With tax season over and the weather finally thawing out, now is the perfect time to take a look at three easy steps you can take to spring-clean your finances. These simple moves could put more than $8,000 in your pocket over the next year.
No. 1: Stop loaning your money to Uncle Sam for free (money in your pocket: $2,790)
Are you looking forward to a sweet refund from the Feds or your state this year? You're not alone. According to IRS data, the average tax refund is somewhere in the neighborhood of $2,790 this year. As nice as it may feel to get that refund, in reality, you're just getting your own money back after having lent it to the U.S. government interest-free for the better part of a year.
By adjusting your withholdings (or your estimated tax payments if you're self-employed or retired) to come closer to breakeven on your taxes, you can keep more of your money working for you. As long as you keep within what are known as the Safe Harbor limits and make your payments on time, you can even borrow a bit from Uncle Sam, interest-free, and settle up on April 15 next year. You're covered by those Safe Harbor rules if any of the following are true:
- You owe less than $1,000.
- You pay at least 90 percent of what you owe for 2013.
- You pay at least as much as you owed last year (or 110 percent of what you owed for 2012 if your 2012 AGI was above $150,000 or above $75,000 if married filing separately).
No. 2: Make a dent in your credit card debt (money in your pocket: $2,392.50)
If you are getting a refund, turn around and use the money to pay down your highest-interest credit card debt. The average American family with credit card debt owes around $15,950 on their cards, with typical interest rates around 13 percent to 15 percent. Letting that debt fester at 15 percent interest ends up costing you $2,392.50 in interest per year. The sooner you can stop paying out that interest, the better off you'll be.
No. 3: Refinance your home mortgage (money in your pocket: $2,893.60)
As recently as 2011, 30-year fixed mortgage rates were above 5 percent. Now, they're down around 3.4 percent. A typical mortgage balance is around $213,000. If you're planning on staying in your home for the foreseeable future, refinancing a two-year-old mortgage to knock 1.6 percent off the interest rate could save you around $2,893.60 in interest in your first year. That's money going toward your equity and/or directly into your pocket that benefits you and not your bank.
Of course, you may need to pay up-front fees in order to lock in that lower rate, but those are costs you'll quickly recover through the lower interest payments on the mortgage. And if you're strapped for cash and can't cover the up-front fees, many lenders offer lower-fee mortgages where you trade off a slightly higher rate in exchange for lower fees up front. That trade-off means that you won't save quite as much on interest, but the lower rates still may be worth it for you over the life of your mortgage.
Three changes -- $8,076.10 more in your pocket
If you're able to take advantage of all three of these tips, together they can put $8,076.10 in your pocket over the next year. That's a decent haul, even in good times. These days when we're all feeling more strapped for cash, it might just be the edge needed to help stop you from merely treading water and start you swimming toward the shore of financial stability.