This year may be your last best chance to really start saving.
The economy is humming along, having grown for 102 months in a row, the third-longest expansion in American history. The Federal Reserve, fresh off three interest rate hikes last year, appears determined to repeat the feat in 2018 as the unemployment rate continues to hover around post-Great Recession lows. This confluence of factors is a boon for savers.
While businesses are loath to substantially increase wages, earnings have inched up over the past few years, and economists are hopeful that 2018 will finally produce the raises that American workers are longing for.
There’s also the matter of the GOP’s $1.5 trillion tax bill that’s coming online now. The majority of the benefits, to be sure, are conferred to businesses and the very wealthy, but most taxpayers will see some relief this year.
Chances are, your savings—in your savings account or IRA—could use some help. Use these tailwinds to fortify your savings before the economic climate changes.
Get the most from rising rates
Conventional wisdom on central bank policy, according to a recent Bankrate survey of economists, states there will be at least three short-term federal funds rate hikes in 2018, just as there were in 2017.
While banks don’t immediately pass on increased yields to savings account holders, you should see slightly more return on your cash this year.
Expect to see the average one-year CD yield tick up to 0.7 percent by next December, according to Bankrate chief financial analyst Greg McBride, while five-year CDs jump to 1.5 percent. Average savings account rates will likewise rise modestly.
Those looking for more yield should cast their gaze to nationally available, high-yielding savings accounts offered by financial institutions looking to boost deposits. CIT Bank, for example, offers an APY of 1.55 percent with only a minimum of $100.
The extra yield juice should hopefully attract some who don’t have enough in savings. Your rainy-day fund should be able to cover three to six months’ worth of expenses, and only 41 percent of Americans would pay for an unexpected $500 expense in cash.
Credit card debt is piling up, and savings rates are ticking down as investors pile money into stocks and consumption.
The bull market will likely last as long as the economy continues to expand. But should a recession occur, expect equities to go from bull to bear rather quickly. Job losses could mount, and finding new work could prove difficult. That’s why now is the ideal time to save.
Take tax cuts to the bank
The recently passed tax bill takes effect in 2018, and despite being wildly unpopular you should see more money in your paycheck this year.
The Tax Policy Center found that the average cut for households will be $1,600, albeit with most gains going to the very wealthy. Still, taxpayers earning $86,000, which is right around the median earning for a household of four, will save $900 this year.
To put it another way, that’s about how much a family making between $70,000 and $100,000 spends on gasoline in four months. Which means you might not notice it in your biweekly paycheck.
Any windfall, either from the tax code or Uncle Jim’s estate, should be banked or invested, rather than spent. Try not to buy more stuff simply because you have slightly more money. That’s how you get into the nasty habit of enduring an underfunded rainy-day fund.
Pay close attention to your wages, and if you see a slight decrease after you fill out your new W-4 this February, set it aside in a savings account. Give it a name that will resonate, such as “In Case My Roof Caves In.”
What to do with a raise?
One of the reasons the tax legislation remains unpopular with the public is that the individual benefits expire at the end of 2025, meaning that more than half of American households will pay more in taxes in 2026 than they did in 2017.
An increase in pay, on the other hand, is decidedly more permanent. Employers may lay off employees if times get bad, but they hardly ever reduce wages.
Significant raises, despite a strengthening economy and tightening labor market, have been tough to come by since 2008. No month has seen a year-over-year earnings increase of 3 percent since April 2009. But this might be the year.
The Fed expects core inflation to jump to 1.9 percent in 2018, which would be driven in part by increased pay. As the job market tightens, you should use your increased leverage to ask for a raise or consider moving to a better paying gig.
Make sure to save any pay hike, or pay down debt. The good times are when you need to get your house in order so that you’re prepared when trouble arrives.