This Week in Your Wallet: February 26, 2013
Riddle me this, dear readers: What impending event could cancel flights, create long lines at the airport and delay your tax refund? Is it:
A) Winter Storm Zenith
B) The Semester
C) The Sequester
D) Congress’ Spring Recess
If you’ve been following the news (or even just noticing the subject lines of these emails), you probably know that the answer is C: The Sequester. What might be a little less clear to you is exactly what the sequester is and why it’s become an issue. So, with some help from two great pieces from the New York Times and NBC News, allow me to try to explain.
The sequester, short for “budget sequestration,” is $85 billion of across-the-board spending cuts that are required to take place on March 1st (Friday) unless Congress intervenes. As for why this is happening now, I could give you the short answer or the long answer. The short answer is this: because in previous budget showdowns (like the debt ceiling debate in July of 2011), Congress decided to kick the can down the road. The longer answer: In response to the debt ceiling, Democrats and Republicans agreed to a set of spending cuts so “onerous” (that seems to be the word of choice) that lawmakers would have no choice but to replace them with a reasonable plan by January 1, 2013. However, in the 11th hour fiscal cliff deal on the last day of 2012, these automatic spending cuts were delayed by another two months. And so here we are.
So what does all of this mean for you? That answer depends partially on what happens over the next few days, and partially on what government services you currently rely on. Agencies will need to furlough workers, and some are already getting ready to do this. As I mentioned in my introduction, fewer TSA workers could produce longer lines at airports (I’ll be at an airport Friday morning, so I’ll be able to tweet updates of what is happening in real time), while fewer FAA air traffic controllers could mean fewer planes in the sky — i.e, more flight delays and even cancellations. On the bright side, some of the more essential services would be spared: Social Security and Medicare benefits would not be cut, nor would food stamps, Medicaid or children’s health benefits.
It’s worth noting that we’re still a few days away from the March 1st deadline, so it’s possible Congress will strike a deal — and we won’t have to worry about the aforementioned chaos. In the meantime, if you’re looking for more information on the sequester, I highly recommend reading the NYT and NBC Q&As linked above. Both break down the issue in a clear and understandable manner.
And now, here are the other headlines for the week:
Smart Ways to Spend Your Tax Refund
According to research from Turbo Tax, 67% of people say they’re planning on using their tax refund to pay down debt, help with bills or to build up a savings nest; only 15% of taxpayers plan on treating themselves to a vacation or shopping spree. These are largely encouraging statistics, and kudos to you if you fall in the first category. As for the rest of you who want to spend that refund check, I’m not going to tell you how to spend your hard-earned money… but I will share this MarketWatch article with you. It has some great suggestions for purchases that might help you a bit more than a trip to Florida — and some of their suggestions might even save you money in the long run. My favorite tip? Use the money to make home improvements. Not only could you be staving off a future emergency, energy-efficient home improvements could get you a tax credit of up to $500.
Also, while we’re on the subject of tax refunds: Did you know you can save yours in different accounts? It’s true. All you have to do is use IRS Form 8888, which lets you divide the refund between two or more accounts. This means that you could send part to a regular savings account, part to your kids’ 529s and part to your own IRA without having to do the transfers yourself. If you use tax preparation software like Turbo Tax, you will see a button/link at the end of your process that says “refund options” — clicking this should allow you complete Form 8888 and split the refund among the desired account. For more information on how to do this, head here. And, if you’re interested, the Doorways to Dreams fund is running a Save Your Refund promotion and contest. All you have to do is save $50 of your refund using Form 8888, and you could win $25,000. The link on using Form 8888 also provides more information on the contest, so check it out. If you were already planning on saving your refund, this could be a chance to win some extra money!
Credit Card Debt Outweighs Savings
Yikes! For all the encouraging news from Turbo Tax about the responsible ways people are planning on using their tax refund, there’s a concerning new report from Bankrate.com that reveals one out of every four Americans has more credit card debt than they do savings. TODAY.com spoke to Greg McBride, Bankrate’s senior financial analyst, who said that a big problem is that wages have been stagnant as expenses for food and health care have gone up.
McBride also predicted that when incomes do start to increase, a savings increase will not necessarily follow. “At the point where incomes do start to grow, I don’t think it means that the savings rate’s going to go up,” he told TODAY.com. “I think it means that consumer spending is going to go up.”
In Defense of the College Degree
More and more frequently, I’ve been hearing people bemoan the value of the college degree. “It’s too expensive!” some of you say. I’ve been pretty consistent in my defense of the bachelor’s (or even associate’s) degree — as I note in my book Money Rules, a college graduate can earn $973,000 more than a high school graduate over the course of a career — and there have been some recent articles that further support the case for college. The first is an infographic that appeared in the Atlantic, and it shows that not only is the unemployment rate lower for those with college experience, but wages are higher and the rate of return on tuition is better than that of the stock market.
The second article is a much buzzed-about piece from the New York Times that proclaims that the college degree is the “minimum requirement” for even the lowest-level job. “When you get 800 résumés for every job ad, you need to weed them out somehow,” said one executive who spoke to the Times. “College graduates are just more career-oriented,” said another.
While generalizations like this aren’t necessarily a good thing — nor is the degree inflation that has occurred as a result — it’s certainly worth keeping in mind as you and your children weigh their various post-high school options. For a student who is undecided about his future, even a two-year degree could make a world of difference in regard to his job prospects and future wages.
Have a great week!
Jean
