Tax time: That interesting time of year when ordinarily smart people begin to make really dumb financial decisions. Isn’t it amazing to watch what a little extra cash (well for some, maybe a lot of extra cash) lining the pockets can do? The average tax refund so far this year may be $3,539 and I suspect there are at least that many dumb ways to spend it. Here are my top five:
ACT LIKE IT’S “FREE” MONEY
The operative word in the term “tax refund” is REFUND! Common synonyms for refund are “repayment,” “reimbursement,” and “return of over payment.” This means that tax refunds are not free money. The government is not giving you a bonus every year just to thank you for being an American. This is money that you’ve allowed them to “borrow” from you all year long. And now, unlike most of your friends or family members, they are actually paying you back.
Never mind the fact that you made the loan with NO interest even though you pay them back with interest on your student loans or installment payments.
Smart Move: If you routinely get a big tax refund, change your withholding (use this calculator to determine the amount you should be having withheld along with instructions on how to change it). Your goal is to neither owe or to be owed at the end of the year. If you can come within $100 of that goal, you’re good.
Apparently, my hair is my life. Believe me, I am as surprised by this fact of vanity as anyone. Had you checked with me about my philosophy of life a mere ten days prior, I can assure you that my hair would not have made the cut for my Top Ten Important Things.
Sure, I’ve had the typical number of issues with my hair over the years, but since I’ve always had plenty of it, I had options. That is until that day when I got a bad haircut.
I could go into long and agonizing detail, but suffice it to say I went in with a full head of hair and came out five pounds lighter. Let’s just say that Mr. Salon Owner (not exactly your Edward Scissorhands) thinned me out—a technique only fitness trainers should attempt.
It used to be that kids reaching adulthood could not wait to leave home and be on their own. That worked out well because their parents longed for an empty nest and quieter lives. But these days, young people are spoiling these plans.
Currently some 85 percent of U.S. college graduates move back home with their parents after graduation. One can only assume the other 15 percent never moved out.
Photo credit: CountryLife.co
Many American homes have become very crowded nests. While parents are asking themselves what went wrong, the “boomerang” kids seem to be adjusting quite nicely. Any why not? For lots of boomerangs, they get a boarding house without the rent, a laundromat with no slots for coins and a mini-storage facility, otherwise known as your garage.
I’ll admit I used to think frugality was a distasteful lifestyle forced upon the poor. I believed “frugal” was synonymous with never buying new clothes and dumpster diving under the cover of night.
Boy, did I have a lot to learn. And learn I did—and continue to learn—that is the path to building wealth on any income.
I’d say the most fun I’ve had learning the fine art of frugality has been in reading The Millionaire Next Door: The Surprising Secrets of America’s Wealthy by Thomas J. Stanley and William D. Danko.
Webster’s defines “frugal” as behavior characterized by or reflecting economy in the use of resources. The opposite is “wasteful,” a lifestyle marked by lavish spending and hyperconsumption. Wealth has nothing to do with how much you earn, but what you do with it and how much you keep.
Even the mention of words like frugality and thrift send some people over the edge because, for them, those words conjure up thoughts of poverty and deprivation.
They assume that cutting costs is tantamount to diving into dumpsters to find one’s next meal. No wonder so many people prefer a life of debilitating debt to one of frugality.
Let me set the record straight. Please.
There is nothing undignified about spending less than you earn. That’s called living below your means, and it’s a fabulous way to live! When you spend less than you earn, you have some to save. And to give away, too. When you spend less than you earn, you are not dependent on credit to get by. It is a very good thing.
So you may be wondering how you can move from overspending to spending less, without giving up your quality of life. It starts with prioritizing everything according to how important it is to your life. Then only spend on things at the top of the list, ruthlessly cutting your spending on the things that don’t matter.
Face it. Living below your means requires a good bit of creativity from time to time. You have to get pretty clever to stretch a buck.
But just how far can you go in matters of etiquette before you cross the line?
Ask yourself these questions when making a decision having to do with gracious living and etiquette:
- Is my choice to be cheap going to harm or insult another person?
- Will my behavior leave a fragrance or an odor?
Rule of thumb: Be cheap with yourself and generous with others.
Don’t, for example, require a service person to forego a tip so you can live below your means. If you cannot cover a decent tip, don’t eat out. Or order less.
Cutting expenses is the way to spend less so you have money to save. But unless you are actually putting that money into a safe place to be held for some future use, you’re not really saving at all. You’re just spending less.
Even if you cannot save a great deal of money right now, that’s okay. It’s not the amount you save that matters as much as the fact that you make saving money a regular habit.
Grab all the discounts. Many mortgage lenders and student loan companies offer incentives for their customers who set up automatic payments for their monthly payments. It’s worth knowing you’ll never be late, and if you can get even 1/4-point reduction in the interest rate over time that will really add up to be something significant. Automobile insurers give discounts to good drivers, non-smokers, good students, cars with particular safety-equipment and any number of other situations. But you have to ask. Make the call.
Set dollar limits. Okay, so this sounds curiously like “budgeting.” It is. Deciding ahead of time the amount you are willing to spend for anything is to impose important limitations on yourself.
Fee yourself. Banks and credit-card companies don’t seem to have much trouble socking us with unbelievable fees, so take a lesson from them and fee yourself. Every payday impose a self-tax equal to one-hour’s pay. Consider it the price for having a job and put it straight into your savings account. Give yourself ample warning that upon your next raise, the fee will jump to two-hours’ pay. Every time you make a withdrawal from the ATM or you write a check, charge yourself a set fee of $1 by recording the actual amount plus a buck. Deposits? A $10 fee for each deposit sounds about right. When you’ve collected $50 or $100 in fees from yourself, settle up and transfer the whole amount straight to your savings account.
Face it. People are simply living longer than ever before and health care costs are climbing higher every year. Which brings me to the subject of long-term care. You might assume that’s just about nursing homes, but it refers to more than that. Long-term care means getting the assistance you need at home as well.
You could live to 100 and never need long-term care. You could end up needing assistance in daily living long before retirement, or you could fit somewhere in between. Maybe your knees go. Or your eyes. Or you become a little too forgetful. No one likes to think about it, but the human body is not built to live forever. You need to be informed and prepared.
Long-term care insurance usually covers the costs for care that aren’t picked up by regular health insurance or Medicare. If you need assistance to properly feed, clothe or bathe yourself, long-term care insurance could pay the bill, depending on the type and amount of coverage you buy. But because it’s expensive, long-term care insurance isn’t typically a product lower-income individuals are able to afford.