Money Management

Should you want a large tax refund? The answer may surprise you. 

Let’s face it — filing taxes isn’t exactly a fun way to spend a weekend (or longer, depending on your situation). The upside, though, is getting to see a potentially large refund hit your checking account.

But what if this year’s tax refund is shaping up to be smaller than last year’s? If so, you’re in good company.

For the week ending March 17, the average tax refund came to $2,933. A year prior, it was $3,305. That’s a notable difference.

It’s easy to see why tax refunds are down this year. In 2021, many tax benefits took effect as part of the American Rescue Plan, the massive stimulus bill that was designed to help the public cope with the pandemic. Those benefits, which included a number of boosted tax credits, translated into larger refunds for 2021 tax returns, which were filed in 2022.

But those pandemic-era benefits didn’t carry through into 2022. So this year, as filers submit their 2022 tax returns, they’re apt to start noticing smaller refund amounts. That’s not necessarily a bad thing, though.

A tax myth worth dispelling

Many people are wired to believe that a larger tax refund is better than a smaller one. But one thing you ought to remember is that a tax refund does not represent free money that the IRS is giving you out of the goodness of its heart.

Rather, a tax refund simply represents money you were entitled to collect earlier on in the year, but didn’t. So if you’re in line for a smaller tax refund this year, it means you got more of your money in 2022, when you no doubt needed it.

To put it another way, the average tax refund so far this year — $2,933 — represents that much income the typical filer did not receive in 2022 but could have. Now, think about last year. Did you struggle with different bills due to inflation? Were you ever forced to carry a credit card balance forward (and rack up some interest in the process) due to not having the money to pay it in full? And would an extra $244 a month have helped you better cope with higher costs and your bills in general?

Chances are, yes. And that’s precisely why a large tax refund isn’t necessarily something to aim for. All it means is that you denied yourself money upfront and paid more in taxes than you were required to.

How to purposely shrink your refund

If you’d rather start getting more of your money upfront rather than waiting for a larger refund, talk to your employer about adjusting your tax withholding (the amount of tax taken out of each paycheck). Your payroll department should give you an opportunity to make changes to your W-4 form, though it might take a few pay periods to process them. From there, your paychecks might get a little larger, giving you the leeway to spend your money when you need to.

The idea of a giant tax refund may be exciting initially — until you realize what it represents. So if you want more financial flexibility on a month-to-month basis, consider taking steps to intentionally shrink your next refund — and collect more of your money as you earn it.

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The recent banking industry crisis makes the economy more vulnerable to a recession, says one expert. Read on to see why you shouldn’t panic automatically, though. 

During the latter part of 2022, a near-term recession began to look likely. Inflation was surging. The Fed was aggressively raising interest rates. And many financial experts were convinced that higher borrowing costs were about to drive a major decline in consumer spending, resulting in a broad economic downturn.

But so far, that hasn’t happened. Inflation is still a problem, and the Fed has already raised interest rates twice this year. But consumer spending has not plummeted to a notable degree. Between that and a relatively low unemployment rate, the odds of a recession seem lower today than they did six or nine months ago.

As such, a number of financial experts have begun to scale back their recession warnings, including JPMorgan CEO Jamie Dimon. Dimon was quick to issue his share of doom and gloom warnings in 2022, but in recent months, his outlook seems to have shifted.

Still, in a recent shareholder letter, Dimon said that in light of the recent banking industry crisis, “The market’s odds of a recession have increased.” And that’s an unsettling thought. But here’s why you shouldn’t be so quick to panic over the idea of a recession.

A downturn is not guaranteed

Today’s economic situation is a strange one. Inflation remains high and the Fed still has plans to raise interest rates to encourage a pullback in consumer spending. That alone has the potential to drive the jobless rate upward and lead to a broad economic decline of some sort.

But a downturn also may not happen. Consumers have shown a resilience to inflation, as evidenced by the fact that they’ve continued to spend. And if that continues, we might manage to completely avoid a recession in 2023.

Furthermore, while the banking industry isn’t totally in the clear, we’re not in the same boat as in 2008. It’s unsettling that several major players in the banking industry — notably, Silicon Valley Bank and Credit Suisse — have experienced recent failures. And the impact of that might reverberate for months.

But there are still plenty of banks that are in good shape. And so consumers don’t necessarily have to lose sleep over the idea of losing their savings. (And besides, that’s what FDIC insurance is for.)

Consumers are better equipped to withstand a downturn

While the chance of a 2023 recession certainly isn’t 0%, Dimon acknowledged that U.S. consumers are in a reasonably good place to deal with one.

“Unemployment is extremely low, and wages are going up, particularly at the low end,” Dimon said. “We’ve had 10 years of home and stock price appreciation, and even if we go into a recession, consumers would enter it in far better shape than during the great financial crisis.”

Of course, this doesn’t mean consumers shouldn’t take basic steps to prepare for a recession. It’s a great time to work on building or boosting an emergency fund, paying off high-interest credit card debt, and growing job skills to gain some protection in the event of layoffs. But all told, consumers don’t have to dive into panic mode just yet — even with the odds of a recession perhaps being a bit higher at this point than they were a month or two ago.

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Dave Ramsey has a list of recommendations before you buy a home. Keep reading to learn whether you really need to accomplish all these objectives first. 

If you are thinking about buying a house, you don’t want to jump into the process of searching for a mortgage and visiting open houses until you’ve made certain you are ready to do so.

Finance expert Dave Ramsey recommended seven steps you should take first. But, while some of his recommended steps are good advice, you don’t necessarily need to do every item on his list.

Here’s what Ramsey suggests, as well as some advice on which steps are worth following.

1. Pay off debt and prepare for emergencies

According to Ramsey, you should be debt-free before buying a home. This includes not just paying off credit cards, but also lower-interest debts, like car loans, as well. He also says you should have an emergency fund, which is three to six months of living expenses in the bank.

Ramsey is right about the emergency fund, as homeownership is expensive and you want to make sure you’re ready for surprise expenses and also prepared to cover your mortgage payment if your income falls.

But, you absolutely do not need to be free of all debt before buying a home — and you could spend many years renting if you try to hit this goal. As long as you don’t have high-interest consumer debt and you keep your debt-to-income ratio below the recommended amount (typically, debt payments should be 36% of monthly income or less, including housing costs), then there is no reason not to move forward with buying. After all, you could be paying on your car loan or business loan for years and losing out on the chance to build equity that whole time.

2. You have money to put down

Ramsey also suggests putting off homeownership until you have a minimum of 5% to 10% to put down (as a first-time buyer), and ideally closer to 25%.

He’s right about this, but he’s wrong about the kind of mortgage you should get after making this down payment. While he recommends getting a 15-year loan, you’d be needlessly committing to a much larger monthly payment if you took this approach when you’d be better off with a 30-year loan.

You can invest the extra you have left over with smaller payments and end up earning a higher return than you would with early mortgage payoff. Or, if you want, you can choose to pay off your loan early, but you won’t be trapped with a huge payment if it turns out you can’t afford to pay extra some months.

3. You’re prepared to cover monthly costs

Ramsey said not to buy until your “budget can handle house payments,” which includes both your mortgage loan and other expenses like property taxes, insurance, and home maintenance.

This is good advice from Ramsey and, in fact, you may want to practice making your mortgage payment to be sure you’re really ready. To do that, if your rent is $1,000 a month and your housing costs (including saving about 1% of your home’s value a year for maintenance) would be $1,500, then pay your $1,000 rent and transfer $500 to savings at the same time. Do this for six months to see how you really feel about making those higher payments for years to come.

4. You’re ready to cover closing costs

Ramsey also advised that you aren’t ready to buy until you have saved 3% to 4% of your home’s value to cover closing costs. This is good advice, too.

These expenses are often surprising for many first-time buyers, and you don’t want to end up having to borrow for them and pay them off along with your mortgage loan as this would significantly increase their costs. Remember, you’d be paying interest on the closing expenses for decades.

5. You’re prepared to cover moving expenses

Ramsey said it’s important to be ready to pay for moving expenses with cash before buying a house and he’s right about that too. Moving can cost a surprising amount, and the last thing you need to do is to end up in debt right before you take on the responsibilities of homeownership.

6. You aren’t planning on moving anytime soon

According to Ramsey, you should be ready to stay put for five years before you commit to purchasing a home because otherwise you are likely to lose money due to the transaction costs you incur.

“It usually takes at least five years for a home’s value to grow enough to keep you from losing money when you resell it.”

He’s right it’s not a good idea to move soon after purchasing, but a five-year commitment is on the longer side of this recommendation. If you’re going to be living in one place for at least two to three years, then buying may not be the worst choice — especially if homes in your area tend to go up in value quickly.

7. You’re represented by a real estate agent

Finally, Ramsey said you need to make sure you have a trusted real estate agent before you buy.

For many people, having an agent does make sense since your agent can help you to negotiate an offer and do your due diligence when buying a property. Experienced buyers don’t necessarily need an agent, especially if they have a lawyer look over their sales contract, but since the seller pays commission to the buyer’s agent, there may be little to lose by having this advocate on your side.

Ultimately, you need to make the choice about whether you are ready. While you should be sure to check some of these seven items off your to-do list, only you can know if you’re in a good position to make the commitment homeownership requires.

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Raising your credit score to 700 can halve your interest rate on an auto loan. Find out how to make purchasing a car more affordable with a below-average credit score. 

Car loans remain more expensive than a year ago. Car owners with below-average credit scores may struggle to find affordable financing for new cars.

FICO, the biggest credit scoring company, considers 500-600 scores below average. Consider credit-building strategies if your score is in this range. Folks with scores above 670 get much better deals on car loans, saving over $100 per month.

Interest rates for low credit scores

The average interest rate for poor credit on new and used cars is about 17% and 18.5%, respectively, according to myFICO data on interest rates by credit score.

Example: Say a customer with a 500-589 score wants to take out a $35,000, 60-month loan. They would pay about $869 monthly for a new car and slightly more for a used vehicle.

Borrowers with high credit scores can expect to pay less. For example, a customer with a 700 credit score could expect to pay only $710 monthly for a new car. That’s why raising your credit score is essential. It can significantly lower the cost of borrowing.

How to raise a credit score fast

Typically, raising a credit score takes time. If increasing your credit score is climbing a mountain, then the mountain is tall, and a marathon is in order. Reaching the peak can take years. But climbers can speed things up by employing the following fast credit-building strategies:

Double-check your credit reports. FICO isn’t perfect; sometimes, it makes mistakes that lower your credit score. You can check your credit report for free at AnnualCreditReport.com. Report mistakes to your credit bureau. Once fixed, your score may improve.Pay down debt. FICO rewards you for paying off your loan balances. If you have racked up a credit card balance, consider paying it down to lower your credit score quickly. The less you owe, the better your score. Experts recommend using at most 30% of your available credit.Request a credit limit increase to raise your credit score. A higher credit limit shrinks your credit utilization ratio. Say you borrow $500 with a card. Boosting your credit limit from $1,000 to $2,000 would drop your credit utilization from 50% to 25%, potentially improving your score.

Other ways to make buying a car cheaper

Sometimes, strategies to build credit fast aren’t enough — you need a car now, and your score is still in the 500-600 range. Borrowing may be too difficult or too expensive. Fortunately, there are tools you can use to make the journey up Credit Mountain more affordable right now:

You can trade in a used vehicle. Some dealerships will subtract the trade-in value of your current car from a new one; essentially, the dealer is paying you for your old vehicle. But dealers typically pay less than what you could get from a private sale.You can extend your loan payback period to 72 months. You’ll pay more interest over a longer payback period, but your monthly payments will be lower. It’s worth considering if you need extra breathing room to make mortgage payments.You can get a cosigner on a loan to borrow another person’s credit score. A cosigner with excellent credit improves your chances of snagging a loan, and they may lower your interest rate. However, not all lenders let borrowers cosign, and your cosigner will be on the hook for missed payments.

Where do I find a loan with poor credit?

You can take out a loan from a dealership or bank. Banks may offer better deals than dealerships. Plus, banks can pre-approve loans, simplifying the car-buying process. The best personal loans for bad credit may give borrowers lower interest rates.

Tools are handy but work best when paired with a good credit score. The sooner you embark upon credit-building strategies, the sooner you’ll reap the rewards of the best auto loans, car insurance, and more. It’s never too late to start climbing.

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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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Only 33% of millionaires pay off their monthly credit card statements. Read on to learn why most Americans are better off avoiding millionaire credit card habits. 

Word on the street is millionaires swipe with special cards. Think platinum, gold, or the legendary “black card” that offers fancy perks and sky-high limits.

According to The Ascent’s research on how rich Americans use credit cards, the truth is less glamorous. Millionaires tend to use the same banks that average Americans do. And millionaires aren’t saints — many disregard sound financial advice.

The average American may be better off avoiding millionaire credit card habits. For one thing, millionaires carry a lot of cards. Too many, according to some financial advisors.

Millionaires lug around more credit cards

Seventy percent of millionaires carry two or more credit cards, according to The Ascent data. Of those, about half possess three or more cards. That’s pushing the limit of expert credit card advice, which typically recommends people stick to one or two cards at any time.

Here’s a breakdown of how many credit cards millionaires own compared to non-millionaires:

Most non-millionaires own fewer than three cards — a smart move. Having too many cards endangers spenders; they become more likely to overspend or miss payments. By keeping credit cards manageable, users shrink the likelihood of going into debt.

Then why do millionaires own so many cards? Their wealth may give them confidence to weather missed payments — only 33.07% of millionaires pay off their monthly credit statements. And millionaires are much less likely than others to care about interest rates.

Millionaires trust big banks

Millionaires tend to trust the same large banks as regular Americans. Big banks offer premium credit cards with zero annual fees. Here are the most popular banks among the wealthy:

Bank of America (50%)American Express (38%)Capital One (35%)

Though luxury “black cards” offer big spenders bragging rights and fancy perks, the most exclusive credit cards typically have high annual fees, ranging from $400 to $700. Users would have to spend a lot for credit card rewards to offset fees.

Stick to one or two cards

Generally speaking, one or two credit cards are plenty. Juggling credit cards can be overwhelming and threaten your financial health. Americans can get the best rates with a high credit score and a standard cash back credit card.

That said, there are legitimate reasons to own more than two credit cards.

Folks might open three credit cards to maximize rewards. For example, say a credit card offers cash back on grocery spending. Frequent travelers may also want a second travel credit card that gives points for booking flights. They might also want to consider a gas rewards card that offers discounts at the pump.

Consider your risk tolerance and spending habits. Most important is to make your monthly payments on time and in full, whenever possible. Simple credit card habits lower the risk of overspending and keep your wallet happy.

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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.Bank of America is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Cole Tretheway has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America. The Motley Fool has a disclosure policy.

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