By Scott Prater
Savvy retailers nationwide are already targeting potential customers.
Knowing many Americans will soon tear open envelopes containing tax-refund checks, those same retailers have begun placing advertisements for big-screen televisions, Caribbean vacations and the latest technology gadgets.
Christina Ruetz, a financial advisor and community readiness consultant at the Airman and Family Readiness Center here, says it’s easy to think big when you know that big check is about to hit your mailbox, but exercising some frugality is usually the best financial decision people can make at this time.
“People have a lot of choices when it comes to how to manage their refund,” she said. “There are smart choices and some not-so-smart choices. Plus, there are a lot of unscrupulous people and businesses out there just waiting to scam you.”
According to the Internal Revenue Service, the average American tax filer earned a refund of $2,902 for the 2008 tax year.
The most common thing people do when they receive their refund? Pay off accrued debt, something Ms. Ruetz says is not always the right decision.
“A lot of times, people will continue to build up debt throughout the year in anticipation of a tax refund,” she said. “That’s not a good habit to get into because you’re falling into a debt cycle. In that situation, people should pay down the debt they’ve accrued over the year, but make it the last year they rack up debt in that way.”
Tax experts say filers should adjust their withholding so that their tax payments match their actual tax liabilities. The IRS even provides a withholding calculator at IRS.gov specifically for this purpose.
“It’s a better tactic to adjust your withholding, claim more exemptions and increase your take-home pay with each payroll check,” Ms. Ruetz said. “That way you keep your money instead of loaning it interest-free to Uncle Sam for the entire year.”
The concept here is to make your money work for you.
The best use of your refund, advises Ms. Ruetz — save it, preferably not under the mattress.
“Take 20 percent and do whatever you want, but stash the rest in a savings account,” she said. “Everybody needs to have an emergency savings account. The threshold I recommend is at least three to six months of your living expenses. If you or your spouse should lose your job, you know you can continue to pay the bills for three to six months. For most people, that job search typically takes three months or longer.”
The other smart choices Ms. Ruetz and many other financial advisors recommend revolve around the making-your-money-work-for-you idea: starting a tax-deductable education-savings plan for your children and covering up-front closing costs while refinancing your home mortgage (mortgage rates are at an all-time low right now).
“What people don’t want to do is splurge,” Ms. Ruetz said. “Don’t go out and buy a new car. Your tax refund is temporary money. Yes, you may be able to make a down payment on that car, but you’ll be stuck with an ongoing monthly payment.”
Also, no frivolous spending. That means placing your refund in a savings account or certificate of deposit, not a checking account.
While retailers are busy building those ultra-enticing promotional campaigns for computers and high-priced home furnishings, predatory businesses are hard at work creating scams.
“Many refund-anticipation loans are scams for example,” Ms. Ruetz said. “Companies lend people money based on what they think they’ll get back from the IRS, and they charge exorbitant interest rates sometimes up to 500 percent which is disguised as a loan fee.”
People who have tax related questions or need help filing their tax returns have a host of resources at their disposal. Contact the A&FRC at Schriever for more information about tax refund choices at 567-3920.