The 3 best money moves for May 2022
May is a month to celebrate.
We start strong on May 1st. Then comes Star Wars Day — aka my birthday — Cinco de Mayo, Mother’s Day (remember! May 8th!), Memorial Day, and dozens of other faux-marketing holidays in between. (Did I mention my birthday is coming up?)
In the midst of all the celebrations, it can be difficult to take a little downtime for your financial health. But we’re here to help. Money brings you a bite-sized financial checklist every month to help you live your best life. This month we talk inflation, tax returns and save for college.
Here are the top money moves for May.
1. Fight inflation with I-Bonds, now with a 9.62% interest rate
Inflation, according to the Labor Department, is 8.5%, the highest since December 1981. This is partly due to rising costs for gas, housing and vehicles.
If skyrocketing prices for everyday items weren’t bad enough, inflation is likely to eat away at your savings as well.
For example, the money that’s in your savings account right now – it’s likely to bring a poor 0.06% Interest – loses value quickly.
The good news: Uncle Sam offers you a safe way to do it 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, which issues the bonds, announced the new annualized interest rate: 9.62%the highest interest rate since bonds were introduced in 1998. Again, this compares to the average interest rate of 0.06% on savings accounts (or even 0.5% if you have one Savings account with high return), I Bonds sound like a no-brainer.
To lock in that 9.62% interest rate for six months, you need to buy it 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 love about I-Bonds, remember that there are important caveats to weigh before you buy:
- I-Bonds have an annual purchase limit of $10,000 for electronic bonds and a maximum of $5,000 for paper bonds.
- You can buy electronic bonds at any time TreasuryDirect.govPaper bonds can only be purchased at the time of filing your federal tax return, and you must choose to use your refund money to purchase them.
- You cannot cash them out within a year (except in emergencies). If you pay out within five years, you lose the interest of the last three months.
2. Budget your tax refund wisely
are tax refunds especially important for people this year, given decades of high inflation. Rising prices are causing many people to hold back on large purchases like cars and houses. And inflation has contributed to about a quarter of Americans missing out on at least one bill payment, according to a recent study by Capital One report.
According to the IRS, the average refund so far this year is over $3,000, and the agency has already made nearly 89 million refund payments.
For many, this windfall is just what they need to regain their financial footing. But when the money rolls in, you might be tempted to avenge it after weeks, months, or even years of austerity.
While experts recommend that you don’t treat your refund as play money, they see the benefit of using some of it to treat yourself — as long as it’s around 5% to 10% of the total refund.
One of the first things to do when the refund hits your account is to catch up on your bills if you were one of many who recently defaulted. Then experts recommend one of the most important personal finance steps: making sure you have an emergency savings fund (perhaps in I-Bonds?) that can cover Costs between three and six months. If this box is already checked, pay off all credit card debt.
From there, packing at least some of it into one is a smart move 401(k) or Individual Retirement Account (IRA). Finally, you can use the remaining refund money for a long-term goal – e.g buying a house or to finance your wedding – or to pay off other high-interest debt.
3. Benefit from a 529 college savings plan
May 29th is National 529 Day – because May 29th – and this is as good a time as any to sing the praises of the Education Savings Plan.
So What is a 529 plan?, exactly? In short, it’s a tax-deferred way to save money on qualifying education expenses, including tuition, books, room and board, and more. Almost every state offers a 529, although exact plans and benefits vary by state.
In most states, you can deduct your contributions from your state income taxes. And withdrawals are not subject to federal taxes as long as they are used for qualifying expenses.
While 529s are often referred to as “college savings plans,” you can now also use them to pay up to $10,000 a year in tuition related to public or private elementary and high schools, the authorities said IRS.
In addition, anyone can open a 529 for any person, including themselves. The beneficiary does not have to be a child.
Around this time of year, many states offer special offers for opening 529 plans around National 529 Day. For example, residents of Utah can get a contribution match 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 vacation deals.
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