Hot on the heels of income tax season dawns a period of time that some Americans look forward to with checkbooks at the ready and others dream about: tax refund season. But how should those who receive refunds spend them? Or should they spend them in the first place?
CCLT homeowner Susan Gaspar is among those who can only dream. When she gets a refund it's usually more or less equal to what she pays her accountant. "So it's always a total wash for me," she says. "I WISH I had a refund I could use wisely or imaginatively."
Teresa Lambarry, CCLT outreach director, has received refunds in the past and put them toward specific, earmarked purchases like a dining room table, or necessary repairs to her home, which otherwise might not have fit into that year's budget. "I have not had to use any money but my tax return," she says.
CCLT homeowner David Koppel has received refunds and has a very simple, four-word answer for those who ask what he has done or would advise others: "Pay down the mortgage."
What the Pros Know But what do the professionals think? Andrew Feldman, founder and CEO of
AJ Feldman Financial in Chicago, and a certified financial planner, says many of his clients bank their money, but he asks them to consider other scenarios first.
"The biggest thing I focus my clients on is cash flow, savings and paying down debt," he says. That doesn't generally mean the mortgage, or even student loans, "but pay down your 15 percent interest credit card. In theory, you're saving 15 percent" additional by avoiding the interest. "That [high-interest loan] can be the hardest thing to get out of because you have to pay a lot to get [the principal] down."
Daniel Fisher, a registered investment adviser, registered financial consultant and principal with
Fisher Financial Group in Northbrook, cautions that those who receive refunds should not think of it as free money or a bonus--remember that it's the government essentially repaying you an interest-free loan. "Getting a tax refund may seem like a bonus or winning a tiny jackpot. But keep in mind that it is money you worked for and earned," he says.
With that in mind, Fisher says, don't splurge on a luxury purchase, buy things you don't need just to blow off steam, or book an over-priced vacation. Instead, he echoes Feldman's comments about paying off high-interest debt--and if you don't have any, consider starting or supplementing an emergency fund, investing in a tax-sheltered account like an IRA, or donating money to charity if you can.
"It's money you earned and should be used as responsibly as any other funds," Fisher says."Just because you want to do something fun, does not mean you have to spend all your refund. ... Remember there are plenty of ways to save on a vacation. Go to a hotel somewhere local, or go out for a nice dinner or see a play."
Few Americans have an adequate emergency fund, he says. "Sock the return away in a high interest savings account and let it just sit there until disaster strikes. This way, the disaster won't wreck your finances--you can just go withdraw the money and it's taken care of."
'Put It in Your Peripheral Vision'
Feldman typically advises those who don't have high-interest loans to save the money, but not just by dropping it into your checking account because--and Fisher seconds this--that's vulnerable to dwindling as you whip out your checkbook.
"It's parking a portion of it toward savings for the longer-term," he says. "Something that wouldn't necessarily be a bank account, but a non-retirement account. I don't want to recommend that you put that money in your IRA if you don't have money anywhere else."
Feldman compares it to what you might do if you found $100 on the street. "I'd like to put it somewhere you don't even know it's there," he says. "If you put it in your peripheral vision, you won't see it and you won't spend it. You'll thank your past self by saving for your future self."
That can mean a small, low-cost savings account with a financial firm like Vanguard or a high interest-rate savings account like the Capital One 360 product.
"You save in your peripheral," Feldman says. "If it's in front of you, you're going to spend it. That's just human nature. If you didn't anticipate this, don't spend it. That's hard for people to do. But saving is the key to savings. That sounds silly and stupid, but it really is that simple."