Be wise with your windfall: don't blow your tax refund - put it to good use.
There are a number of things you can do with your money besides buying a whole new summer wardrobe. You can pay off your credit card debt, invest your money or start a small business.
About 79 million refunds were delivered during the last filing season and checks averaged $1,178, according to the Internal Revenue Service. Through March of this year, refund checks have averaged $1,387.
"Most people get a refund and have a vacation, or just go about having a party," says Preston H. King, a CPA based in New York City. "Fun may be appropriate, but you want to sit down and look at your options. After thinking about it you may want to set some of that [refund] aside."
The point is, put your refund to good use. After all, a tax refund is simply an interest-free loan you've given to the government and now you're just getting it back.
Most financial planners recommend that you determine what number of exemptions would make sense based on the average refund you have received. You may not have enough exemptions, so ask your tax adviser.
"If you expect a refund next year, you should make steps now to have more take-home pay, rather than wait until the summertime to get the refund and then blow the money," says Marvin Mangham, a financial advisor with the Atlanta Planning Group.
What are you going to do with your hard-earned cash? Pay off those credit cards and pronto, Mangham suggests. Many credit cards have interest rates ranging from 18% to 21%, which is not tax deductible. If, for example, you pay off a $1,500 credit card debt in one sum, says Mangham, you would save about $270 in interest payments over the course of a year.
"Credit card debt is the worst consumer debt that people can have. Using your refund would eliminate the debt, but people should have better control so they won't be in that situation next year," he says.
If you are a sage, and have kept your credit card debt to a minimum, you may want to look at building up your nest egg by parking your money in a savings account. New York-based financial planner David Eaton says you should have a cash reserve equal to three-to-six months of expenses. "Most people's debt is ridiculous and their savings paltry," he says.
Looking for investment ideas? You may want to consider a nutual fund money market account, a short-term savings vehicle that provides interest on your investment. They are not as risky as stock mutual funds because they invest primarily in T-bills, municipal bonds and corporate bonds. Among the mutual fund families that Mangham recommends are Vanguard, Fidelity and T. Rowe Price. These money market accounts generate about 5% and also provide immediate access to your money, he explains.
Now that you're debt free and actually have a little nest egg, climb the beanstalk and grab the goose with the golden egg. In other words, use your refund as seed money to start your own business.
"By creating a business, you create future opportunities for revenue and growth and it creates a cushion if and when that corporate boat ever sinks," King says.
Before you start your business, develop a business plan. And once you are up and running, items like travel, equipment and a home office can be tax deductible if they're used exclusively for business purposes.
The moral of the story is to look before you leap when you get the refund check in the mail. You may even want to request the direct deposit of your money into your bank account to avoid the temptation of spending it frivolously.
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|Date:||Jun 1, 1996|
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