Smart uses for tax refunds
A tax refund can have a real impact on your personal and financial well being, but what should you do with that “extra” money? Without a plan, you may use the money on the first thing that comes to mind and later realize something else was more important. Financial research clearly indicates that people with a clearly defined savings plan save about twice as much as a family with a comparable income but without a plan. Before you spend that refund on new “stuff,” consider these smart uses for your money:
• Pay off bills — First priority are regular monthly bills (utilities, phone, etc.) and then those with the highest interest rate. If you owe $2,000 on a credit card (18 percent interest) and pay $50 a month, it will take five years to pay it off and you’ll pay $1,077 in interest. Ask yourself if you will even still have the items five years from now that you charged today. If you use your tax refund to pay off $1,000 and continue to pay $50 a month, the bill will be paid in 2 years and you’ll save $879 in interest!
• Emergency funds — Try to save enough money to get you through a couple of months if you had unexpected car repairs or medical expenses or lost your job.
• Occasional expenses — Avoid big bills (like holiday spending) by saving $10 a week to build up your savings now!
• Long-term savings — Your tax refund can help you plan for future goals like a home or a comfortable retirement. Adding $500 a year into an IRA retirement account can yield $68,100 after 30 years. If you add $25 to the yearly $500 contribution you could have $113,800 for a retirement nest egg! You may save even more in taxes by contributing to a tax deferred IRA or a Roth-IRA that is tax-free when you retire.
• Special purchases — Ask yourself “Do I need or want that new television or sofa or phone?” These may be essential or can be delayed until you save for that specific item. Your best bet: Put some of your tax refund toward financial security by paying off debt, planning for the year ahead and setting money aside for your goals.
If you are getting money back from Uncle Sam, use it wisely. Use form 8888 and split your refund. Put some into checking to spend on bills, having family fun or special purposes. Put the rest into savings! Also remember that getting money back means you’re essentially lending money, interest free, to the government for the year. Better to have those dollars in your account! So, if you’ve been getting big refunds or have had changes in your life (marriage, divorce, baby, increase or decrease in income), adjust the withholding allowances on your W-4 form. You can do that for your 2009 taxes now at irs.gov. Use the withholding calculator to determine the correct figure for you. Then print a new W-4 form, fill it out and turn it in to your work place’s human resources/payroll department.
Another good hint … don’t throw away part of your refund on loan fees. “Quick Refund” companies are just giving you a high-cost loan! The average interest rate for 2008 Rapid Anticipation Loans factored out to 123 percent. A little patience can save you big bucks.
For more information about saving money and to enroll in the America Saves program as a Kansas Saver, visit americasaves.org/Kansas.