Newspaper Page Text
12A
9 Dumb To Do With Your Tax Refund
not we get
lump sums of cash, and
temptation is great to do the
wrong thing. In case you're not
quite sure what the wrong thing
is. here's a quick checklist.
By HYPERLINK "http://www.
moneytalksnews.com/author/
stacy/” Stacy Johnson I Feb
2011 Money Talks News
According to the IRS, the aver
age American tax refund for
tax year 2010 is about $3,000
- a slight increase over the pre
vious year.
But whatever you're expecting
this year, there are smart things
you can do with it. as well as
things that aren't so smart. Here
are some dumb things, along
with some advice on how to
check on the progress of your
refund if you've yet to receive
it.
1. Spending it rather than
investing it
Getting a lump sum of cash is a
great time to consider investing.
10 Smart Ways To Spend Your Tax Refund
Expecting a tax refund
year, you need a gixxi plan
your money. Maybe you
have the funds earmarked
some spending, but before you
let your tax refund burn a hole
in your pocket, remember that
the government isn’t sending
you a bonus check - it’s money
that should have been yours all
along. In fact if you’re receiv¬
ing a huge refund, you’re prob¬
ably having too much with¬
held. Be sure to revisit your
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allowances/" adjust your federal
income tax withholding allow¬
ances.
Don’t get caught treating your
refund check any differently
than you’d treat your weekly
or monthly paycheck or if you
own a small business, revenue
from your customers. Give the
money a purpose. Don't just let
it sit in your checking account.
If you do, it will quickly vanish
after you use it for dining out
here, shopping for clothes there,
and getting Starbucks every day.
Before you know it, you’ll have
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a
vehicle like an IRA or other
account that will allow your
earnings to grow tax-deferred,
Saving might not be as much
fun as shopping, but think
about this: If you invest a
$3,000 refund every year and
earn 10 percent annually on it,
in 20 years you'll end up with
an extra $189,000. That means
retiring three years earlier if
you can live on $63,000 a year.
Doesn’t that sound like fun?
2. Not paying down debt
Every dollar you pay in inter¬
est makes your HYPERLINK
‘'htt p://w w w.moneytal ksnews.
com/credit-cards/” credit card
company or other lender richer.
Every dollar of debt you pay off
makes you richer. While there’s
no guarantee that you can earn
10 percent if you invest your tax
refund, here's a sure thing: If
you're paying 15 percent inter¬
est on a credit card, paying it
off is the same thing as eam-
nothing to show for the refund.
Think about your
financial situation, and
ure out your needs. To get
started, consider this hierarchy
of financial priorities, from
fundamentals to advanced strat¬
egies.
Top 10 Priorities for Your
Tax Refund
1. Start or Increase Your
Emergency Fund
Without an emergency
just one surprising piece
bad news can send you on the
debt spiral to financial disas¬
ter. Most experts say that
fund should have about six to
eight months worth of savings
in an easily-accessible interest
bearing account online sav¬
ings account or money mar¬
ket account). Storing that much
away might take months or even
years if you’re just taking a little
bit out of each paycheck, so use
your refund to make a signifi¬
cant deposit in your emergency
fund.
2. Pay Off High-Interest Debt
After establishing an emergency
fund, the next best thing you
can do with your tax refund is
to pay off any high-interest debt
that you’re carrying. If you have
a lot of debt, just putting money
percent,
risk-free,
3. Not using it to generate a
tax credit for next year
Can’t stand the thought of not
going shopping? Then buy
something that will improve
your home and generate a
tax credit at the same time.
Example? A solar water heater
might set you back $3,000 to
S5.000. But it will save you
about 20 percent on your elec¬
tric bill every month for years
to come, and get you a tax
credit next year equaling 30
percent of the cost. So if you
spend $4,000 on a solar water
heater, next year's tax bill will
be $1,200 lower.
4. Failing to create a memory
Take $3,000, deposit it in your
checking account, and then
gradually use it in dribs and
drabs. When it’s over, what do
you have? Nothing. If you're
determined to blow your tax
in savings is like borrowing
money from yourself. Put your
refund to work by starting your
debt elimination program of
choice and paying off any pay¬
day loans, title loans, debt con¬
solidation loans, high-interest
private student loans, car loans,
and of course credit card debt.
3. Spend It on Something You
Need
Are you having car trouble, do
you need a new winter coat, or
have you put off dental work?
You need to take care of these
essentials, and now that your
refund is here, you can cover
the cost.
4. Start Itemized Savings
Accounts
Now is the time to start prac¬
ticing the mindset of the dis¬
ciplined and frugal consumer.
First make a budget, and then
break your refund into pieces,
each of which plants the seed in
your bank account for important
future purchases. Putting your
refund toward specific savings
goals will keep you from taking
on debt down the road, when
needs or desires arise. ING
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tures that allow you to set up
these specific savings goals in
your account.
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letting your windfall slowly
blow away.
5. Loaning it to someone
If you’ve been bragging about
the giant check you’ve got com¬
ing, you’ve got only yourself to
blame: Now your friends, rela¬
tives, or kids are looking for a
loan. Before it’s too late, start
telling everyone you made a
math error and rather than get¬
ting $3,000 back, you actually
owe $3,000.
6. Not doing something to
improve yourself
Maybe it’s time to take that
class that will prepare you for a
better job, or get that computer
5. Refinance Your Mortgage or
Make Home Improvements
Mortgage rates are below 5%
for the first time since the hous¬
ing boom, except this time the
price of homes is far less than
they were in 2004. When you
refinance your mortgage, you
will still pay closing costs and
fees. Use the refund to pay for
the dosing costs, and you will
save thousands of dollars per
year on mortgage interest.
If you're happy with your mort¬
gage rate, take a look around the
house. Do you need a new roof?
Is your kitchen outdated? Could
new energy-efficient applianc¬
es to save you money on your
utility bills? Home improve¬
ment projects can immediately
increase the value of your prop¬
erty and make your home more
comfortable at the same time.
6. Invest in a Tax-Sheltered
Account
Depending on your income
level, goals, age. and whether
you have already fully-funded
your tax sheltered accounts,
using your tax refund to get a
head start on Roth IRA con¬
tributions or 529 college sav¬
ings plan contributions is a great
move, one that can let your
three-digit tax refund grow into
LEADER
or software that you
make some money on the side.
Even a new suit that might get
you noticed at work - there’s
something you can do that will
pay dividends. Now’s the time
to do it.
7. Using it to create more debt
Using your tax refund as a
down payment on a car or other
type of loan - especially the
kind used to purchase a depre¬
ciating asset - should top the
list of dumb things to do. espe¬
cially if it's unnecessary
8. Failing to prevent future
big refunds
1 know it feels good to get
checks in the mail, but big
tax refunds are really more
defeat than victory. Money
you get as a refund is money
that you’ve lent interest-free to
Uncle Sam all year. If you're
consistently over-withhold¬
ing. visit the HYPERLINK
“http://www.irs.gov/individu-
to a over
course of a few years. Plus, it’s
like using your tax refund to
create a tax deduction: How
does that sound?
7. Invest in a Taxable Account
Have you already contributed
the maximum to your tax-shel¬
tered accounts? Give yourself
a pat on the back and consider
opening a brokerage account
with a discount broker and
Lean toward conservative and
diversified investments with
low expenses. Check out some
mutual funds. Index funds or
ETFs may be a good choice for
you. especially if you are not
interested in actively managing
your stock portfolio. They offer
instant diversification and very
low expenses.
8. Give to Charitable Causes
For many people, giving to
charities is non-negotiable, and
would be priority number one.
But on a tight budget, donations
can unfortunately slip down on
your list. Your refund is your
chance to give a little back.
Contributing to charity is an
excellent use of capital, and pro¬
vides a huge societal benefit.
Choose a cause that is important
to you and your family, and
give generously. Although the
returns on your investment may
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and see if you should adjust
your W-4 at work so you’ll
have less withheld from each
paycheck throughout the year.
On the other hand, if you’re
more capable of doing some¬
thing productive with an annu¬
al lump sum versus a slightly
larger monthly income, don’t
change a thing.
9. Going to the mall
For some reason, when we get a
check from Uncle Sam, some of
us act like we won the lottery.
This isn’t “found money” - it’s
your money. If you didn’t need
new clothes before you got your
refund, you probably don’t need
any now either.
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not as or measur¬
able as investing in the financial
markets, giving to charity will
benefit your community in a
major way. and you can claim
the tax deduction too.
9. Get that Business Up and
Running
Have you been looking for seed
money to take your business to
the next level? Do you have a
venture that you want to start?
You can use your refund to
get you moving in the right
direction. It’s a great opportu¬
nity to turn, your refund into
income for years to come, and
get a few more tax-deductions
self-employed-business/’’ small
business tax deductions next
year too.
10. Spend It on Something You
Want
If you made it to priority ten
and still have some money
left to spend, so you deserve a
treat. You saved all year, and
now you’ve earned the right
to splurge a little bit. Don’t
feel guilty about using the extra
cash for a summer vacation or
to treat your family to a nice
dinner. Just don’t let your eyes
get too big for your stomach. A
$500 refund is no excuse for a
$3,000 trip.