Financial tips for what to do with that tax refund
Feb. 15, 2014 at 9:03 p.m.
Updated Feb. 15, 2014 at 8:16 p.m.
Tax season is here.
If you haven't filed yet, you might be like Susan Collins, of Yorktown, who calls herself a procrastinator.
When she's ready, she'll bring her tax forms to a professional. Once she gets that refund, she's already got a plan on how to spend it.
"I put it toward my bills, and I've got a credit card I'll pay off," Collins, 62, said.
According to Steven Orr, president of Orr Financial Group, that's the best thing for someone to do with his or her tax refund.
It's hard not to spend that tax refund on something shiny and new.
"You really have an opportunity when you get your tax return to have a chunk of money to save," he said.
The biggest mistake most people make, he says, is that they spend it all on one thing.
When the basic necessities are taken care of - paying bills and saving for retirement - then it's OK to spend a little extra money on that luxury item, he said.
"It's a choice of needs versus wants," Orr said.
Here are a few tips on how to spend - or not spend - this year's tax refund.
Pay off debt
Put that one lump sum of cash toward something useful. Whether it's a student or payday loan or a credit card, paying off as much as possible now can set the tone for better saving later.
"I like to see people do that first," Orr said.
Credit cards are just a means of buying things with money that doesn't belong to the spender, he said.
The accounts with the highest interest rates are the ones doing the most damage, Tommy Peitsch, owner of Pietsch Wealth Management, offered.
"Pay off the account," he said. "If they're only paying the lower interest rate first, it's not benefiting them; they're losing money."
Save for a rainy day
The rule of thumb for an emergency savings account is about three to six months of income.
"You want to put it somewhere liquid," he said. "In case there's an emergency, you've got some place you can get it immediately."
A checking and savings account is a good place to put that money and still have access to it, he said.
Peitsch said small amounts of savings will eventually turn into something larger.
"Put half of it away," he said. "That would be a big step in the future."
He's had clients who have saved $5 a week and watched it turn into something they can use toward an emergency or retirement.
Ready for retirement
It is expensive to retire, Orr said.
With the rise in cost of living, people need to start saving early in order to have money when they stop working.
"You need to make sure you're saving before you splurge," he said.
The rule of thumb for retirement is to save at least 10 percent of earnings or income, Peitsch said.
Set a goal
Depending on where you stand financially, making plans for the future can help alleviate unnecessary stress.
"If you are going to spend it in one to two years, then you are saving," Pietsch said. "Three to five years is an investment."
It's important to know where you want to be in a few years, he said.
"One of the main questions I ask is: What does money mean to you?" Pietsch said. "Oftentimes, it's things or security."