Tax day was a couple of months ago and most of us just want to file that memory away until April 15, 2018. However, our long-term fiscal health would be improved with just a little work and evaluation now that the deadline is in our rearview mirror.
Eighty percent of us get a tax refund and the average amount this year was $2,870. We often look on these refunds as found money — as if we found it in the street. In truth, the money is actually an interest-free loan to the federal government. I realize that the interest on $2,900 isn’t much right now, but having that money in your control is invaluable, rather than in government coffers.
If you received a large refund, take steps now to reduce that amount for 2018. Reduce your withholding amount to come closer to the amount you will owe. My aim is to come so close that the government has to refund me less than $100, but I’ve never come that close. If most of your income is from a steady paycheck, reduce the amount you have withheld each pay period. If you have business income or an outside income, look into your crystal ball and estimate what is needed. Either way, make an adjustment to come nearer the target.
When you receive a tax refund or an Alaska Permanent Fund dividend in the fall, it’s the perfect time to take a look at your finances and determine how to use this money to improve your long-term financial health.
Build an emergency fund. Experts tell us that we need three to six months of our expenses in a savings account. I don’t know about you, but even thinking about that kind of money gives me a stomach ache. Don’t let this large amount of money overwhelm your savings resolve. Having as little as $2,000 in an account that is easily accessed can mean a great deal to your fiscal fitness. The average emergency costs a family around $2,500. That is the cost of a home repair, an uncovered health emergency or a car repair. If you would take that $2,900 refund and place it in an emergency fund, you will be less likely to hit the credit cards to pay for those emergencies.
Pay down debt. Think of it this way. If you owe $10,000 on a credit card with a 15 percent interest rate, you will pay $1,500 next year in interest. If you devote that $2,900 to the debt, you will save yourself $435. That is the equivalent of receiving 15 percent on your savings account. Can’t beat that one.
Save more. The headlines have been rife over the last few years that we aren’t saving enough. According to the U.S. Bureau of Economic Analysis, we’ve gone from a personal savings rate of 17 percent in May of 1975 to a current rate of 5.9 percent. However, we have improved our rates from an all-time low of 1 percent in 2005. We aren’t saving enough to retire, nor to have adequate savings in case of job loss. Save that $2,900 and you’ll start reversing that trend.
Invest in your home. It is the largest investment most of us make in our lives and it is important to keep it up. Whether it is an improvement on your kitchen, a new energy-efficient window or two or painting a room, spending money on your home will increase its value. Also, why wait until you feel you must make improvements to sell a house? Make those improvements now and enjoy them.
Have some fun. What’s the good of having that windfall if you don’t have a little fun? Take stock and decide what really gives you the greatest pleasure. A meal out, a visit to see the family or even buying something you covet can help improve your attitude on life.
Treat your tax refund as a windfall and use it to improve your financial well-being.
Roxie Rodgers Dinstel is associate director of the Cooperative Extension Service, a part of the University of Alaska Fairbanks, working in cooperation with the U.S. Department of Agriculture. Questions or column requests can be e-mailed to her at email@example.com or by calling (907)474-7201