WASHINGTON — April 15 is looming ever nearer. But for those who have already filed, start thinking about how you can spend that tax refund wisely.
Pat Seaman, spokeswoman for the National Endowment for Financial Education, stresses that Americans should remember that their refunds — an average of about $3,000 this year — are hard-earned money taken out of their paychecks, not a windfall from the government.
“If you look at tax refunds as free money, kind of like a blank check on electronics or vacation, that’s the biggest mistake,” Seaman said. “It’s your money.”
Behavior economic research suggests that if people view their tax refunds differently than paychecks, they also tend to spend them differently and thus are more willing to treat themselves, she said.
According to a poll commissioned by Bankrate.com released Monday, 7% of Americans plan to splurge with their refunds on either a vacation or shopping spree while 30% plan to pay down debt and 28% plan to save or invest.
Paying yourself back is fine, so long as you’ve taken care of your other obligations, such as high-interest debt, Seaman said.
“Once you’ve done that, if you’ve taken care of those obligations, if you have leftover money, sure, go to the electronic store and get that flat screen,” she said.
So before you book that flight to the Bahamas, make sure you have your basics covered and consider spending your refund on things that will give you a return.
1. Pay down credit-card debt. Because of the current economic climate, Seaman noted Americans might have turned to credit cards to make ends meet. “Look for the best return on your money,” said Christine Benz, Morningstar Inc.’s personal finance director. If you’re paying high interest rates, apply a large chunk of your refund there. If you can’t pay off your cards in full with your refund, apply as much as you can to lower your balance.
2. Build an emergency fund. It’s smart to have money in the bank for unforeseeable circumstances. The rule of thumb with emergency funds is to save enough living expenses for three to six months, Benz said.
3. Save toward retirement. Any little amount can put you on the right track. “They can start that retirement account with $500 or $1,000,” Seaman said.
4. Get insured. Nancy L. Anderson, resident financial planner at Financial Finesse Inc. said she often fields calls from the unemployed or those whose jobs don’t provide health insurance. “They’re really at risk if they have some sort of medical [emergency],” Anderson said. “It could create debt for them for years.
5. Check under the hood. Get the most mileage on your car by being up to date on your maintenance needs. “This would be an opportunity to invest in your mode of transportation because that helps you get to work and fulfills your other obligation,” Seaman said.
6. Get your home energy audited. Your house is likely the largest purchase you have to your name, and investing anywhere from $500 to $1,000 can drastically increase your home value and create savings on your energy bill. “You can easily save 20 percent on your energy costs,” said Corbett Lunsford, technical director of Green Dream Group LLC and executive director of the Illinois Association of Energy Raters. An audit can also reveal where you should focus home-maintenance projects. Lunsford said a leaky roof might have nothing to do with the roof itself but rather how air and moisture interact with the house.
7. Invest in microfinance. Lend your money to entrepreneurs or the poor in other countries through organizations such as Kiva or MicroPlace. While making a difference, you’ll also pocket a return — historically up to 6.5 percent rates at MicroPlace Inc., according to Ashwini Narayanan, the organization’s general manager. “It’s a smart way to use your refund,” she said. “You’ll get a return on it, and you’ll do good in the world.”
8. Get educated to invest in your career. Whether or not you decide to formally enroll in classes at a nearby college, you can easily put money toward learning. You can learn remotely through programs offered through The Teaching Company LLC or practice public speaking by joining Toastmasters International, both of which Anderson has enrolled in. If you do use your tax refund to enroll in classes, Anderson said “it shows your employer you’re going above and beyond on your off hours.” Also check to see if your company will also pay for part or all of it.
9. Buy a nice suit. By no means should you go on a shopping spree if you can’t afford it, but if you do have some money leftover, you can’t go wrong with dress clothes. “We’re always told to dress for our next position,” Anderson said. “Everyone should have a very nice suit. That’s what you wear for interviews. That’s what you wear for important meetings.”
10. Get started with investing. Even if you don’t have the knowledge on what your proper bond-stock allocation should be, it takes very little to get started. It can be as easy as buying an e-reader and subscribing to the Wall Street Journal, Anderson said. “Whatever they’re getting, they can … use that to really make an impact on their wealth creation.”
11. Get a personal trainer. Anderson warns against just getting a gym membership because “it can be a drag on your finances” if you don’t go regularly, but she recommends signing up to work with a personal trainer for a 12-week period. “You have to do something for 21 days to make it a habit,” she said. Getting a trainer, however, can instill a good habit. “It helps your attitude. It helps your energy level. It helps your confidence and appearance.”