Budget Basics
Be Rational With Your Tax Refund
Experts advise paying off that credit-card debt
Thursday, June 16, 2005
Dave Burge
El Paso Times
Financial planners and other experts, however, recommend a more pragmatic approach to spending any money you get back from the Internal Revenue Service.
"My advice is to pay down your credit-card debt," El Paso certified public accountant and financial planner Carolyn Mora said. "That's not what people want to hear."
The IRS estimates that 102.6 million Americans will receive tax refunds this year.
In El Paso County, 246,400 taxpayers are expected to receive refunds, IRS spokesman Ken Vargas said.
Westsider Mike Hernandez said he would spend his tax refund on "some electronics."
"Maybe a new TV. Maybe buy a new monitor for my computer," he said. "I also spent some of it on repairing one of my cars."
Erin Freeman, who was visiting El Paso from Raleigh, N.C., said she planned to use her refund to save for retirement.
"I'm young and in debt, and don't want to be like that when I retire," she said.
As of April 1, the average refund check was $2,210, up from $2,100 at the same time in 2004, Vargas said.
"In my 19 years at the IRS, I've never seen the refund rates as high as they are now in terms of dollars and number of people getting them," Vargas said.
If you don't have a credit card to pay off, financial experts say, the second-best use of a tax-refund check is to get a jump-start on creating an emergency savings fund.
Experts recommend that you keep a short-term savings account that's the equivalent of three to six months of living expenses.
"I really like that three- to six-month buffer," El Paso CPA Kym Anderson said. "People don't really do that. They think they can borrow money when they get in trouble, but that can get you into more trouble."
According to a recent survey commissioned by TrueCredit.com, the consumer division of credit bureau TransUnion, 49 percent of Americans planned to use their tax refund to make a payment on their credit card, mortgage or other bills.
We would advise people to look at their individual situation," TrueCredit.com spokesman Zachary Hastings Hooper said. "If you have debt to pay down, you should do that. Of course, you want to stay on top of your bills."
"If you don't have a lot of debt, you could consider socking some money away in a savings account or investing it," Hooper added.
Putting money into an individual retirement account is also another prudent way to go, experts say.
"It's a great opportunity to build a nest egg for retirement," said Greg McBride, a senior financial analyst with personal finance Web site Bankrate.com.
"With rising life spans and medical costs and the uncertain future of Social Security and private pensions, individuals are bearing a greater responsibility for funding their own retirement," McBride added.
If you're getting a big refund check, financial experts advise you to re-evaluate your W-4 withholding allowances.
"The idea is to come as close to breaking even" on your taxes as possible, McBride said. "You don't want to give Uncle Sam an interest-free loan, but you don't want to be surprised by owing a bunch of money either."
After you've adjusted your W-4 to reduce your future refunds and increase your take-home pay, you can bump up your contribution level to your 401(k) retirement plan or save the difference in an IRA, McBride said.
Mora advises taxpayers to turn off their television sets and tune out all the advertisements enticing them to spend their refund checks.
"Everyone is trying to get you to spend it on something," she said.
Raul Amaya, an El Paso personal financial analyst, said each taxpayer faces a personal decision on how to spend his or her tax refund.
Amaya recommends paying down credit-card debt and opening a Roth IRA that invests in a stock-based mutual fund.
What about buying that latest high-tech gizmo?
"It's your money," Amaya said. "But it won't get you ahead."
Most people will get a refund of $500 to $1,000, said Howard Dvorkin, founder of nonprofit Consolidated Credit Counseling Services Inc. and author of the book "Credit Hell: How To Dig Out of Debt."
"Unfortunately, people get that money, and they blow it," Dvorkin said. "They get a false sense of reality, and in May, they're back to where they were."
The average American household has $9,000 in credit-card debt at an average interest rate of 17 percent, Dvorkin said.
"Pay down your credit-card debt," he said. "If you're sitting there putting your tax-refund check into an account that earns 1 percent or less, which is typical of a bank account these days, and you're being charged 20 percent interest on a credit card, that just doesn't make sense."
