May is a month to celebrate.
We start off strong with May Day. Then comes Star Wars Day — aka my birthday — Cinco de Mayo, Mother’s Day (reminder! May 8!), Memorial Day and dozens of other faux-marketing holidays jammed in between. (Did I mention my birthday’s coming up?)
Amid all the festivities, it can be hard to carve a little time out for your financial health. But we’re here to help with that. Each month, Money brings you a bite-sized financial checklist to help you live your best life. This month, we're talking inflation, tax refunds and saving for college.
Here are the best money moves for May.
1. Fight inflation with I bonds, now with a 9.62% interest rate
At 8.5%, the inflation rate is at the highest level since December 1981, according to the Labor Department. That's due in part to the soaring costs of gas, housing and vehicles.
If skyrocketing prices for everyday items weren't bad enough, inflation is also likely eating away at your savings.
For example, the money sitting in your savings account right now — likely yielding a paltry 0.06% interest — is losing value fast.
The good news: Uncle Sam offers a safe way for you to protect your savings from inflation with Series I Savings Bonds, otherwise known as inflation bonds or I bonds. And in May, I bonds are looking more attractive than ever before.
Today, the U.S. Department of Treasury, which issues the bonds, announced the new annualized interest rate: 9.62%, the highest rate ever since I bonds were created in 1998. Again, compared to the 0.06% average interest on savings accounts (or even 0.5%, if you have a high-yield savings account), I bonds sound like a no-brainer.
To lock in that 9.62% rate for six months, you must purchase them between now and the last business day of October, as the interest rate changes every six months to account for inflation.
While there is a lot to love about I bonds, bear in mind that there are important caveats you should weigh before you buy:
- I bonds have an annual $10,000 purchase maximum for electronic bonds and a $5,000 maximum for paper bonds.
- While you can buy electronic bonds at any time on TreasuryDirect.gov, paper bonds can only be purchased at the time of filing your federal tax return, and you must elect to use your refund money to buy them.
- You won’t be able to cash them out within one year (unless under emergency circumstances). If cashed out within five years, they lose the final three months worth of interest.
2. Budget your tax refund wisely
Tax refunds are especially important to folks this year, given the decades-high inflation rate. Soaring prices have many people holding back on big purchases such as cars and homes. And inflation has contributed to about a quarter of Americans missing at least one bill payment, according to a recent Capital One report.
So far this year, the IRS says the average refund is north of $3,000, and the agency has already pumped out nearly 89 million refund payments.
For many, that cash windfall is exactly what’s needed to regain their financial footing. But when the money rolls in, you may be tempted to revenge-spend it after weeks, months or even years of austerity.
While experts recommend you avoid viewing your refund as play money, they do see the benefit in using a portion of it to treat yourself — so long as it’s about 5% to 10% of the total refund.
One of the first things you’ll want to do when the refund hits your account is catch up on your bills if you were one of many who fell behind recently. Then, experts recommend one of the most important personal finance steps: ensuring you have an emergency savings fund (perhaps in I bonds?) that can cover between three to six months of expenses. If that box is already checked, pay down any credit card debt.
From there, it’s a savvy move to stash at least some of it away in a 401(k) or Individual Retirement Account (IRA). Finally, you can put any remaining refund money toward a long-term goal — such as buying a home or funding your wedding — or use it to pay off other high-interest debt.
3. Take advantage of a 529 college savings plan
May 29 is National 529 Day — because 5/29 — making this as good a time as any to sing the praises of the education savings plan.
So what is a 529 plan, exactly? In short, it’s a tax-advantaged way to save money for qualifying educational expenses, including tuition, books, room and board, and more. Almost every state offers a 529, though the exact plans and benefits vary by state.
Most states allow you to deduct your contributions from your state income taxes. And withdrawals are not subject to federal taxes so long as they’re used for qualified expenses.
While 529s are often referred to as “college savings plans,” you can now also use them to pay up to $10,000 per year for tuition costs associated with public or private elementary and secondary schools as well, according to the IRS.
Additionally, anyone can open a 529 for any person, including themselves. The beneficiary does not have to be a child.
Around this time of year, many states run special offers for opening 529 plans around National 529 Day. For example, Utah residents can receive a contribution match of up to $40 for opening a new account and setting up recurring payments. Several other states offer similar incentives. Check with your state’s 529 provider for holiday promos.