Many folks set their resolution to save money, but that's easier said than done. Learn lifestyle changes that will help you save substantial money over time.
Trying to save money can be overwhelming.
It's difficult to navigate which expenses of your daily routine can be eliminated for financial gain and which are necessities. Many people believe that in order to accumulate savings, sacrifices must be made. And while simple sacrifices such as minimizing your takeout purchases and online shopping habits may be necessary, there are ways to save that still allow you to live a comfortable lifestyle. Consider the following lifestyle changes that will help you save money so you can start striving toward your financial goals.
Establish a Budget
Just like anything else you hope to succeed at, saving money requires active effort. Create a budget based on your monthly income. Evaluate your typical expenses and set minor goals to help you stick to an intended budget.
If you're looking for budget guidance, try the 50-20-30 rule. This rule segments your income by percentages: 50 percent of income toward essentials like groceries and rent, 20 percent toward savings, and 30 percent toward fun, lifestyle expenses.
Know Your Tax Breaks
You don't have to be a tax savant to score a better tax deduction. Filing your taxes meticulously can save you trouble down the line and ensure you're getting the best outcome. Get familiar with the standard deductions and whether you're eligible for a larger one.
If you plan on donating this year, be sure to keep track. It turns out, giving back might be the first step to getting back! You can score a greater tax break with sizable donations and adequate documentation. Creating a charitable giving plan will help you manage your budget and your donation endeavors.
Adopt the 30-Day Rule
Looking to make a large purchase? Give yourself 30 days to reflect on whether you truly need the costly item. Construct a list of pros and cons to determine its necessity. Once 30 days have passed, consider again if you're ready to make the steep purchase. If you still feel it's necessary, then go for it!
Maintain Your Home and Car
Some lifestyle changes that will help you save money in the long run require initial minor investments. Proper home and car care can add up, but ultimately, they'll prevent you from having to make hefty damage fees in the future. A few things you can do to ensure the longevity of your home and vehicle include:
- Enlist arborists to verify the sturdiness of tress surrounding your home.
- Upgrade your home's siding, as necessary. Check your home's exterior for signs of excessive weathering.
- Clean out gutters to prevent roof damage.
- Perform auto-detailing tasks on your car frequently, providing a new coat of paint when needed.
- Change tires and auto liquids as recommended by professionals and in the vehicle's manual.
Tax deductions can be tricky to understand if you're new to the finance world.
One of the biggest sources of confusion is knowing what you can and can't deduct from your taxes. Deductions can be a massive financial boon for a lot of people, yet not everyone files for them correctly. This causes people to miss out on money that should be theirs. We'll go over some of the most common tax deductions that are overlooked, so you don't get shortchanged when Tax Day comes.
Charitable Contributions
When you start regularly giving to charity, even if the donations are small, you'll want to start getting itemized receipts for your donations. These receipts will help you write off these charitable contributions on your taxes. You can even write off supplies that you bought for use in a charitable cause or any miles you drove on your car while in service to a charity. Make those donations to the Purple Heart Pickup with an open heart, but make sure you get your deduction on top of that.
Student Loan Interest Payments
Student loans take up a significant amount of a lot of people's money. If you're one of these people, make sure that you get a deduction on the amount of interest you paid off in the last year. What's important to remember is that even if you aren't someone's dependent, you can write off the money someone else gave you to pay for said student loans. If someone else helped you pay off part of your loan, don't think that means you can't still get a deduction on that sum.
Child and Dependent Care Credit
If you have a reimbursement account through your job that pays for child or dependent care, you might be forgiven for forgetting about this particular tax credit. However, you can use these funds for a tax credit if you file for them correctly. This is hugely important because this is an opportunity to receive a full tax credit, not just a deduction. You're losing money you could be directly receiving if you don't file for this credit.
Jury Pay Given to Your Employer
A lesser-known tax deduction that often gets overlooked is the money you can deduct from jury pay you gave to your employer. It may not be the most exciting thing to come out of jury duty, especially after handing over any money you receive to your employer, but you do get to deduct however much money your employer made you hand over after you finished jury duty.
Credit for Saving
While this credit is more for people that are working part-time or for those that have a retired spouse, you can get a tax credit for contributing to a 401(k) or another retirement savings plan. This is also a great incentive for those that are just starting out in their careers and need another reason to start saving for the future.
Some have alleged taxes will be going up in 2021. Are they right?
The Tax Cuts and Jobs Act of 2017 (TCJA) is the hallmark legislation of the Trump administration, and no American taxpayer was unaffected. But was this legislation a Trojan horse that could lead to you paying higher taxes starting in 2021?
The Joint Committee on Taxation released a chart indicating that federal taxes for those making between $10,000 and $30,000 would actually go up starting in 2021.
The new tax brackets for 2021 have the same rates, and the only changes are the income brackets that have been adjusted for inflation. What's driving this higher tax rate for these particular brackets?
That links back to the Republican efforts to repeal the Affordable Care Act. The TCJA lowered the individual mandate penalty, the penalty paid to the government if you do not have a health insurance policy, to zero. This means there will be no tax implications to not carrying an insurance policy.
Under the ACA, individuals within 100% and 400% of the federal poverty level were eligible to receive tax credits to offset the costs of these plans. With no individual mandate penalty, the expectation is that less people will sign up for insurance. Less people signing up for insurance will lead to less people receiving the tax credits, which would lead to an increase in the average tax rate across this group.
That doesn't mean that you are in the clear if you make above $30,000. Remember how income brackets are adjusted for inflation? The TCJA also changed how inflation is calculated. Tax brackets used to be adjusted off of the Consumer Price Index (CPI), an index that tracks the prices of goods and services across different geographical areas.
The Consumer Price Index tracks how much more you are paying because of inflation each year. But the IRS now measures inflation against the chained CPI. The idea behind the chained CPI is that if prices rise, customers will change their purchasing habits and substitute goods. For example, if the price of orange juice rises faster than the price of apple juice, chained CPI assumes that people will lower the amount of orange juice that they are buying and substitute that by buying more apple juice. CPI tracks a fixed basket of goods while the basket of goods tracked by chained CPI changes periodically.
Because chained CPI assumes that consumers are going to seek out substitutes for products with rising price tags, it rises more slowly than traditional CPI. Thus, the IRS will adjust tax brackets upward more gradually, and you are likely to move into a higher tax bracket faster than you would under the old calculations.
Chained CPI calculates the cost of everyday goods rising more slowly than calculations based on traditional CPI.Federal Reserve Bank of St. Louis
If the cost of consumer prices rises 2% and you receive a similar 2% raise, normally you would be able to maintain your lifestyle. However, if the tax brackets only increase 1.5% because tax brackets are now tied to chained CPI, you will be paying more in taxes because your income and expenses will be rising faster than the rate the IRS is using. Because the tax rate is being adjusted for 2021 and will be adjusted in future years, this will compound over time, and has led to a slew of recent articles discussing a tax hike starting in 2021.
Congress passed the TCJA through budget reconciliation to avoid a filibuster, but that meant that the law could not increase the long-term budget deficit. As a result, Republicans decided to include a provision to have the individual tax cuts expire in 2025 while making the lower corporate tax rates and the chained CPI method of adjusting tax brackets permanent. The increased standard deduction and the larger child tax credit will also expire at this time. And because of the continued use of the chained CPI method, people will actually be paying higher taxes after the TCJA then they would if it had never been passed in the first place.
During open enrollment or when you start a new job, you may find that your company offers the chance to enroll in a Flexible Spending Account (FSA - registered trademark). It might seem annoying to have money deducted from your paycheck at first, but it can actually save you money on health care expenses in the long run.
An FSA is an account that takes money from your paycheck and puts it into a special account that you can only spend on certain healthcare items or eligible medical services.
You can use an FSA for copays for visiting the doctor, prescriptions, and even for services like new retainers or glasses. Some of the FSA-eligible expenses you might not even think about include sunscreen, condoms, and tampons.
Parents and children of elderly might be familiar with Dependent Care FSA, a similar pre-tax benefit used to pay for things like after school programs and even adult daycare.
The money taken out of your paycheck is pre-tax, meaning that while you can't spend the money on just anything, if you are able to estimate your medical expenses for the next year, you can avoid paying payroll taxes on up to $2,750.
If you've had your eye on LASIK surgery (eye – LASIK, get it?) you can include extra money in your FSA contribution for the next year and pay no taxes on the money from the FSA you use to pay for the surgery.
Many plans allow you to access the full year's contribution on January 1st. This means you can use the FSA as an interest-free loan for medical expenses. The money is going to be deducted from your paycheck anyway, so why wait?
The big downside to an FSA is that you usually can't change your contribution mid-year. So, if you run out of money in the FSA funds in July, you'll have to use regular after-tax dollars to pay for qualified goods and services.
Conversely, put in too much, and you might be scrambling in December to find eligible expenses to spend the money in your FSA account. An FSA is use-it-or-lose-it – you have to spend all the money that year or poof, it's gone. However, if you have funds remaining in your account at the end of the plan year, there is a grace period of two months and 15 day. That means you have until March 15th to spend money from the previous year.
To decide how much to contribute to an FSA, I recommend a few steps:
- Look at your qualified medical expenses that happen on a regular basis. If you know you're going to have a $20 copay every week for therapy or a $35 copay every six months for a checkup, take note of it.
- Think about any big procedures or items you might want in the next year. If you're thinking it's about time for new prescription sunglasses, be sure to set aside some money for that.
- Do some research about what FSA-eligible items you use regularly and get a rough estimate as to how much you might spend on them. I usually check out the FSA Store to get an idea of the different categories. If you're addicted to a certain lip balm or have been dying to try light therapy for your acne, try to get a ballpark idea of how much you're going to spend next year. I don't know what guy needs to hear this, but you probably do not need that many condoms even if they are tax-free.
- I like to then add a small gross up for incidentals that may pop up (nobody plans on spraining a wrist) and any random expenses you might have (if you have to pay for parking at the hospital or something, you can use your FSA). The specific amount depends on how comfortable you are of running out of your FSA if something comes up and how much extra you can afford to set aside each week from your paycheck.
- Add that all together and that's how much you should set aside in your health care FSA.
Once you have your limited purpose FSA, you can use the FSA mobile app for deadline reminders and eligibility checks.
You can retain hundreds of dollars a year in tax savings by paying your medical expenses with money from your FSA all while keeping you healthy. If your employer offers one with your health insurance benefits, I definitely recommend enrolling. Spend more on your health, and less on the internal revenue service.
