7 Ways to Maximize Your Income Tax Refund

You take a few hours one weekend between February and April to pop numbers into your online tax prep software or prepare documents for your accountant. You don’t know whether you’re going to owe more to the government or get money back in the form of a tax refund.  

Quick side note: Getting a large tax refund may sound like a huge win, it can often mean that you had too much taken out of your paycheck. In other words, you gave an interest-free loan to Uncle Sam. So while it may be tempting to cheer when you get a big refund check, you may want to take another look at your W-4 exemptions to make sure the right amount is taken from your paycheck. Imagine if you overpaid your rent monthly and received your surplus payments back in April of the following year. Not a cause for celebration, in fact, you might be upset and you would figure out what the correct amount was so you didn’t overpay.

So let’s say that you are “fortunate” enough to receive a large tax refund. The question is, what do you do with that money? Well here are seven ways to maximize your refund so you don’t regret a single dollar you spend.

1. Make a donation  

The size of the donation is not important, it’s the act of giving first that’s important and giving to something (or someone) that’s meaningful to you. Giving is one of the most important aspects of my Spending Formula to Win with Money. That spending formula applies to any money you receive, whether it’s a tax refund, paycheck, inheritance or a gift. Giving counterbalances our naturally selfish instincts to spend on ourselves first and also makes us happier.

2. Emergency Fund

An emergency fund, separate from your checking account (preferably at a different bank), is one of the most important financial decisions you’ll make. You should have a minimum $1000 cash in savings at all times. This is to help keep you out of credit card debt in case of emergencies. This is not an account that you’re looking to make a ton of interest on, it’s an account that you put money into and forget about until your car breaks down, you get a bill from an ER trip, or you have to travel unexpectedly for a funeral. Online savings accounts work perfectly for this.

3. Pay Down High-Interest Debt

If you have revolving credit card debt (you carry a balance from month-to-month), check out the annual interest rate on your card(s), It’s likely 15%+. Giving credit card companies and banks interest payments on items you’ve likely already consumed is like lighting money on fire. Credit card companies are NOT charities! Let’s not donate our hard earned money to them. You cannot find a bank that will pay you guaranteed 15%-25% annual interest, but VISA, AMEX, and Discover are making that off of you. Let’s not.


4. Resignation Fund (Emergency Fund with Flair)

If you have at least $1000 in your emergency fund and you have no credit card debt, consider increasing your Emergency fund to 3-6 months of essential expenses. That is different from 3-6 months of income. Essential expenses are your housing, food, healthcare and transportation costs. If you lost your job tomorrow, how much would you absolutely need monthly to get by without credit cards? (FYI – cable and  smartphones are not absolute needs) When you have a fully funded Resignation Fund, it changes the way you look at your job and how you value your time. Remember, 76% of Americans live paycheck-to-paycheck, meaning they don’t have enough cash savings to cover basic expenses if they missed 1 or 2 paychecks. They would have to borrow money. That’s living on the edge! Have you ever noticed wealthy people use different language when they quit? They resign. It’s a polite way to tell your employer, “I’m just not that into you anymore.” Don’t let your employer control your life! A Resignation Fund gives you the flexibility to walk away if you need to and the security to maintain your expenses if you are unexpectedly laid off.


5. Roth IRA

If you have a fully funded Emergency/Resignation fund and no credit card debt, you should consider long-term investing. We discussed before What a Roth IRA Is and Why You Should Care, but it’s a great option for investing outside of your 401k/403b if you have one. There is an annual contribution limit of $5500, and you have until tax day the following year to contribute, so at the time of this writing, you can still contribute for the 2017 tax year until tax day 2018.


6. Personal Saving and Debt Payoff Goals

Now that we’ve got your emergency and retirement savings out of the way, you can stash funds for a vacation, a home, a car, wedding, kids college fund, etc. You can also put extra money down to pay off debts like student loans or auto loans.


7. Splurge

Often with money, particularly when we receive a lump sum, we spend first and if there’s any left over, we may save and donate. This is a broke mindset and broke behavior! Remember 76% of Americans are living paycheck-to-paycheck, so if you want to be different you have to do different! I want you to do the exact opposite. Give first, save second and spend third. Once you’ve taken care of your important giving and saving priorities, you can spend guilt free!

5 Steps to Financially Prepare to Be Laid Off

It’s very possible, and some would argue very likely, that you could experience being laid off from your job at least once in your career. There really is no such thing as job security these days. Experiencing a layoff unexpectedly can trigger a range of emotions. The company you have devoted thousands of hours of your life to, away from your family and friends, abruptly informs that you and your services are no longer needed. Betrayal, frustration, anger, sadness, anxiety, and embarrassment are just a few of those emotions. It doesn’t have to be that way though! If you are financially and emotionally prepared for a layoff, it can be an empowering experience.

1.    Your Employer is Just Not That Into You

Unless you’re in a union, have a written employment contract or live in Montana, employees of private companies are likely subject to at-will employment. Three-quarters of American workers are subject to at-will employment. Let’s understand what that means:
At-will means that an employer can terminate an employee at any time for any reason, except an illegal one, or for no reason without incurring legal liability.
Again, there is no such thing as job security! With a few protected exceptions, (e.g. based on race, sex, gender, national origin, age, disability), a company can terminate your employment at any time for any reason, or for no reason at all. Many of us don’t realize this simple fact and base our livelihoods around our employer. Where we live, what time we wake up, what time we sleep, when and where we vacation. Most of our lives are centered around our employer and that connection can be ripped away for any reason or no reason at all.
This is not to bash corporations, but rather simply to put into context that many of us are centering our lives around a relationship that has little to no contractual stability. In other words, you are not married to your employer, you’re just dating.
Corporations, especially publicly traded companies, have one primary goal – Increase shareholder profit. Regardless of what it says on your employers’ ‘About Us’ page, everything your company does centers upon that one primary goal. Corporations are like animals in the wild. That animal may look cute and cuddly, but the second it even perceives a threat to its survival, it is deadly. If company leadership decides that it needs to remove 10% of its workforce to be more competitive, it is their fiduciary duty to do so. It’s not even about you. They are just not that into you.

2. You are the CEO of [YOU], Inc.

Once you understand that you are not wed to your employer, the next step is to understand that you yourself are a corporation. The employment contract has changed dramatically from the days of our parents and grandparents, pensions have all but vanished, unions have diminished. You are solely responsible for your financial well-being, that includes preparing for layoffs and managing your own retirement. Once you begin to see yourself as a business, ask yourself a simple question: Can you think of any successful businesses that only have one client/product? Probably not, because if that one client leaves or the product stops selling, they would be out of business. Well, if you are an employee and your employer is your sole source of income, that’s exactly what you are doing.

3. Build an Emergency Fund

Once you get your head around the fact that you are not wed to your employer and you are actually a business, a world of opportunities can open up to you. By no means are we advocating quitting your job, but once you see your employer as one client and one revenue stream, you can start to focus on other things.
You have to build an emergency fund. No excuses, it’s vital. Three to six months of your essential monthly expenses (in cash in a separate bank account) is a great goal and gives you the peace of mind that you can pay your bills if your employer breaks up with you suddenly.

4. Evaluate Your Skills In the Marketplace

If your employer is your primary client, can you use that same skill set for other clients? If you do social media marketing for your employer, can you do social media marketing for other companies in other industries? You may also have skills that are completely outside of what you do from 9-5 that you can think about monetizing. One way to evaluate this is to ask yourself three questions:

  1. What do people come to me for advice for personally and professionally?
  2. What problems do I want to solve?
  3. What value do I bring to the marketplace that people are willing to pay for?

Since you are a business, you must think about solving problems for others and providing value to the most amount of people. Once you start thinking this way, the gears will start to turn and you can develop side hustles and other sources of income outside of your employer.

5. Let Your Employer Help You

Finally, utilize your employers’ resources. You may just be dating your employer, but there are advantages to dating wealthy. Here are a few suggestions on how to make sure you’re getting the most from your relationship with your employer.

  1. Maximize Your Employment Benefits – don’t leave money on the table because you haven’t looked at the HR Portal in a while
  2. Take Employee Development seriously – You must continuously learn and grow to make yourself (and your business) more marketable. If your employer (primary client) is willing to pay for you to develop new skills, that can be valuable in your current role, future roles and for other clients.
  3. Build Your Clientele – Now that you know that you’re just dating, give yourself permission to see other people. Network within your company, your company’s business partners, and competitors. There are people within all three of those groups that can be future employers and/or future clients.
  4. Check Your Value in the Marketplace – Employers have a financial incentive to pay you less than market value, especially over time. Remember, their #1 goal is to increase shareholder value and your salary may be in direct conflict with that goal. You are solely responsible for ensuring you are getting paid market value, no one else. Every 3-5 years, you should be testing that value in the marketplace by applying for jobs. Not only is applying for jobs good for networking and building clientele, but it also helps keep you from being severely underpaid, costing you tens of thousands of dollars in the long run.

Thirty-year employees are increasingly rare each day. You most likely will not work for the same employer for your entire career. Understanding the true nature of your relationship with your employer and your responsibility to your own financial well-being is vital. If you understand your value in the economic marketplace and maximize that value not just for your current employer, but also for [YOU], Inc., getting laid off can be an opportunity, not a catastrophe.

4 Money Lessons from the 2016 U.S. Presidential Election

The 2016 Presidential Election was historic on multiple fronts. Two of the most unpopular candidates battled in one of the most contentious, divisive and unconventional campaigns in modern history. For some, the result was a deeply shocking and painful event, for others it was redemption for voices long ignored. In all, nearly 120 Million Americans voted and the popular vote was separated by less than 200,000 votes, which is about the population of Little Rock, Arkansas. Regardless of your politics or preference of candidate, there’s no question that the country is divided politically. Whether you’re extremely disappointed or excited by the result there are lessons to be learned from the election and how it can affect our wallets and thus our livelihoods. How can the lessons from this election make us better managers of our finances?

1. Conventional Wisdom Isn’t Always Wise

Nearly every political expert and reputable polling firm who had been polling voters on a weekly basis for 18 months were completely wrong about the actual results of the election. Polling models that were used for the electorate in 2008 and 2012, became obsolete in 2016. Conventional wisdom can often be generalized and not specific to our individual situation.

There are certain standards of conventional wisdom in our finances that are also outdated or need to be challenged based on our individual situations. For example, conventional wisdom often stresses going to the best college one can get into (regardless of cost), pursuing a degree in a field of interest (regardless of expected future salary). This is not to say that people shouldn’t go to college or pursue a major solely based on expected future salary. It is to say that mode of thinking was developed at a time when people could pay their full student tuition by working part-time. That’s a 1970’s/80’s model, which needs to be challenged and may not take into account the realities of increased tuition costs and the impact of student loan debt on your future livelihood.

Our motto is Reject the Status Quo. In order to manage your finances well, there are times when you’ll make decisions that are not popular. The status quo embraces consumerism culture in which many people equate spending with projecting wealth or building relationships. It may be tough to navigate being the odd one out if you don’t subscribe to that mode of thinking. You may find that unnecessary spending actually doesn’t project wealth or make you happier, but rather delays and extends the time it takes for you to reach your personal and financial goals.

2. Prepare for the Unexpected

To say that Donald Trump becoming the 45th President of the United States was unexpected is a dramatic understatement, but life can often be very unpredictable. It was the Greek Philosopher Heraclitus who said, “Change is the only constant in life.” Sometimes change is good and sometimes it isn’t, but regardless, we have to plan for the unexpected. [bctt tweet=”Being unorganized with your finances is like playing Russian Roulette. ” username=”moneyspeakeasy”]

One of the lessons learned from the 2008 Great Recession was the people that were impacted the most were folks who carried high levels of debt and lived above their means. That’s not a judgment on them personally, but we need to ask ourselves if we have recession-proofed our finances. The following questions can help you assess your readiness:

Do you have 3-6 months living expenses in an emergency fund?

Do you have more than one source of income?

Do you have a written budget and track your spending?

Do you have life and disability insurance?

Do you have revolving credit card debt?

3. Depending on Government is a Losing Strategy

One of the truly negative impacts of having a divided country and a divided government is that even topics of general consensus may not get accomplished. There are serious financial issues, such as the cost of higher education, the cost of healthcare, student loan debt, social security, increasing wages and tax reform that can have dramatic effects on our finances, both positive and negative.

We believe the best plan of action is to treat your finances as if you will not get any assistance from the government and if you do, it will be a bonus. If you are under the age of 50, you should have no expectation that you’ll receive any social security benefits in retirement. If you have student loans, you should have no expectation that the government will help reduce the cost or forgive any portion of it, unless you are in a loan forgiveness program, have it in writing and understand the nuances.

The point is that our government is not a nimble organization, even when there is a consensus. Big changes can often take years, if not decades. Therefore government assistance should not be an important part of any financial planning.

4. Your Money, Your Values

Finally, if you want to know what someone truly values, you may listen to their words, you may even look into their actions, but one of the most revealing aspects of a person’s values is their spending. As they say, follow the money! We may vote for a Presidential candidate every four years, but we vote daily with our financial resources. [bctt tweet=”The more we control of our finances, the more resources we can direct toward causes we value.” username=”moneyspeakeasy”] For example, if a company decided to move a factory overseas or company funded organizations that were contrary to your values, an organized voter base could decide they were no longer willing to purchase products from that company and impact that decision. Just as many Americans believe that every vote counts, your dollars and purchase decisions count. Make sure your bank statement reflects what you value most.

EMERGENCY: Stop What You’re Doing If You Don’t Have an Emergency Fund!

Imagine this: You spend an entire year trying to pay off your credit card debt, just to have your car break down. You don’t have the cash to cover it, so the $2000 repair goes right back on the credit card. You right back where you started, or possibly even worse.
 
One of the biggest personal finance pitfalls is a lack of solid emergency fund. Emergency funds are critical because they can be the difference between an inconvenient bad day and a financial catastrophe that can take years to escape.
Let’s start some facts to get us on the same page.

  • A recent study showed that over 60% of Americans do not have enough cash saved to pay for unexpected emergencies such as a $1000 ER visit or a $500 car repair.1

That means that the majority of us are living so close to the edge of the cliff that even the slightest nudge can tip us over.

  • The average American household has over $15K in credit card debt, over $26K in auto loans, and over $47K in student loans. The average household is paying over $6K per year in interest on their household debt.2

Let me rephrase that last sentence, the average household is paying financial institutions $6,658 just in interest per year. If we don’t financially prepare for emergencies, we end up working harder to pay more in interest to financial institutions. No thanks!

Paying off debt without emergency savings is like running a long distance race in flip flops, you may be able to get to the finish line, but your chances of falling and hurting yourself are pretty high.

Most experts recommend 3-6 months of living expenses in cash savings. The only problem with that recommendation is that can be more than most people have ever saved, so it can be overwhelming. If that’s true for you, start small. Start with a goal of at least $1000 so that if you have an emergency while paying off debt, you don’t run to credit cards and add to the debt pile. However, if you have a house, car and children, $1000 may not go very far in an emergency. Set a goal that’s appropriate for your situation and build upon that.
We’ll discuss specific saving strategies in detail in later posts, but for emergency funds, some people like to use larger sums they receive to put it away quickly. Birthday money, income tax refunds, bonuses are just a few examples of how people can stash away savings quickly.
One of the most important aspects of building savings is your perspective. Many people view saving money as a chore and painful. There’s a common belief that saving money gives us less to spend when we should view saving as giving you more financial control and independence. Change your perspective and view saving as splurging on yourself and investing in your financial goals. Focus on how much better you’ll feel when you reach your savings goal and have confidence that you can tackle debt even harder.