May is a month to celebrate.
We are starting strong with May 1st. Then comes Star Wars Day – aka my birthday – Cinco de Mayo, Mother’s Day (reminder! May 8!), Memorial Day, and dozens of other fake-marketing holidays squeezed in between. (Did I mention my birthday is coming up?)
In the midst of all the festivities, it can be hard to take some time off for your financial health. But we are here to help you. Every month, Money brings you a little financial checklist to help you live your best life. This month we are talking inflation, tax refund and save for college.
Here are the top money moves for May.
1. Fight inflation with I bonds, now with an interest rate of 9.62%
At 8.5%, the inflation rate is the highest since December 1981, according to the Labor Department. This is partly due to soaring prices for gasoline, housing and vehicles.
If soaring prices for everyday items weren’t enough, inflation is also likely to eat into your savings.
For example, the money that’s in your savings account right now – probably earning a derisory 0.06% interest — quickly loses value.
The good news: 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 look more attractive than ever.
Today, the US Treasury Department, which issues the bonds, announced the new annualized interest rate: 9.62%the highest rate since the inception of I bonds in 1998. Again, compared to the average 0.06% interest on savings accounts (or even 0.5%, if you have a high yield savings account), the I links sound like a no-brainer.
To lock in that 9.62% rate for six months, you must buy them by the last business day of October, as the interest rate changes every six months to account for inflation.
While there’s a lot to like about I-bonds, keep in mind that there are some important caveats you need to weigh before you buy:
- I bonds have an annual purchase maximum of $10,000 for electronic bonds and a maximum of $5,000 for paper bonds.
- Although you can buy electronic bonds at any time on TreasuryDirect.govpaper bonds can only be purchased when you file your federal income tax return, and you must elect to use your refund money to purchase them.
- You will not be able to cash them out within a year (unless there is an emergency). If they are cashed within five years, they lose the last three months of interest.
2. Budget your tax refund wisely
Tax refunds are especially important for people this year, given the high inflation rate for decades. Soaring prices are forcing many people to delay major purchases such as cars and homes. And inflation has contributed to about a quarter of Americans missing at least one bill payment, according to a recent Capital One report.
So far this year, the IRS says the average refund is north of $3,000, and the agency has already pumped out nearly 89 million refund payments.
For many, this financial windfall is exactly what they need to regain their financial footing. But when the money comes, you may be tempted to spend it after weeks, months or even years of austerity.
Although experts recommend that you avoid thinking of your refund as play money, they see the benefit of using some of it for fun, as long as it’s around 5-10% of the full refund.
One of the first things you’ll want to do when the refund hits your account is catch up on your bills if you were one of the many who fell behind recently. Next, experts recommend one of the most important steps in personal finance: making sure you have an emergency savings fund (perhaps in I bonds?) that can cover between three and six months of expenses. If this box is already checked, pay off any credit card debt.
From there, it makes sense to store at least some of it in a 401(k) or Individual Retirement Account (IRA). Finally, you can allocate any remaining refund money to a long-term goal, such as to buy a house or fund your wedding – or use it to pay off other high-interest debt.
3. Take advantage of a 529 college savings plan
May 29 is National 529 Day — because 5/29 — which makes it as good a time as any to sing the praises of the college savings plan.
So what is a blueprint 529, exactly? In short, it’s a tax-efficient way to save money for eligible education expenses, including tuition, books, room and board, and more. Almost every state offers a 529, although the exact plans and benefits vary from state to state.
Most states allow you to deduct your contributions from your income taxes. And withdrawals aren’t subject to federal taxes as long as they’re used for qualifying expenses.
While 529s are often referred to as “college savings plans,” you can now use them to pay up to $10,000 a year for tuition associated with public or private elementary and secondary schools, depending on 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 opening 529 plans around National 529 Day. For example, Utah Residents can receive a matching contribution of up to $40 for opening a new account and setting up recurring payments. Several other states offer similar incentives. Check with your state’s 529 provider for holiday specials.
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