every employee automatically signed up to contribute that amount, and have to opt out in order to change it. That would cause a lot more people to be aware of what their negligence costs them!

Want The 401k Employer Match, But Can’t Afford to Reduce Your Take Home Pay?

Keep in mind that a contribution to a traditional 401 (k) plan is made with pre-tax dollars. That means that taxes are not taken out of your pay until AFTER you make your contribution – leading to you paying less taxes!

Taking this example a little further will help us see this more clearly. Remember that I am making a few assumptions about your tax status in order to simplify the example:

Let’s say that your net pay is usually 25% lower than your gross, or $1,500. Contributing 6% of your salary ($120) will reduce your net pay to $1,410. This is a reduction of only $90 instead of the full $120 that you saved.

Actually, you managed to save $240 for your retirement by reducing your take home pay by only $90! That’s a return of 167% before you even started investing!!!

Is A 410k Employer Match In Your Future?

I hope you’ve read enough to convince you to take full advantage of your company’s 401 (k) match. The only thing worse than not getting the full match is using your 401(k) for credit card debt! Of course, in order to plan carefully you need to know the current 401k contribution limits, and even consider the prospect of a 401k rollover!

photo by AMagill

Reader Questions:

  1. Does your employer currently offer a 401 (k) plan?
  2. If so, are you contributing enough to get the full employer match?
  3. If you are contributing less than that, what’s your reason?

Taking Early Distributions from Retirement Plans

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Due to the state of the economy, many taxpayers may have taken early distributions from retirement plans last year. In most cases, there is a negative tax impact that arises from these early distributions. Because of this, the IRS has released some facts about early distributions. Here are some of the highlights:

  • Payments you receive from your Individual Retirement Arrangement before you reach age 59 ½ are generally considered early or premature distributions.
  • Early distributions are usually subject to an additional 10 percent tax.
  • Distributions you rollover to another IRA or qualified retirement plan are not subject to the additional 10 percent tax. You must complete the rollover within 60 days after the day you received the distribution.
  • The amount you roll over is generally taxed when the new plan makes a distribution to you or your beneficiary.
  • If you made nondeductible contributions to an IRA and later take early distributions from your IRA, the portion of the distribution attributable to those nondeductible contributions is not taxed.
  • If you received an early distribution from a Roth IRA, the distribution attributable to your prior contributions is not taxed.
  • If you received a distribution from any other qualified retirement plan, generally the entire distribution is taxable unless you made after-tax employee contributions to the plan.
  • There are several exceptions to the additional 10 percent early distribution tax, such as when the distributions are used for the purchase of a first home, for certain medical or educational expenses, or if you are disabled.

For more information about early distributions from retirement plans  IRS Publication 575 and Publication 590.


For more information on taxes click here.

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