Sunday, March 1, 2015

Do You Have a Spending Plan for Your Tax Refund?

Having a plan of action makes future decisions easier.  Tax season is here and many of us will get a nifty tax refund in the mail or electronically deposited to a designated account.  Once the money comes in, your state refund and federal refund show up as deposits on your bank account, it may be too late to start making smart financial decisions.  Why?  The urge to do something with it, like spend it, will be too great to get your butt to think without emotion.  Thoughts of enjoying television with a brand new big screen will be non-stop.  Or how about that new car you think you're in store for?  A plan of action, prior to getting your refund, will keep you honest.

If you don't believe self-control has a lot to do with your financial well-being just read this: 3 of the worst ways to spend your tax refund.  Booze and gambling, a shopping spree, and a new car were how many Americans consumed their one-time windfall of cash.  Not good.  In contrast, this article gives you 10 smart ways to spend your tax refund.  I don't agree with all of the ten "smart" ways.  For starters, I'd flip numbers one and two.  First pay off your high interest credit cards, THEN start building your emergency fund with what's left, if any.  I don't believe in doing number four, starting an itemized savings account.  What the heck is that?  That's what your emergency fund is for, right?

Number five: Refinance your mortgage or make home improvements.  Dumb.  Most people won't have enough equity in their home to be able to refinance, or they won't have enough of a refund to pay the closing costs of the refinance.  Yes, interest rates are incredibly low but by now those that could've refinanced, have refinanced.  Also, home improvements?  Unless you need to replace something in your home due to it being indispensable, don't upgrade anything.  Your home is a liability and the economics of home improvements are a loser's game.  Never a 1:1 return on your money.  I haven't replaced my carpet in ten years!  I still have the same laminate floor installed ten years ago, and the kitchen countertop…not granite!  You guessed it, ten year-old tile. Reserve "home improvements" for a new boiler or furnace, kitchen sink and faucets, shower heads, paint job, carpet cleaning services, exterior stucco repairs, rotted wood replacement, etc.  Things that will cost you in the long run IF you don't get a handle on it today.

Ten year-old carpet and laminate floor.  Still going strong!

10-year-old Tile floor and counters.  Just keep them clean!

The other items suggested by "10 smart ways…" get the thumbs-up from me.  Whatever you are considering doing with your refund, it is best if you wrote these things down on paper and strategized on dollar amounts or percentages.  For example:

50% of the tax refund will be used to pay credit cards
25% of the tax refund will be used to start an emergency savings fund
25% of the tax refund will be disposable income with, 20% going toward a new, high efficiency top-loading washer (I got your back ladies), and 5% for a family outing.

Of course you should sit down with your partner if the tax refund is a jointly-filed one and strategize together.  The main point is that you should seriously consider having a tax refund plan.  Thanks for reading!  Make every dollar count! 

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