There’s just something so fresh and motivational about January. Between New Year’s resolutions and fitness goals, renewed commitments to organization and financial responsibility, the list of things we can accomplish in January seems almost super-human.
Use this heightened motivation and momentum to prepare for tax season, too! While you’re not required to file for a few more months, it’s best practice to take a look at your taxes now so you’re not scrambling come April. There are a few steps you should take to proactively prepare for a successful tax season. Let’s take a look.
The stock market has been a mess over the last couple of months. I guess after almost a decade of solid growth, it was time. Of course, our President has a different thought. He blames high interest rates. The President has been pushing the Federal Reserve to lower interest rates. They haven’t been listening. Currently the Fed rate stands at 2.25%. So, are interest rates too high?
Comparing Interest Rates To Recent History
In a quick answer, no. Interest rates are not that high at all. Of course, this takes some comparison.
Since the start of the 1990’s, interest rates have been higher than they are now more often than not.
The entire decade of the 1990’s saw interest rates in the 4-6% range. I remember that, at the time, this was considered pretty low. The 1970’s and 1980’s had very high rates. So a drop to 4-6% was actually a relief for many!
In the early 2000’s, interest rates did drop for about 4 years to levels lower than today. The 1-2% range followed a pretty bad post-Y2K recession, as well as 9/11. Lower rates were used to provide a boost to a dragging economy.
Following 2004, the economy ‘recovered’ and interest rates were back up around 5% for the next few years. In 2008, the bottom fell out of the economy, and they were quickly lowered, all the way down to practically zero. Come to find out, the economy wasn’t as stable as had been purported.
Interest rates stayed at those non-existent levels for seven whole years! It wasn’t until 2015 that any increases were seen, and even those were small. It wasn’t until 2017 that more than one increase per year took place.
That’s nearly ten years of extremely low interest rates.
Perspective On Interest Rates
The president is arguing that the rate increases are hurting the economy. He has asked for them to be lowered.
The Fed has all but ignored him.
From a historical standpoint, interest rates really don’t look too high at all. But, we also had the lowest interest rates ever for a very long period of time. Bottom line, we got complacent.
Right now, a 15 year mortgage is around 4.5%. This probably is considered high for many who financed at or even below 3%. Again, looking at how long interest rates were low, a great many people got these rates.
However, they were never meant to be a ‘forever’ thing. But, nearly ten years of practically no interest did start to feel like forever. It became the new normal.
Why We Need Higher Interest Rates
I studied Economics in my undergraduate. So, while I’m no expert, I do remember enough to understand that we do need higher interest rates. We can’t keep them the levels they were at forever.
Eventually, the economy will go into a recession. The economic cycle makes this a certainty. Recessions are good for the economy. We just don’t want them to the scale of the last one! But, a common tool to minimize the effect of recessions has been to lower interest rates. This encourages companies to borrow and spend money. This leads to jobs. If it all works out, eventually the recession ends.
But in order to do that, we must first raise them. These rate increases are done when the economy is doing well. Like it is now. The idea of this is that a strong economy can withstand the increases.
This system has worked well for quite some time. But, it’s predicated on having the cushion in interest rates to be able to lower them.
Why We Can’t Keep Interest Rates Low Forever
Think of what would happen if we had 0.25% interest rates and slipped into a recession. What could we do? Well, one thing we wouldn’t be able to do is lower interest rates. This would end up making it harder to pull out of the recession. The recession would likely last much longer than normal. Plus, other less effective measures would have to be taken. Tax cuts or additional spending would help, but would spur higher deficits and more inflation in comparison to interest rate cuts.
Personally, I thought that the Fed waited too long to start raising rates. I thought they should have started around 2013 or so. By that point, the real estate market had stabilized. Unemployment was near pre-recession levels. I knew full well that the longer the Fed waited, the more ‘normal’ the ultra-low rates would seem. And, that’s the thing. They weren’t normal.
The bottom line is that interest rate cuts are a needed tool to fight recessions. Building that cushion during times of growth will help us down the line when we need an economic boost.
Do you think rates are too high?
Readers, let me know what you think. Have we gotten too used to low rates that we now expect them? Do you think the Fed should lower rates or keep on the current path? Let me know in the comments below.
The latest buzzword in the personal finance community is FIRE. Many of the most successful blogs now talk about FIRE. For those that don’t know, FIRE stands for Financial Independence, Retire Early. The blogging community now has many blogs where people achieve financial freedom at a young age, and can retire well before traditional retirement age. Many boast of retiring in their 30’s.
This is a pretty cool movement, especially in the age where Millennials are breaking many of the molds created over years past.
I started thinking about it. I came to the conclusion that FIRE probably wouldn’t have been embraced by generations past.
Here’s my take on what I think generational mindsets are regarding FIRE.
Millennials (born 1980-2000s)
I think that millennials are the heart of the FIRE movement. Many don’t want the traditional life that they witnessed grown up. This stands to reason that many millennials are at the heart of the FIRE movement.
Generation X (born 1965-1979)
This is probably the dividing line between acceptance of FIRE and skepticism. Many in our generation have gone through enough recessions that we know things can change. We’ve seen good times and bad. The idea of FIRE sounds great, but many may see it as ‘too good to be true’.
Others in our generation still fall in the mindset that each generation should strive to be more successful than that prior. This has been pretty hard for our generation. There’s a lot more competition in the job market. We’re the first generation that saw most of our parents get a pension, but very few of us will. We have healthcare costs that previous generations did not. For many in our generation, just trying to keep up with our parents is hard enough. Adding in the goal of early retirement can seem even further out of reach.
Baby Boomers (born 1946-1964)
The baby boomer generation was fueled by consumerism and prosperity. A lot of wealth was built by boomers. While making money wasn’t ‘easy’, boomers who worked hard found money flowed in. For many boomers, making money and achieving wealth was the goal. The big one.
Simply put, I think many boomers would have asked why they would give up making money when there was money to still be made?
Greatest & Silent Generations (born 1910-1945)
These generations were both impacted by the Great Depression. Because of this, FIRE would simply not have made any sense to them. Many here saw what it was like to struggle. To have nothing. Many people immigrated and started with nothing. The idea of retiring early would have been unheard of. For many in these generations, not having enough money was a giant fear. Even if they had enough, there was always the fear of what could happen. Why? Because many here had seen what could happen.
I think many in this generation would have been scornful of FIRE. To people in this generation, if you were able bodied, you worked. That’s just the way it was.
The Late 19th Century
In the late 19th century, everything was changing. Machines were making things easier and creating worldwide growth. Cities and population centers were exploding. There was so much to do that everybody had to pitch in. The demands of the world were plentiful, and everybody was expected to pitch in.
I think in this era, anybody who would have attempted FIRE would have been laughed out of whatever town they lived in.
Tribal Days (Going Way Back)
Hundreds of years ago, when we lived in tribes, everybody contributed. Many tribes expected every person to contribute. If you couldn’t, many tribes expelled you. Or worse. There would have been no FIRE here. If you had tried to stop working, the tribe would have taken what you have, and sent you away (or thrown you off a bridge).
Kind of makes working seem like a pretty good alternative, no?
FIRE Across The Generations
There’s my take on the generational acceptance of FIRE. I think that FIRE is a big thing because it truly is a new concept for many.
What do you think of my thoughts? Do you agree on how prior generations would have looked upon FIRE? What generation are you and what do you think of FIRE? Let me know in the comments below.
The past month has seen roads in Michigan deteriorate to never before seen conditions. Potholes and cracks are everywhere. The freeze and thaw cycle has been especially bad this year, turning many roads to near gravel. But, Michigan isn’t the only state with this weather. So, why are the roads so bad? The answer isn’t as simple as any one thing. Here are ten things to know about why Michigan roads are so bad.
Taxes and Spending
Michigan drivers pay a lot in fuel taxes. Michigan is one of the top five states in terms of taxes collected at the pump. This infuriates a lot of drivers. Common sense tells you that higher taxes should mean better roads. Unfortunately it doesn’t work out that way. So why?
Michigan doesn’t allocate sales tax at the pump to roads. Most states assign all taxes collected at the pump toward roads. Michigan only allocates the fuel taxes specifically toward roads. The sales tax portion goes to the general fund. This means our spending levels are among the lowest in the nation per capita.
Voters said no when given a chance to correct this. A few years, it was put before voters to allocate the sales tax on gas toward roads. This would have infused a ton more money into the roads. But, it required an increase in the sales tax rate, which required it be put before voters. They said no. I wonder how many regret this decision now.
Road construction isn’t the problem. Many roads in Michigan are hard pressed to last 25 year. Many reason that they aren’t building the roads well. In fact, roads are built to the same standards as in surrounding states.
Preventative maintenance is what’s missing. If roads were taken care of here as they are in other states, people would be very perplexed. See, we only start giving attention to a road after cracks and potholes appear. In fact, attention should be given to a road before any of these things happen. In other states, roads are repaved before they appear to need this done. This protects the underlying road, which is the key to longevity. If you keep the base road in good shape, it can last 50 years or more.
Weight limits. Michigan allows heavy trucks to travel the roads with limits twice as high as most states. Some say that this hurts roads. Others on the opposite side of the fence argue that it doesn’t matter, since more axles are required to spread the load. I think we should be in line with the surrounding states, but lobbyists have this one locked up.
Lots of barely used roads. Michigan’s Upper Peninsula is a beautiful place. There are a lot of roads there to travel around. Many of them are barely used, but require attention nonetheless. A higher percentage of funding per car traveled goes to these roads than to the roads in the population centers. Many such roads have actually been returned to gravel roads, but there’s still a large disparity here.
The Future of Michigan Roads
Roads have more funding coming. A couple of years ago, lawmakers increased the gas tax and also increased registration fees. This was the first major increase to road funding in over 20 years. This will dramatically increase spending on roads. It also will increase the taxes along with inflation, something that the increase 20 years ago failed to do. This should help us from falling behind again.
It’s going to take time. Many voters are unhappy since the funding increase went into place a couple of years ago, yet the roads seem to be worse than ever. The harsh fact is that the improvements will take time. The funding shortages toward roads have been years, even decades, in the making. It is going to take just as long to correct this.
The bottom line is that roads are awful but at least help is on the way. It can’t come soon enough. We’ll likely have to endure at least a few more spring seasons of bad roads, which is when potholes hit. Hopefully, momentum will build and roads will improve over time. Good roads in Michigan is something I hope to see in my lifetime!
Readers, how are roads where you are? Does your state adequately fund road construction and maintenance?
We are lucky enough to already have our taxes done and filed. I anticipated that we would get a refund (which we’re OK with). Now the idea is how are we going to apply our 2017 tax refund.
Our goal with our tax refund has always been a mix of things.
Boost Savings Goals. When there is something big we’re saving for, money gives us the chance to help things along. This has helped us when we needed big projects done around the house. Examples: A new roof a few years back or exterior painting last year.
Offset Spending Needs. If there is spending we know we are going to do regularly, sometimes this can give it a push.
Repair. Getting this fixed or maintained is something I’ve always used when applying refund dollars.
Enjoyment. As you’ll see below, putting our refund to use for vacations is a strategy we use.
Without going into exact figures, here’s how things shape up:
Vacations. We are allocating roughly half of our refund toward vacation funds. This actually applies to four different areas:
Our 2018 Disney Trip. We’re going on a trip next month and this will help complete the payment.
A 2019 Florida Trip. Disney is a treat this year. Normally, we rent a condo down in Florida. We’ll have to put a deposit down a year in advance. This will fund that deposit.
Anniversary Trip. We sometimes go away for a weekend around our anniversary. This will help set money aside for next time we do this.
Camping Trips. This helps fund our summer trips. What we put aside will fund about 10 days of camping. That definitely helps!
New Camper. We’ve had our current camper for around seven years. It was used when we bought it. Eventually we’d like to look at an upgrade.
Car Repair. Throwing a little toward eventual car repairs and maintenance? Why not?
Home Repairs. We don’t have any projects planned. This will help with any just-in-case things, or for future projects.
Kids Activities. This is for things like summer camps and such.
Repairs. We have two things we’d like to get repaired or in for regular maintenance.
Clock. I have an antique clock wind-up clock that needs repair. It’s likely over 100 years old and is a family heirloom.
Boring And Proud
This might sound like a pretty boring list. In fact, it really is. But, I’m kind of proud of that! I would like to think that this is helping us get a mix of several things. We are using it to enjoy ourselves. We are using it to take care of our stuff. And, finally, we are using it to save for future goals.
If that’s boring, then sign me up!
Readers, what are you doing with your refund money this year?
Don’t get a tax refund. That’s one of the first things most personal finance bloggers will tell you. It’s giving the government an interest free loan. That’s what they will say to justify the reasoning. Keep the money yourself. That’s the advice you’ll get. Earn the interest on your own money. That’s the benefit you’ll be told justifies it.
I’m here to tell you that you don’t need to worry about it. If you get a refund, even a large one, it’s no big deal. It really isn’t much of a problem at all.
The Justification For No Refund
Avoiding a tax refund was one of the first big tenets of personal finance I heard when I started reading money blogs. That was over ten years ago. I listed above the reasons, but it basically boils down to the idea that you shouldn’t give the government an interest free loan. It’s money that you paid all year that you get back, right? So, you should earn interest on it. Interest is more money. More money is great for personal finance. It all makes perfect sense.
It’s Stale Advice
Back in the day ten years ago, I was 100% for this. However now, I really don’t think it’s that important. Why? Two
words: Interest rates.
Ten years ago, banks were flying high and paying out big interest on savings accounts. Getting a yield of 5-6% was not uncommon. Things like CDs and such could get you 7% or more.
That was pretty big money.
Now, interest rates are pretty low. The biggest savings rate I earn is 1.75%, and that’s up big from a few years ago. It was 1%.
Say you get a $3,000 refund. Your interest, back in the heydey, could have been as high as $210. Now, with 1.75%, you’d get $52.50. *I know that it wouldn’t come to these exactly, but for simplicity purposes, I’m going with these.
When Something May Not Be Better Than Nothing
One thing I still hear is that, even with low rates, it’s still free money. After all, while $52.50 isn’t as much as the $210 you could have earned, it’s still $52.50. You should grab it, right?
My answer: Sure, but….what about temptation?
See, when you get extra money in your check, it’s easy to say that you won’t spend it. But, what if you do? In my example above, it would only take $52.50 of spending through the entire year before you come out behind.
Think about that. $1 per week and you’d be behind. One night out with dinner and drinks. You get the point.
You Can’t Spend What You Don’t See
Getting $52.50 is certainly nothing to sneeze at. But, if you take away the temptation to spend that throughout the year, most people won’t. If you don’t see it, you’ll be less inclined to spend it.
Is taking away $52.50 a small price to pay to end up with a guaranteed $3,000? I think that for many, it might be.
It’s All Discipline
Many will read this and be aghast. They’ll say that of course they could save that money every week. They’ll point out that any money left on the table is foolish. They’re right.
But the fact is, those people are in the minority when it comes to saving. Many people may not be disciplined enough to end up with that full $3,052.50 at the end of the year.
See, I’d rather a whole bunch of people end up with $3,000 than end up with $2,500 because they spent $10 per week throughout the year. For many, that’s worth it.
Know Yourself And Trust Your Gut
If you end up getting a hefty tax refund, don’t beat yourself up. If anything, understand that it’s still your money. Interest alone won’t make you rich, so don’t sweat the lost opportunity.
If you think you can make the change, then do so. Keep the money. Enjoy the interest.
But if you decide it’s not worth it, don’t sweat it. If you think you might get tempted to spend a little bit, then let the government have their loan. Take your refund next year and enjoy it. I promise it’s not that big of a deal.
Readers, what do you think about getting a tax refund? Am I violating the personal finance code of ethics, or do you see my point?