FSS Newsletter :: February 2003

Money Matters :: What Should I Do with My Tax Refund This Year?

According to the Internal Revenue Service, refund amounts this year are averaging $2,091. That's slightly more than the typical $1,743 refund filers got back last year.

Each February, I start to think about offering some bit of wisdom regarding the tax refund subject. I searched and scoured the Internet looking for just the right bit of advice and came up empty. Therefore, I have decided to take another road by just writing something myself. I hope that our FSS clients take advantage of what I have to offer in this column. Here goes:

1) Save – Yes it’s 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 camp. These things happen, you know they do, why not be prepared next time?

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 spoke with an FSS client on this very subject. She admitted that when this “big check” came back to her, that she just couldn’t help herself. She just had to go shopping for her and her daughter. She was entitled! I then asked her to tell me what the money was spent on last refund season and how valuable those items were to her now. I think you can guess what the answer was. Why don’t you try asking this question of yourself before spending this year’s refund.

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 fat $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) If you haven’t started a retirement account, why not take some of the money and set it aside for that. Especially if you do not have any type of retirement benefits from your work. Most of us do not want to work all of our lives. Should you be interested in pursuing this option, you can contact Marty at the TMHA office for assistance.