Should I Really Save My Tax Refund This Year?

Can it be cold in Ohio in February? YES, YES, YES

Each February, I start to think about offering some bit of wisdom regarding the tax refund subject. I hope that our FSS clients take advantage of what I have to offer as I repeat this column again for 2007.

1. YES, Save it! – I guarantee that you will have a significant need for this money in the coming year so don’t just fritter it away like you do every year. What did you spend the money on the last year? Can you even remember? Yes, SAVE is a four letter word but the most important four letter word in our financial vocabulary. Does “rainy day” fund have meaning to anyone? Take that refund money and stash it away. This year, the unexpected will happen like it does every year. Your car will break down, you could face a job lay-off, unexpected medical bills may arise, the kids will need money for school or camp or something. You may want to move to another apartment and need a security deposit. These things happen, you know they do, why not be prepared this year?
   
   Sure, you can go blow all the money on a fantastic stereo system or a big screen TV, buy the kids neat new toys, yourself a newer car or whatever shopping spree you have in mind. Then the money will be gone. Emergencies will arise and you’ll be looking to borrow the money somewhere or charging them on your already overused credit card. Why not avoid all that hassle and be prepared. Wouldn’t a cushion to meet these expenses provide you with peace of mind? Have valuable is that? Is that more important to you than that fancy newfangled item that you just have to have? It should be!
   
   Recently, I heard a story of a person who had received a check in 2005 for several thousand dollars, not a tax refund, but mostly for back Social Security benefits from the time that this person had become disabled. Less than one year later, the several thousand dollars is completely gone and I would bet the person does not have one thing that will significantly improve the family’s financial future for the long term. Talk about a missed long term opportunity for the short term pleasure of going on a shopping spree.
    
2. Pay down debt! If you're not paying your debts in full and on time then you're likely spending more on your bills than you would make through most investments. Consider credit cards, for example. Most come with double-digit interest rates, so making minimum payments is a sure-fire way to derail your finances and put you in debt for years or even decades.
   
   Consider, for example, a $3,000 credit card balance with a 15 percent interest rate. If you pay just $50 a month, it will take you 26 years and six months to be debt-free and your total interest will have cost you $6,030.
   
   If you were to you get a $1,000 tax refund, you could instead shave that balance to $2,000. If you continue making monthly $50 payments, you'd be debt-free in 10 years and six months and interest payments would total just $1,437. That's a savings of nearly $4,600.
   
   Apply a more modest refund to that debt -- say $500 -- and you'd still pay off your plastic 10 years early, cutting your interest by more than half, to $2,917.
    
3. Start to think about home ownership! The most significant thing that most people can do to improve their long term financial future is to invest their money in a home of their own. Statistics have long shown that homeowners accumulate far more wealth during their lifetimes than renters. And where does a significant amount of that wealth come from? Equity in their homes, that’s where. By making those monthly house payments, a portion of the payments slowly builds equity in your home over time until eventually the home is paid for and is yours free and clear. Thus becoming a significant financial asset, especially if it is properly maintained. So save this year’s tax refund toward a downpayment and before you know it, a new home could soon be yours.