Posts Tagged ‘savings bonds’

My Interest Rate Can Beat Your Inflation Rate!

February 27, 2012

By Leigh Guth, Lincoln County Extension Agent 

There’s a wonderful Extension curriculum, Money Talk for Women, which I use frequently. Throughout the curriculum, the author points out how, in general, women view money differently than men. Women tend to think about money as security for themselves and their children rather than a sign of power or achievement. Because women are concerned about their security, they may be more conservative with their money and investments. Furthermore, we know from research that women are, as a rule, more focused on relationships. So, putting these ideas together, look at the following scenario:

I am a woman making money decisions on my own for my family. I do my banking right down the street from my workplace; I may personally know a banker through my social circles. Based on my comfort level and relationship, I chose to invest my money at that institution in a CD earning 2.25%. I feel confident working with someone I know, and I feel that I can access my money at an institution right down the block. Besides, this is not risky like the stock market – I’m guaranteed a fixed interest rate.

In this situation, by leaning toward security through a fixed-rate CD, the investor will lose money. Yes, the balance will continue to rise as interest is added, but buying-power is decreasing. Inflation is the rate at which buying power decreases. For example, $100 today buys less than it did two years ago.  In 2010, the average inflation rate for the year was 1.5%. In 2011, the annual inflation was 3%. And in January 2012, it was 2.93%. Only in the year 2010 (rate of 1.5%) would this CD offering 2.25% in interest get the owner ahead because the interest rate earned was more than the rate of inflation:

CD Interest rate of           2.25%

Less Inflation                    -1.50%

Net interest gain               0.75%

In 2011 and January 2012, this CD earning 2.25% might be secure, meaning that the investor is not at risk for losing any of the principal and will earn a guaranteed return on the principal.  But it is important to realize that the owner would be losing buying power: 2.25 – 3.00= -.75%.  The money, principal and interest, that is withdrawn at the end of the CD term the money will buy almost one percent less (-0.75%) of goods or services than the investor could have purchased with the principal alone at the beginning of the CD term.

So the next time you are evaluating interest rates on potential investments look for the other rate – the inflation rate. Make sure your interest rate can beat your inflation rate. Other investment options to consider include:

  • Mutual funds, which diversify the money invested over several products in an effort to minimize risk
  • Tax-deferred investments which include retirement accounts such as a 401(k) or an IRA.
  • Savings bonds are US Treasury-backed securities that offer modest returns, but also offer tax benefits.

Leigh Guth will be offering a Money Talk for Women series April 17-20 and 24, from 9 a.m. to noon. To register or learn more contact Leigh at Leigh_Guth@ncsu.edu.

Extension Agents, have you used Money Talk for Women? Do you think this curriculum’s assumptions about women’s investment habits are accurate?

Core Competencies Discussed: Saving, Protecting.

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Get a Smarter Tax Refund

February 10, 2012

By Joan Reid, Extension Agent, Family & Consumer Sciences, Granville County

“It’s not how much you earn that counts, but how much you keep.”

Extension Agents, it goes without saying that most of us hate filing our income tax returns, but we love getting money back from the government. While you don’t want to owe income tax, too big of a refund doesn’t work to your best advantage, either. So, how can you prepare your clients to best put their tax return to work for them? This post focuses on strategies you can share with clients that will help put their tax returns to work.

Make Your Refund Work for You

The much anticipated tax refund is not a windfall, but a return of earned income, which the government has been using all year. While many families regard this refund as forced savings, it may serve you better if you were to have access to that money throughout the year. Consider reviewing your annual withholding amount. If you decide to change your with­holding rate, submit a new Form W-4 Employee’s Withholding Allowance Certificate to your em­ployer. Be sure to discuss changing the withholding rate with your spouse if you are married. Coordinate your withholding rates so you do not accidentally under-pay your taxes, which would cause your household to owe money the following year.

To make your money work for you, develop a planfor that extra money that will be in each of your paychecks. If you don’t have a savings account, open one and move a set amount into it each month. Or have automatic transfers set up from your checking account into your savings account. This is a good way to develop an emergency fund if you don’t have one.

You can get started on saving with this year’s refund. When you prepare your tax return, simply use IRS Form 8888  to divide your refund into two or more accounts or financial institutions and/or to purchase U.S. Series I Savings Bonds.

Avoid Refund Anticipation Loans

Refund Anticipation Loans (RAL) provide early access to part of the refund amount you are expecting. The com­pany offering the RAL will charge a fee for lending you part of your tax refund until the actual refund is received. You can keep more money in your pocket by avoiding rapid refund offers and choosing to electronically file (e-file) your taxes. A tax refund can be received in 10 days or less with electronic filing. This is true whether you e-file through a Volunteer Income Tax Assistance, or VITA site, a paid tax preparer, or on your own through the IRS Web site.

Many folks sign up for a RAL because they either are desperate for the cash or don’t want to delay a desired purchase. You can prepare yourself to not be in that position next year by decreasing your withholding, as discussed above, and saving that amount. Then, you can keep your whole refund and earn at least a bit of interest throughout the year. If you have enough in emergency savings, you may want to put some of those savings into an IRA or other retirement account.

H&R Block Emerald Prepaid MasterCard® 

When you have your taxes completed at a participating H&R Block tax office, you can choose to have your tax refund or refund anticipation check funds proceeds loaded onto the H&R Block Emerald Card. 

The card can be used for everyday purchases, such as bill payments and ATM withdrawals, anywhere debit MasterCard cards are accepted. You can also add money to your card any time through payroll direct deposit or at participating retail reloading locations through the Green Dot®, MoneyGram® and Western Union® networks.

Emerald Card Fees

Although there is no fee to set up the card, there are some usage fees of which to be aware. ATMs in the Allpoint network are surcharge-free. If you use a non-Allpoint ATM for any transaction, including a balance inquiry, the ATM operator may charge you a fee even if you do not complete a withdrawal, this is in addition to the fees listed below:

  • $ 2.50 –  ATM Cash Withdrawal Fee (each/per occurrence)
  • $ 1.00 –  ATM Balance Inquiry/ATM Denial Fee (each/per occurrence)
  • $25.00 – Over the Counter Withdrawal Fee (each/per occurrence)
  • $2.50/month – Monthly Inactivity Fee

Visit the website for a complete listing of fees

Volunteer Income Tax Assistance (VITA)

The VITA program offers free income tax preparation for individuals and families with incomes up to about $42,000. Look in your community to find a free VITA tax preparation site or call 1-800-829-1040.

What tax refund advice do you typically share with interested clients?

References:

Bird, Carolyn L. Getting the Most from Your Tax Refund (FCS-528-01). Raleigh: North Carolina Cooperative Extension Service, NC State University.

Bird, Carolyn L. Smart Uses for Your Tax Refund (FCS-528-02). Raleigh: North Carolina Cooperative Extension Service, NC State University. 

H&R Block Emerald Prepaid MasterCard.