Money Management

According to Benjamin Franklin, nothing is certain but death and taxes. Here’s what can happen if you fail to pay those taxes. 

The number of Americans who fail to file taxes each year is estimated to be 10 million. We’re not talking about folks who aren’t required to file taxes or people who file but don’t owe taxes. We’re talking about those who deliberately choose to ignore their tax obligations.

Of course, there are a lot of reasons a person might try to forget the IRS exists. Let’s say someone owns a small online business and got so busy during the year that they failed to keep proper records. That person may be tempted to ignore the annual tax deadline. Maybe someone is fighting a serious illness and doesn’t feel up to dealing with taxes.

Whatever the reason, it’s important to understand what can happen if you decide not to file this year.

You’ll receive a stern warning

A letter from the IRS rarely contains good news. If you’ve filed taxes but have not paid the amount owed, you’re likely to receive a letter telling you that you’re legally obligated to do so.

Really, sending a letter is a relatively polite way for the IRS to remind you of an issue you may be trying hard to ignore. Your best bet is to pay attention to the letter. Failure to pay can also result in the following consequences.

You’ll get hit with penalties

Failure to pay taxes can be costly. The IRS charges a penalty of 0.5% of the unpaid amount for each month or part of a month the tax remains unpaid, not to exceed 25% of your unpaid balance.

If you haven’t even filed your taxes, the IRS will apply both a Failure to Pay and Failure to File penalty. In total, this penalty amounts to 5% of the unpaid balance.

There may be a levy placed on your bank account

If the IRS does not receive an indication that you’ll be paying your taxes, it can impose a bank levy. A bank levy is a legal maneuver that allows the IRS to take funds from your bank account.

Your wages could be garnished

If you’re already cutting the monthly budget close, you’re not going to like the fact that the IRS can take a portion of your paychecks through wage garnishment to repay a tax obligation.

A lien may be placed against your property

Typically, once you owe the IRS $10,000 or more, the federal government adds “property lien” to its list of potential actions. A property lien is a legal maneuver that gives the IRS a stake in your home. Let’s say you decide to sell the property. Your proceeds won’t be paid out to you

Your property could be seized

If you totally ignore IRS warnings and your tax bill begins to pile up, it has the right to seize your property. If the IRS does so, the property will be sold and the proceeds used to cover your tax debt.

You may be required to forfeit a refund

If, for some reason, you’re owed a refund but are still choosing to avoid the IRS, that refund may be forfeited.

You might face tax evasion charges

If you’re a regular working person and have gotten behind on taxes, you’re probably not going to be thrown into the clink. If you’re a millionaire who isn’t paying taxes because you don’t want to, jail is possible — theoretically.

Your passport can be revoked

The State Department has the right to revoke the passport of anyone who deliberately avoids their tax obligation. Thanks to the Fixing America’s Surface Transportation Act (FAST Act) of 2015, the State Department can yank passports from delinquent taxpayers. If you’re a frequent traveler, this penalty could be particularly difficult to deal with.

The IRS may be the bill collectors for the federal government, but that doesn’t mean it’s the bad guy. No matter how far behind you are, there’s no time like the present to reach out to an IRS representative to learn how you can get caught up.

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Congratulations, graduate! Keep reading for the financial facets to focus on now — and helpful hints for future success. 

While there’s a lot of debate about the merits of a college education, if you’ve just finished with school, you’re in a good position to earn more money over your lifetime. Pew Research reported data from the Bureau of Labor Statistics for 2021 that showed full-time workers ages 22 to 27 with bachelor’s degrees earned a median annual salary of $52,000, compared to just $30,000 for those of the same age who had only a high school diploma. And Zippia found that the average starting salary for a college graduate last year was $55,260.

If you’ve got your diploma in hand, let’s take a look at some key money moves you should make now.

1. Think about the future

You’ve got your entire (financial) life ahead of you as a new graduate. Your money goals could (and likely will) change over time, but the sooner you consider your options, the better. Why? If you’re only in your 20s, you have a lot of time to save money to make your dreams a reality. If you know you want to be able to buy a home someday, you can start setting aside money now. Want to live overseas? Or retire early? Have kids and be able to pay for their college education? The possibilities are endless.

2. Consider your career path

When you’re a fresh grad, you’re likely looking at entry-level roles, and could be feeling discouraged about the minimal job duties (and matching salary). Don’t be, though. We all had to start somewhere, and even if your first (or second, or third) job out of school isn’t ideal, it will at least teach you skills you can take forward into your career. At the very least, you’ll learn what you don’t want to do for a living. Consider pursuing work that’s more interesting to you via a side hustle or even an internship, if you have the time on top of the work that pays the bills.

3. Learn how to budget

Nobody likes the b-word, but giving your money a job and learning how to manage income and bills now is a sure way to set yourself up for future success. Remember, a budget doesn’t just tell you what you can’t spend; it also tells you what you can spend. And spending some of your money on things you enjoy is important. Check out the best budgeting apps to find the system that works best for you, or if you like spreadsheets, build yourself the budget spreadsheet of your dreams.

4. Start saving an emergency fund

Along with budgeting, having a solid emergency fund is another piece of personal finance 101. Aim to save enough cash to cover three to six months’ worth of bills, so you can sleep easier at night knowing that if you lost your job or suffered another financial hiccup, you could get by without going into debt. A good high-yield savings account is an excellent place to put your emergency fund. Some accounts with online-only banks are paying 4% APY or better right now, too.

5. Evaluate your checking account

While you’re looking at new bank accounts, don’t forget to check up on your checking. You may currently have a student checking account that doesn’t charge you any fees, but it might also not offer a full range of perks and benefits. Thankfully, there are great low or no-fee checking accounts available that can make it easy to pay your bills and reimburse you for ATM fees — and some of them even pay interest on your cash.

6. No credit? Begin building it

If you graduated college without much in the way of established credit, you might wonder if it’s too late to start. Definitely not! If you’re no longer a student, getting a student credit card may not make sense for you (and some issuers require you to be a current student anyway).

The good news is that secured credit cards are available to you. They require a security deposit, which becomes your credit limit. It’s best to keep your credit usage low, ideally under 30%. So if you have a secured credit card with a limit of $1,000, you’d keep your balance under $300 at any given time. Pay your bill on time (and even better, pay off your whole balance every month), and your card issuer may upgrade your card to an unsecured one.

7. Make a plan to pay off any accumulated debt

Perhaps you’ve graduated college with an existing credit history, but also some debt you need to pay off. The sooner you can become debt free, the easier it will be to start saving for those goals we talked about above. There are several ways to pay off debt, but you may not yet qualify for all of them. For example, a balance transfer credit card or a debt consolidation loan often require credit in the “good” range, and you may be too new to using credit to have gotten there.

Instead, consider tackling your highest interest rate debt first (this is the avalanche method), as it will help you save on interest. If you’re worried about staying motivated to keep making those payments, try the snowball method instead. Speaking from experience, the wins you get from paying off your smallest debts first can be a great help in the process of becoming debt free.

8. Get a life insurance policy

Life insurance could well be the last thing on your mind right now, but this is actually an excellent time to consider it. If you’re young and healthy, you can get a term life policy for a very low cost, and if you sign on for a term of say, 30 years, you’ll have affordable coverage that could help support your future spouse and children (if you end up having them) in the event of your death.

9. Speak to a financial advisor

It’s likely that talking to a professional about your finances is also pretty low on your list right now. But here’s the wonderful thing about financial advisors: They can help anyone, at any stage of life. If you have questions about insurance, bank accounts, investments, budgeting, and beyond, your “money coach” can be a great resource.

10. Start investing

Now is the absolute best time to start investing, because you have many years to benefit from compound interest. You can certainly open a taxable brokerage account at this stage of your life and begin learning about stocks and other types of investments.

But if you’ve just landed a new job that offers a retirement plan like a 401(k), definitely sign up to contribute, especially if your employer will match a certain percentage of what you save. This amounts to free money, and it’s worth going after.

If you don’t have a retirement account option at work, you can open an IRA account instead and save for retirement while lowering your taxable income. If you’d rather save on taxes in retirement, a Roth IRA might be the right option for you instead.

Graduating from college and getting to start your adult life is exciting. Lean on the above tips to get your finances in order and set yourself up for future success.

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Getting in over your head on a mortgage could wreck your finances. Read on to see how to tell if you’re about to go overboard. 

In March, applicants looking for a mortgage loan faced a median monthly payment of $1,736, according to the Mortgage Bankers Association. Now that may seem like a lot of money or very little money to you, depending on your local housing market and your personal financial situation.

But either way, if you’re looking to buy a home, it’s important to not get in over your head by taking on too large of a mortgage. Here are some signs that you may be on the verge of doing just that.

1. You’re signing the absolute highest mortgage you qualify for

Ideally, you got pre-approved for a mortgage before embarking on your home search. Looking for homes with a pre-approval letter in hand can give you an advantage over other buyers, and it can also help you narrow down your search to homes within your price range.

But one thing you probably don’t want to do is take out a mortgage that represents the highest sum you’re eligible to borrow. That’s already a red flag that you may be stretching yourself too thin financially.

2. You’re signing a mortgage that will result in spending more than 30% of your income on housing

As a general rule, your monthly housing costs should not exceed 30% of your take-home pay. And that figure shouldn’t just include your mortgage payment. Rather, it should account for all of your different housing expenses, from property taxes to homeowners insurance to HOA dues, if they’re fees you’ll have to pay.

If your mortgage is going to drive you beyond the 30% threshold, that’s a clear sign that you may be making a big financial mistake. Spend too much on housing, and you’ll risk falling behind on your bills on a whole.

3. You’re already counting the bills you’ll need to slash to keep up with your mortgage

Maybe you’re signing a mortgage that won’t put you in a position where you’ll be spending more than 30% of your pay on housing. But even so, if you know from the start that taking on that loan will require you to make immediate spending cuts, then it’s a sign that you may be signing up for payments that are too large for your own good.

You shouldn’t, for example, have to cut back on smaller bills like streaming services or the occasional restaurant meal to be able to cover your housing costs. These small expenses should have a place in your budget because they’re reasonable ones to bear and lend to a nicer quality of life.

These days, home prices are pretty elevated despite a recent cooling of the housing market. So between that and higher mortgage rates, you may be looking at a larger mortgage no matter what type of place you’re buying. But be careful to not to sign up for a mortgage that’s going to mess up your finances and force you to constantly pinch pennies. You may be better off buying a less expensive home or waiting for home prices to drop on a whole.

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Paying off your home before retirement could benefit you. But read on to see why you’re not doomed if you enter retirement with mortgage debt. 

Many people aim to pay off their homes before retirement rolls around. But between 1989 and 2016, the share of homeowners aged 65 to 79 with mortgage debt more than doubled from 17% to 43%, according to a report by the Harvard Joint Center for Housing Studies cited by Kiplinger.

Now, the reality is the more debt you’re able to shed ahead of retirement, the more financial security you might buy yourself for that stage of life. That’s because many people find that their income drops in retirement, so having fewer expenses to contend with is generally more ideal.

But worry not — you’re not doomed to a miserable retirement just because you have a mortgage. All you need to do is make sure your mortgage is affordable given your new set of financial circumstances.

Can you afford to stay in your home in retirement?

There’s a reason so many retirees opt to downsize. Not only do many find that they no longer need so much space, but they also tend to get overwhelmed by the many costs associated with owning a larger home.

It could pay to move to a smaller or less expensive home if you’re entering retirement with a mortgage. But you don’t necessarily have to go that route if your mortgage is affordable.

As a general rule, it’s important to keep your housing costs to 30% of your income or less. This is a good rule for workers and retirees alike to follow. So if your mortgage, plus your remaining housing costs, including property taxes and homeowners insurance, don’t exceed that threshold, your lingering home loan doesn’t have to be something you worry about.

Now that said, you may want to aim for housing costs in retirement that are limited to more like 20% to 25% of your income. The reason? During retirement, you’re likely to see your healthcare costs increase. And you’ll want to leave yourself with enough wiggle room to cover those bills. But you can still get away with spending up to 30% of your senior income on housing if doing so means not having to deal with an unwanted move.

How to pay off your mortgage before retirement

There are steps you can take to accelerate your mortgage payments so your home is yours free and clear before your career wraps up. One option is to simply pump extra money into your mortgage as it comes your way, whether in the form of a bonus from your employer or a tax refund.

Another option is to split your monthly mortgage payment in half and pay it every two weeks. Doing so will mean making an extra payment each year, which could help you get your home paid off sooner.

But all told, if you’re not able to pay off your mortgage ahead of retirement, all isn’t lost. And it’s also not worth stressing yourself out to pay down your mortgage before retiring if you have a competitive interest rate on your home loan and you’re earning more money on your savings account balance than you’re paying your lender.

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Some expenses that might seem like unplanned bills are really anything but. Read on to learn more. 

A recent SecureSave survey found that 67% of Americans don’t have the cash to cover an unplanned $400 expense. And that underscores the importance of having an emergency fund.

If you don’t set money aside in your savings account for unexpected expenses, you might instantly land in debt the next time such a bill lands in your lap. But it’s also important to recognize the difference between expenses that are truly a surprise, and those you have ample opportunity to prepare for. Here are three that fall into the latter category.

1. Property taxes you pay quarterly

Some people pay property taxes once a quarter, and they don’t do so through their home loan servicer. Rather, they pay that money directly to their township or municipality.

Because property taxes aren’t a monthly expense, they’re an easy enough bill to forget about. But you should always have property taxes on your radar because they’re a given cost associated with owning a home. Along these lines, you should set aside money every month for property taxes so that when your quarterly bills come due, they don’t throw you for a financial loop.

2. Annual auto insurance premiums

If you own a car, you need to insure it. Auto insurance may be the sort of thing you only pay for once every six or 12 months. But even so, it should be on your radar every month, and car insurance should be a line item in your budget. That way, you can set money aside for those premiums rather than risk landing in a situation where you’re struggling to pay them.

3. Attending a wedding

The cost of being a wedding guest can be significant, especially if there’s travel involved. Similarly, if you’re in the wedding, you can expect to shell out a fair amount of money on things like attire and chipping in for a shower or bachelor party.

But even if you’re not traveling for a wedding or serving as a member of a wedding party, you might still end up having to write a large check as an invited guest, or shelling out a large sum of money for a gift. Since it’s common to get a save the date card for a wedding months in advance, you should generally have plenty of time to save for your costs ahead of time. And even if the bride and groom don’t send a formal save the date notice, if you’re close enough to be privy to an invite, you’re probably close enough to get a heads-up about the date of the big event.

Be prepared

It’s a good idea to build an emergency fund so you’re equipped to handle surprise expenses as they arise. But property taxes, auto insurance premiums, and weddings do not fall into that category.

So while these are things you should definitely save for, they’re actually not things you should tap your emergency fund for. Rather, you should budget carefully and keep money for these expenses in a separate account so you’re not forced into debt over costs you have every opportunity to anticipate.

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A 700 credit score qualifies you for discounts on car loans, insurance, and more. Find out how much you can save, plus how to shrink monthly loan payments. 

Car loans remain more expensive than a year ago. But car owners with “good” credit in the 700 range can expect to take out more affordable loans.

FICO, the biggest credit scoring company, considers 670+ scores “good.” If your score is in this range, you’re not alone — the average American’s FICO® Score hovers around 700. Folks with good scores get decent rates on car loans.

Average interest rate for good credit

The average interest rate for good credit on new and used cars is about 8% and 8.5%, respectively, according to myFico data on interest rates by credit score. (Early last year, auto rates were much cheaper.)

Example: Say a customer with a 700 credit score wants to take out a $35,000, 60-month loan. They would pay about $710 monthly for a new car. Used car interest rates tend to be higher. So the same customer would pay about $864 per month for a used car.

Customers with lower scores can expect to pay more, between $710 and $1,100 monthly, on a $35,000 loan. That’s why it’s essential to have a high credit score. It can help you keep your monthly payments low, and you’ll pay less in the long run.

Other perks of a 700 credit score

Good credit grants perks like mortgage loans and credit card approvals. A credit score of 700 qualifies potential homeowners for lower mortgage interest rates, which equates to cheaper home payments. And drivers might want to pair a snazzy new car with a credit card that makes travel more affordable. (The best gas credit cards offer 3% refunds or more at the pump.)

A 700 score may even lessen the cost of car insurance. The best car insurance for good credit offers discounts to drivers with high scores.

How to lower your monthly car payment

Cost too high? No worries — you can lower your monthly premiums by extending your payback period, switching to a lease, or raising your credit score.

You can lower monthly payments by extending a standard 36-month payback period to 48 months or more. However, doing so will cost you; you’ll pay more interest over the life of your loan. But it’s worth considering if you need some wiggle room to cover non-car expenses.

Switching to a lease lowers your monthly payments, but buyers sacrifice car ownership. However, a lease could be worth considering if you expect to upgrade to a new vehicle frequently or anticipate having more disposable income when your lease ends.

It takes time to boost your credit score, but the juice is worth the squeeze. Typical strategies include making on-time monthly payments, keeping your monthly balance low, and avoiding opening new credit cards frequently. The best credit scores are in the 800+ range and can offer significant discounts on car loans.

How much can you afford to pay for a car?

The higher your income and the better your loan, the more you can afford to spend. A good rule of thumb is to keep car payments — including gas and insurance — below 15% of your monthly income (after taxes). The best auto loans offer reasonable rates, saving you thousands in interest fees. Consider the whole financial picture before purchasing a car to maximize savings.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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