DREAMING ABOUT YOUR TAX REFUND
Lori Z. Bahnmueller
Michigan Credit Union League - Your Money Matters
By this time last year Uncle Sam had issued more than 35 million tax refunds, with the average check totaling $1,268. Analysts are predicting another healthy dose of returns this year; and if you're like many millions of Americans who are expecting a refund this year, you have probably already begun to plan how it will be spent. Maybe a Florida vacation to beat the winter blahs or perhaps a new home entertainment center?
I even know friends who complete their income tax forms, see the bottom line, drop it in the mail and head for the mall--credit cards in hand. Why not? They worked hard for that money. It belonged to them all along and now they deserve a treat, right? Well, yes. Maybe. First off, if you're expecting a return, you'd better make sure you actually get the return you expect. Sometimes things don't work out the way you anticipate. And please don't fall for the old business of borrowing against your anticipated refund, which is a deal often offered by tax preparation businesses. You don't need to borrow money. Wait a few weeks for the check to arrive.
However, when and if it does arrive, consider treating yourself to a bit of financial happiness and reduced stress before you spend that hard-earned return. How? By following a few money saving tips.
For starters, use that "wind-fall" to pay off any outstanding credit card balances. Because you've worked so hard for those dollars, don't let credit card companies steal your profits. Most credit cards charge high interest rates--18% or more in some cases. Each year consumers lose millions of dollars paying interest on credit card balances.
Do you have a college education bill looming in the future? With the rapidly rising costs for a college education, a mutual fund may be just the place for your refund (especially if your kids are more than four years from graduation). If your kids are in high school already, a certificate of deposit (CD) or money market account with check writing privileges may be a better alternative. Either way, $1,000 earning interest over a couple of years is smarter financial choice than a big screen TV today and a student loan tomorrow.
While the economy is strong and unemployment rates are at all-time lows, having an emergency fund established is something most people neglect to do. Even when economic confidence is riding high, individuals are advised to have an emergency fund amounting to six months' worth of living expenses. Using your tax refund here is a good place to start.
Do you remember how expensive holiday shopping was this year? Even if you've already paid this year's balances off, there is nothing wrong with planning for next year. By purchasing gifts throughout the year, you can shop at your own pace and find items on sale. This tip also reduces stress, allowing you to avoid crowded malls during the already busy holiday season.
Finally, if you're receiving a substantial return each year you may want to think about increasing your exemptions on the W-4 form you file at work. The extra money you see in your paycheck could be automatically transferred into a savings account. When the government holds your money until the end of the year, you earn no interest. In contrast, a basic credit union savings account earns approximately 3.5 percent.
Does your company offer a 401(k) or some other type of retirement plan? Reports suggest that Americans are ill-prepared for retirement; devoting dollars that you don't see to these types of savings plans work toward a healthy financial future for you.
For some, the temptation of all that money is just too much and the need to buy something persists. Circumstances like these are completely understandable and there can be a happy medium. Spend part of your return and save the rest. You will feel good watching your new 27" television set and seeing your monthly savings account statements growing throughout the year.