How Do You Plan to Use Your Tax Refund?
I know it is early to discuss this topic.
The year just ended, and few people have even received their w-2 forms to begin filing.
The reality is most large retailers are already counting on your refund dollars and their budgets are planned expecting that you will spend that money.
The new trend in retail is "bring your refund check to us and we will cash it.
" The average refund for most families is around $2500, and for many families that is the biggest lump sum of income they will receive during the year.
Ironically that is exactly half of your $5k goal on the 5k5k challenge.
So you should be making plans right now of how you can most effectively use that small windfall in your own finances.
According to a USA Today article, when polled about 70% of people say they plan to save their refund or pay off debt.
Many people will say that to a pollster, but the reality changes when the check actually comes in the mail.
On average retail sales jump anywhere from 15-20% when refund checks start arriving, so proves the point that the road to debt is paved with good intentions.
What should you do with your return? First try not to get one in the first place.
One way my wife and I "found" new money to tackle our monthly debt was to reduce my monthly withholding.
Before we started to tackle our finances we viewed our refunds as a large gift from the government.
I failed to see that I was providing an interest free loan and forfeiting about $70.
00 per month to withholding when I could have been using that to pay down debt that had a 15% interest rate.
Let's do the math.
Contribute an extra $70 to the government and receive a 0% return on your money, or pay off that credit card with an additional $70 per month on that credit card that is gouging you at 18% interest or more.
HR professionals will even tell you "have the IRS hold out more, so you can get a bigger return.
" Ask your HR professionals about FMLA, HIPAA, COBRA and all those other HR legal minefields, don't get financial advice from them, not even on your 401K.
You may want to consider talking to your tax preparer this year to find out exactly how much money you should pay in each month or quarter to ensure you come close to breaking even.
In the end, I would rather pay the government $200 at tax time and know I used my money effectively throughout the previous 12 months.
Financial types suggest that you should use that refund to contribute to a retirement account.
I am working on becoming a certified financial planner and even the text used to prepare financial planners recommend paying off high interest debt, before investing.
Again look at the math.
Invest in a mutual fund with a projected (not guaranteed) return of 8% or pay off that department store card hitting you with 17% in finance charges every month.
Finally, one of the best uses for the money could be to establish an emergency fund.
I know I've been talking about looking at the numbers and see what make the most sense.
So, why would I suggest putting $2500 in the bank and earning less that 3% when you have debts that have 5 or 6 times that rate in finance charges, or investing that money and possibly earn 3 times that amount growing tax free? Because, if you have an established emergency fund and the transmission goes out, or one of your family members take a trip to the emergency room, you are not perpetuating your debt by putting those high dollar expenses on a credit card.
I love basketball so I'll use the sixth man analogy.
Really good basket ball teams are not successful because they have a great starting five.
Good coaches know that injuries happen and at times they can loose their best players for weeks and months at a time.
If they don't have strong players waiting on the bench then the entire season could be a waste.
Sure they could trade those talented players and make more money for the team and owner, but if they really want to compete and succeed through the entire season they better have a strong bench.
Don't let retailers and emotions about the latest gadgets demand your attention for your tax refunds.
Make plans today to use them effectively and move yourself to a better position financially.
The year just ended, and few people have even received their w-2 forms to begin filing.
The reality is most large retailers are already counting on your refund dollars and their budgets are planned expecting that you will spend that money.
The new trend in retail is "bring your refund check to us and we will cash it.
" The average refund for most families is around $2500, and for many families that is the biggest lump sum of income they will receive during the year.
Ironically that is exactly half of your $5k goal on the 5k5k challenge.
So you should be making plans right now of how you can most effectively use that small windfall in your own finances.
According to a USA Today article, when polled about 70% of people say they plan to save their refund or pay off debt.
Many people will say that to a pollster, but the reality changes when the check actually comes in the mail.
On average retail sales jump anywhere from 15-20% when refund checks start arriving, so proves the point that the road to debt is paved with good intentions.
What should you do with your return? First try not to get one in the first place.
One way my wife and I "found" new money to tackle our monthly debt was to reduce my monthly withholding.
Before we started to tackle our finances we viewed our refunds as a large gift from the government.
I failed to see that I was providing an interest free loan and forfeiting about $70.
00 per month to withholding when I could have been using that to pay down debt that had a 15% interest rate.
Let's do the math.
Contribute an extra $70 to the government and receive a 0% return on your money, or pay off that credit card with an additional $70 per month on that credit card that is gouging you at 18% interest or more.
HR professionals will even tell you "have the IRS hold out more, so you can get a bigger return.
" Ask your HR professionals about FMLA, HIPAA, COBRA and all those other HR legal minefields, don't get financial advice from them, not even on your 401K.
You may want to consider talking to your tax preparer this year to find out exactly how much money you should pay in each month or quarter to ensure you come close to breaking even.
In the end, I would rather pay the government $200 at tax time and know I used my money effectively throughout the previous 12 months.
Financial types suggest that you should use that refund to contribute to a retirement account.
I am working on becoming a certified financial planner and even the text used to prepare financial planners recommend paying off high interest debt, before investing.
Again look at the math.
Invest in a mutual fund with a projected (not guaranteed) return of 8% or pay off that department store card hitting you with 17% in finance charges every month.
Finally, one of the best uses for the money could be to establish an emergency fund.
I know I've been talking about looking at the numbers and see what make the most sense.
So, why would I suggest putting $2500 in the bank and earning less that 3% when you have debts that have 5 or 6 times that rate in finance charges, or investing that money and possibly earn 3 times that amount growing tax free? Because, if you have an established emergency fund and the transmission goes out, or one of your family members take a trip to the emergency room, you are not perpetuating your debt by putting those high dollar expenses on a credit card.
I love basketball so I'll use the sixth man analogy.
Really good basket ball teams are not successful because they have a great starting five.
Good coaches know that injuries happen and at times they can loose their best players for weeks and months at a time.
If they don't have strong players waiting on the bench then the entire season could be a waste.
Sure they could trade those talented players and make more money for the team and owner, but if they really want to compete and succeed through the entire season they better have a strong bench.
Don't let retailers and emotions about the latest gadgets demand your attention for your tax refunds.
Make plans today to use them effectively and move yourself to a better position financially.
