by Betty Killebrew
Most people have a plan for spending their tax return as soon as they get it. (That’s not even mentioning the ones who spend it without a plan!) I’ve always had a different system for my tax refunds and any other “found” money that comes my way. I save it.
There was only one year of my working life that I had a plan to spend my refund; I used my tax refund that year to pay college fees.
This year, one of my sons and his wife plan to pay off credit cards with their refund. That’s a big one for a lot of people. The main problem with this—with credit reinstated, they are likely to start running up that credit card debt all over again.
Even when my husband and I were younger, we never made any plans for our refund other than to save it. Of course, if we were merely “saving it for the sake of saving it,” it would have been of less use to it than if we spent it on in one big splurge. What I mean to say is that its first stop is our savings account.
There we keep a sum of money to be immediately available if something comes up; and when something does come up, we are not such tightwads that we don’t raid the fund. However overtime, as we add our regular savings and found money to that fund, it grows bigger; and when it gets large enough, we transfer some money to certificates of deposit. Whenever those certificates come due, we add a little money to bring the total to the next round number and roll them over. As our savings increases, our cushion against having to go in debt also increases.
Interest rates are so high today that my thought process from the old days when I too had credit card debt isn’t very practical anymore. Back then, I always operated under certain financial rules, the main one being. We had to live on what we earned, so if I borrowed money or went in debt to buy something, I had to have a plan in mind for paying off the debt with the money we earned. So if we owed $500 and received a tax refund of $1000, I would put the whole tax refund in the bank and continue paying off the debt we owed according to my plan.
Now that my son and his wife pay over 25% interest on credit cards and can save over a hundred dollars a month by eliminating the debt, they are making a smart decision in using their tax refund to pay it off. But will they be like so many others and fall right back into debt? Probably.
Tax refunds used to be just that—refunds of overpaid taxes. Today people in certain circumstances receive refunds that are larger than the total sum their employer withheld. This can be a really big windfall to a poor family, but almost always the money they receive is gone within a week of their receiving it. In fact, sometimes the money is gone even before they receive it. Often, they get a tax refund loan as soon as their taxes are figured, which they finance with part of the money they are slated to receive.
Used cars are a real big item at tax return time. People with a lot of money in their pockets often want new wheels. Sometimes they also want new furniture, clothes, hairdos, manicures, pedicures, vacations and dinners out at fancy restaurants. The tax return gives them an opportunity to “live it up” for a while.
After living it up for a short while, however, they often get a taste for the extra items and after the money runs out, they start going in debt to satisfy their desires. Up goes the credit card debt and with it the interest expense that is so excessive that everything bought with the card ends up costing far more than the sticker price.
Also, once that tax return is gone, when the car you bought needs gas or car repair, there you go using that credit card again—or even worse, taking out a payday loan.
So here’s my novel approach for the use of your tax refund money:
First—even if you owe more than the tax refund you receive, don’t use all the money to pay off debt. Instead, put some of that cash away. The next time you have car repair expense, it will cost a lot less if you can pay the bill without incurring an interest charge.
Next—address your finances with a fresh perspective. You now have a little money. Why not do something really novel and make it last? Times are hard these days, but chances are you have not given up everything you can to make life less expensive.
Have you given up eating out? Does your grocery list include potatoes for baking and beans for soup? Have you ever made vegetable soup with a soup bone instead of chunked beef?
When you think an old chair is too worn out to use, have you ever tried pitching it without replacing it. (Maybe a little extra empty space would improve the looks of your room.)
Or don’t throw it out or replace it. Just keep it. When the arms of a chair are worn a neat trick is to drape placemats over them to cover the worn spots. These are available in every conceivable fabric and pattern and don’t cost much and you will feel so virtuous not buying a new chair.
When my kids were young, I cut their hair. You can do that too.
Of course, there are thousands of ways each individual can find to live on less. If you can’t think of any offhand, read a few magazines at the library or check out the web for money saving hints.
The important point I’m making here is that when you get that tax refund, there’s a little bit of leeway in your life. That makes it a great time to re-evaluate your circumstances.
Yes it would be nice if we all had more money and I’m sure you thing you NEED more. The truth is though; this is not a boom time in the economy. Entry-level jobs pay less than they used to and raises are harder to get. Realistically, most of us need to learn to live on less. We need to live on what we earn.
If you have lots of credit card debt, you really should use that refund to cut it way back in order to save the whopping interest you pay every month; but the most important thing for you to do is stop using those cards. Unless it’s a matter of life and death, do without whatever it takes to keep your expenditures in line with your income.
I promise you, once you start living on what you earn and stop chasing your tail of debt around and around, you will feel a lot richer and you’ll worry less. And you will be so proud.