Thursday, March 28, 2013

Using Your Tax Refund Wisely

Swallowtail butterfly on dianthus flowers March 2013
Tax Time in Texas is Also Spring
Spending Your Tax Refund To Give You the Best Return on Your Investment
You probably have a hundred ways to spend your tax refund, but savvy money managers are always interested in another point of view or someone else's input. If you haven't filed your taxes yet, consider U.S. Savings Bonds for your refund. You file Form 8888 with your tax return to get the bonds. Here's the information from the IRS if you're interested.  
Tax refunds are later this year because most of us had to wait for forms and figures to file a tax return for 2012. Some of the delay was from the Internal Revenue Service as a result of a slow Congress, but employers and contractors don't always get the W-2 or Form 1099-Misc out early. Banks send 1099-Int forms if you've made enough interest on your accounts. If you filed with H&R Block software and used Form 8863 between February 14 and February 22, your refund may also be delayed.
If you are waiting for your tax refund, you're probably making plans for the use of the money. You could go out to eat or buy something you want and the refund would be gone forever. Or you could make good use of your refund and add to your net worth. Here are some ways you could make your tax refund last longer than a few minutes.
Add your refund to your retirement plan
This is windfall money, a refund you didn't expect to get. Treat it as if you didn't receive it by putting it away for the future. I never understood Ben Franklin and "A penny saved is a penny earned" until I learned the benefits of saving money. Interest, although minimal at this time, is money you don't have to work for. You can fund an Individual Retirement Account or Roth IRA at your local bank. Ask for advice. An IRA is funded with pre-tax funds and you pay tax when you withdraw the money. You pay taxes on the money before you fund a Roth IRA and you can withdraw qualifying funds without taxation (including earned interest).
Put Money in Savings
If you don't have 6 to 8 months of expenses saved for an emergency fund, you're living on the edge. Build your emergency fund with your tax refund and regular additions to your savings account until you have a comfort zone of at least six months of expenses. If it costs you $3,000 for basics (rent, food, payments) each month, then you need a minimum of $18,000 in a savings account.
Pay Off Credit Card Debt
You may think there's no reason to save money with interest rates low, and if you're paying interest on credit card debt, you may use your tax refund wisely by paying down or paying off credit card debt. The interest saved is money you don't have to pay, but if you're just clearing your credit card to charge more, you're not accomplishing anything. The only time it's smart to use your windfall tax refund to pay credit card debt is if you don't incur more credit card debt.
Make a Purchase
If a purchase can save you money over the long run and you really need the item, consider making the purchase with your tax refund. Choose an item within the refund amount -- don't add to your debt by using the tax refund as a down payment. If you need a washing machine, for example, and it will save the cost of taking your laundry to the laundromat, you may consider a washing machine as a wise purchase.
If you pay for the washer with your tax refund and save the money you would spend every week at the laundromat, you can make your tax refund work double for you. Take the money you allocated each week for laundry to develop a cushion for repairs or other potential emergency expenses.

Watch for Specials at Your Bank

Banks often have specials for savings accounts, and some pay a premium at the end of a savings program. Build My Savings is one of those. You commit to adding an amount to the account a certain day every month for a year or so and at the end of the time period, the bank adds a bonus to your account. Some of these average about 3 percent on your money. Ask at your bank, and also ask at the credit union near you. Sometimes credit unions have specials and higher rates. 
Remember that while interest is low, put your money into a long-term certificate of deposit only if the penalty for early withdrawal is low. You may want to withdraw the funds to get a higher rate if interest rates increase. For example, if the withdrawal penalty is 1 percent and the difference in the interest rate for a 5-year certificate of deposit over a 1-year certificate of deposit is more than 1 percent, you may come out ahead with the 5-year certificate, even if you withdraw some funds early to get a higher interest rate.
You can use your tax refund wisely and prepare for the years ahead. Don't let your immediate desires burn a hole in your future.