Just thought of sharing this post about tax refund. Got it from MSN Money under Liz Pulliam Weston's column.
Four out of five workers say they'll get a refund this year, and most of those say they'll do something responsible with the money, like pay down debt (44%) or save or invest (38%). That's according to the latest Principal Financial Well-Being Index, a survey of 1,374 workers.
We'll see. The latest IRS estimate is that the average refund will be nearly 5% higher this year, with an average $2,480 returned to taxpayer's hands. That's a big chunk of temptation.
If you're on the fence about what to do with your refund, here are some ideas to consider, including at least one I know you'll like.
Blow (some of) itSeriously. I firmly believe in frittering away 10% of any windfall as an incentive to be responsible with the rest.
Your refund isn't exactly unexpected money, of course, but it does tend to be a big chunk of change. You'll probably be tempted to blow all of it (indeed, that's exactly what 7% of those in the Principal survey intend to do with theirs: buy some big-ticket item). By limiting your splurge, you'll feel rewarded while still having the bulk of the money to pay off debt or invest.
So that means you'll have about $250, on average, to spend. Take your kids to a theme park or your partner to a weekend getaway. Buy that outfit or that tool you've been lusting after. Just pay cash and have fun.
Pay your credit cardsYou knew that was coming. You'll have a bit more than $2,200, on average, left over after your splurge. That just happens to be the median amount owed on credit cards among families who carried a balance, according to the Federal Reserve's latest Survey of Consumer Finances.
With average rates on credit cards hovering around 16%, that $2,200 balance is costing you more than $350 in interest each year.
Paying your cards off, or at least down, will save you a big chunk of change and free up space on your cards for emergencies. Since most U.S. families have woefully inadequate emergency funds, those cards could be your backup in case something goes wrong.
Fund your retirementHere's where an investment of tax money can really pay off.
You'll get the biggest bang for your buck if you've got a 401(k) plan at work and you're not already contributing enough to get the maximum company match. With the typical matching system, you'll get an instant 50% return on your money, plus years of future tax-deferred growth. Over a 40-year working career, that extra $2,200 annually could turn into a nest egg worth $850,000, assuming average 8% annual returns (which is a reasonable assumption with a balanced portfolio of stocks and bonds).
The problem is that you can't just dump your refund directly into a 401(k). But you can ask your human-resources department to increase your contribution from your paychecks (it works out to about $85 more a check if you're paid every two weeks). Then you can stick your refund into your savings account and have $85 transferred every two weeks to your checking account for the next 12 months. The result: You boost your retirement kitty without feeling the pinch.
If you can live without that $85, or you don't have a 401(k) match to gain, you can contribute the $2,200 to an individual retirement account. Over your working career, those annual contributions could grow to $570,000.
Your contribution is deductible if you don't have a retirement plan at work or if you do but your income is under certain limits. (The ability to deduct an IRA contribution phases out at between $50,000 to $60,000 of adjusted gross income if you're single; the phase-out range is $70,000 to $80,000 for married couples for 2005 and $75,000 to $85,000 in 2006.)
If you can't deduct your contribution, consider putting the money into a Roth IRA instead. There's no tax break when you contribute, but your money comes out tax-free in retirement. The ability to contribute to a Roth phases out between $95,000 and $110,000 for singles and between $150,000 and $160,000 for married couples.
You have until April 15 to fund an IRA or Roth IRA for 2005. After that, you can fund one for 2006. The annual contribution limit for either year is $4,000. If you're 50 or over, you can make an extra $500 "catch-up" contribution for 2005 or an extra $1,000 for 2006.
Boost your emergency fundIf you're already maxing out your retirement-savings options, the next place you should look is your savings account.
Only about three in 10 U.S. households have enough liquid savings to get them through three months of unemployment. That's a little scary, given that the U.S. Bureau of Labor Statistics says the average length of unemployment in the past year has been between four and five months.
You may not be able to survive long on whatever's left of your refund, but it's a start. And having a little spare cash on hand might help you avoid using credit cards to pay for the inevitable crises like auto repairs. You can squeeze a little more interest out of your account by using an online bank such as ING Direct, UFBDirect, NetBank or HSBCDirect.com, which pay higher-than-average rates with no monthly account fees. Bankrate.com can help you compare banks.
Contribute to a college fundGot kids? They'll probably go to college someday, and every dollar you save for them now could spare them from a buck or two of student loan debt later.
You can put up to $2,000 a year into a Coverdell Education Savings Account (read "College plans for the rich, poor and in-between") and withdraw the money tax-free for qualified elementary, secondary or college expenses. (Unless Congress renews the legislation, the ability to use Coverdell money for elementary and secondary school costs is scheduled to expire after 2010.) The ability of parents to contribute is phased out when modified adjusted gross income is between $95,000 and $110,000 for single people and between $190,000 and $220,000 for joint filers. But parents can always gift the contribution money to the child, then have the child make the contribution.
Another good option for many families: state-run 529 college savings plans. Some states offer tax breaks for contributions, and the money grows tax-deferred. (The ability to avoid taxes on withdrawals is scheduled to disappear after 2010, but again, Congress may act to extend the legislation.)
For more information on picking a plan or on college savings in general, visit MSN Money's Saving for College Decision Center.
Continue your educationWhen your other financial ducks are in a row, it's time to look at your earning power.
The economy can be a scary place, as it constantly destroys or outsources old jobs and comes up with new ones. If you want to keep yourself employed and maximize your earnings, you may need to learn new skills.
That may or may not mean getting another degree. If you've only got a high school diploma, you probably will get a payoff by attending night school to get your associate's degree. (Conveniently enough, the average cost of a year at a community college for 2005-2006 was $2,191, according to the College Board, which you could neatly cover with your refund). The payoff from other degrees may not be as assured, as I wrote in "Is your degree worth $1 million -- or worthless?"
You may be able to expand your skill set profitably with just a course or two. Maybe you need accounting chops for the next move up the ladder, or a class in marketing. If you're not sure, talk to your boss about what skills seem to be in short supply at your company and in your industry.
Attend a conferenceMost jobs are represented by some kind of trade or professional group that holds regular conferences or conventions. These can be a great place to network, add new knowledge and skills, or even find your next job.
If you figure you'll spend $400 or so on airfare, $500 or so on conference fees and $200 a day on hotel and meals for three days, you should have plenty of cash left over for drinks or a little sightseeing.
Just make some time to actually attend the conference. You can't learn or schmooze if you're not there.
Finally, consider adjusting your withholding so your refund isn't quite so spectacular next year. The IRS has a withholding calculator that can help you fine-tune your taxes so you get more in your paychecks. Then set up an automatic transfer so this extra money is promptly whisked away into your retirement, college or savings accounts so it can start working for you year-round.
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.