Speculating about how your refund can be best spent can be a fun pass-time almost like considering how you might spend any other windfall that might come your way. Everyone chimes in with their own wishes: "how about a new TV or a game system, or paying off debt". While you want to enjoy a little of the bounty that comes your way, it is also important to balance debt reduction and savings as well.
Having a plan before the money arrives can ensure you get the best use of the funds. Without a plan, you may find that in two months that you are not financially better off than you were before the refund. Our temptation is to spend the money on current wants and desires while leaving debt and savings as they were before the bounty. This is the year all that changes!
Virginia Saves recommends using the 30-40-30 plan to address your past, present and future with your refund in 2011. It is a simple plan and works like this:
PAST: Earmark 30% of all of your refund to debt reduction and catching up on past due bills. This can be a great way to start power paying your debt. Power paying your debt can accelerate your journey toward financial freedom and increased savings.
PRESENT: Dedicate 40% of the refund to current needs and wants. Need that car repaired or wishing for a new computer? This is the money that can be used to improve your quality of life right now allowing you to splurge and enjoy some of the proceeds.
FUTURE: Finally put 30% of your tax refund into a savings plan. This can help jumpstart that emergency fund or be used for larger purchases later.
There you have it. A plan to address past, present and future with your refund. If you use this plan, you will surely find your future looks brighter. Don't forget to join the saver's movement at www.virginiasaves.org/enroll. Together we can make our personal economies stronger!
R-A-L is a B-A-D Deal
Everyone wants their tax refund quickly, but watch out for this bad deal. Some Tax Prep Companies offer a Refund Anticipation Loan, a RAL. These loans are for the short period between when a tax return is filed and the IRS deposits the money into the lender’s account (usually less than two weeks). A RAL allows access to the anticipated refund in one day or less.
The problem with these loans is they are extremely expensive!
The loan amount is the ‘anticipated’ refund minus loan fees and tax preparation fees. If there was an error or miscalculation on the tax return, the refund could be less than anticipated. The entire loan balance must be repaid even if the tax refund is denied, is less than expected, or is frozen.
People who do not have bank accounts are often tempted by a RAL because refunds issued as a paper check can take up to 6 weeks to receive in the mail. Having access to the funds early comes at a large cost because of the fees associated with these loans. Typical fees include a $75 "processing fee", an additional "service fee" (equal to 10% of expected refund amount) and a $50 bank fee.
Tax returns that are e-filed with direct deposit refunds will result in the quickest refund. Electronically filed tax refunds should be deposited into a checking or savings account within 10-14 days. 1040 Central gives all the details.
RAL is a bad deal for the customer. Be patient and do not choose to get a Refund Anticipation Loan.
Keep your refund and spend it wisely!
You know you should . . . but do you?
You know you should save money, but do you put money into savings every month? Do you have a savings goal? It is easier to stay motivated when working toward a goal. The best goals are well defined. Check out this Savvy Saver article about creating a saving goal.
Here are some steps you can take today to become a successful saver.
1. Open a Savings account. Virginia Savers can open free or low fee savings accounts at local banks and credit unions. Check out our partners. These banks and credit unions offer no fee, low beginning balance ($25 or less) accounts.
2. Make saving automatic. Set up automatic monthly transfers from checking account to savings account.
3. Start contributing to workplace retirement plans. Many employers match a portion of the fund saved in retirement funds. Try to at least save enough to receive the employer match; it is free money! There may even receive some tax savings.
4. Save the tax refund. Use the IRS’s Form 8888 to directly deposit part or all of your refund into a savings account. Visit www.Form8888.org for more information.
5. Save raise or bonus this year. Jump start savings with money that will not be missed.
6. Enroll as a Virginia Saver. Savers receive a monthly newsletter full of tips and ideas to increase savings.
The key is to start today! Start small. Think big.
Is there a Tax Credit for you?
Check out http://www.taxcreditsforworkingfamilies.org/ for information about tax credits for working families. Click Virginia on the State Resource Map.
Tax credits directly reduce taxes owed, dollar for dollar. Tax deductions reduce taxable income and will indirectly reduce taxes owed, but not dollar for dollar. In short, a $100 tax credit is worth more than a $100 tax deduction.
Some tax credits are refundable while others are non-refundable tax credits. Refundable tax credits are refunded to the tax payer even if credit exceeds the tax liability. A good example is the Earned Income Tax Credit (EITC). Click here for details about income qualifications.
The 2011 EITC Awareness Day is February 28! Stop by the Norfolk Workforce Redevelopment Center at 201 E. Little Creek Rd in Norfolk on Friday, February 28th 9AM- 2PM.
This is the kickoff event for free tax prep. There will be a team of tax preparers ready to prepare taxes. Many other vendors will be available to give information including VEC, an IRS tax advocate, and some of the Virginia Saves financial partners. Also, Virginia Saves will have a table at the event. A change wrapper machine will be at the table and can be used to turn change into bank deposits!
Why build and emergency fund?
Saving for Emergencies is a sound choice. Having an emergency savings fund may be the most important difference between those who manage to stay afloat and those who are sinking financially. That’s because maintaining emergency savings of $500 to $1,000 allows you to easily meet unexpected financial challenges such as:
• repairing the brakes on your car
• buying your child a new pair of needed shoes
• replacing a broken window in your house
• paying for a visit to the doctor when your child has the flu
• covering the dental expense of filling a painful cavity
• paying for a parking ticket
• flying to visit a sick parent.
The emergency fund not only allows you to cover these expenses, it also gives you the “peace of mind” that you can afford these types of financial emergencies. Not having an emergency savings fund is an important reason that many individuals borrow too much money at high interest rates. For example, with emergency savings, Americans probably would not have to take out $2 billion a year in payday loans at interest rates that average 300 to 500 percent.
To read more check out Build Your Emergency Fund.
• repairing the brakes on your car
• buying your child a new pair of needed shoes
• replacing a broken window in your house
• paying for a visit to the doctor when your child has the flu
• covering the dental expense of filling a painful cavity
• paying for a parking ticket
• flying to visit a sick parent.
The emergency fund not only allows you to cover these expenses, it also gives you the “peace of mind” that you can afford these types of financial emergencies. Not having an emergency savings fund is an important reason that many individuals borrow too much money at high interest rates. For example, with emergency savings, Americans probably would not have to take out $2 billion a year in payday loans at interest rates that average 300 to 500 percent.
To read more check out Build Your Emergency Fund.
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