Money Matters: Using your tax refund wisely

Are you one of the fortunate taxpayers who received or is due a tax refund this year? Is the money burning a hole in your pocket yet? For some of you, the refund may have been spent prior to filing your return, so that takes care of considering any options. But for others, you may be trying to determine just what should be done with the refund.

Asking a financial planner what to do with your refund may not be on the top of your list or the most fun thing to do, but it would probably be one of the wisest things to do. Our typical answer will not be to go ahead and buy the new motor for the bass boat or the new living room suite of furniture. It will be more in line with providing and planning for your financial future and security. The first thing a planner should consider is to make sure you have an emergency fund. The importance of an emergency fund has been covered before in my column, which you can find in the archives on The Blount Today Web-site. If you are a single individual with a consistent salary and without substantial obligations, then $3,000 to $8,000 in an emergency fund will meet most circumstances. A parent also without substantial obligations and with one or two children should have between $6,000 and $15,000 in emergency funds. There are always personal circumstances that dictate more or less in the emergency fund, but these figures should work as a good target to start.

If your income is not consistent due to commissions or other reasons, then the emergency fund should be higher. If you have substantial debt obligations, you should also increase the emergency funds. Once the emergency fund is established and properly funded, then you can look to other ways to invest or spend the money.

The next focus should be on your retirement. If you are over the age of 18 and do not have a retirement account started, then you should take a portion of your refund and establish an Individual Retirement Account. You must have earned income during 2008 to open this type of account, and the earned income must equal or exceed the amount you contribute. The maximum contribution to an IRA or Roth IRA for 2008 is $5,000 and is $6,000 for those who have reached the age of 50 or older. If you did not contribute to an IRA for 2007, there is still time to do so provided you had earned income during 2007 and the contribution qualifies as a deductible contribution. The contribution for 2007 must be made prior to the initial due date of the return, April 15. Once this is done, you can amend your 2007 return claiming the additional deduction. This will increase your refund. Please seek the assistance of a tax professional to help with this process.

If you have already taken care of the first two items, then you could consider reducing a portion of your credit card debt. In fact, this is an area that should always have your attention. If you are not accustomed to reading the notices included often with your credit card statements, you should change your habits and soon. Many times the rate of interest being charged to your account changes without the cardholder realizing it. This can have a direct impact to your cash flow and the length of time it will take to reduce your debt. Credit cards are an excellent tool and convenient, but do not become a slave to them. If your cumulative credit card balance increases from one year to the next, you are clearly spending more than you are making. This can only lead to a disaster when not managed properly.

Don’t be part of the reports and statistics of the U.S. Commerce Department’s Bureau of Economic Analysis where so many Americans have a negative savings rate. What exactly does this mean? It means you’re spending more than you earn, so you’re withdrawing out of your savings or you’re borrowing to pay for purchases. In 1985 the savings rate was over 11 percent and has gradually decreased over the years to actually below zero!

Proper and wise planning can make a significant difference for you and your family. Have fun with your tax refund, and go open that emergency fund or savings account today!


Would you like a response to a financial question? Send your question to Doug Horn, 115 W. Broadway, Maryville, TN 37801. Be sure to mark your envelope Money Matters.

Doug Horn, CFP, is an area financial planner with more than 24 years financial experience and founder of Quality Financial Concepts, located in downtown Maryville on Broadway.

Doug Horn, CFP, Registered Investment Advisor in Tennessee and Texas and Registered Principal, Branch Office of and Securities offered through CUE Financial, Member FINRA, SIPC.

© 2008 All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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