Friday, April 16, 2010

How Should I Spend My Tax Return?

Around tax time a lot of people start asking the question, "What should I do with my tax refund?" If you feel lucky enough to be getting a tax refund, or your personal savings has been piling up this year, you are not alone. 

The markets were undeniably devastated in 2008. The precipitous fall in stock prices scared people so bad that they fled the market in droves. For many people, they looked outside and saw that it was raining and decided that it was finally time to start saving for a rainy day. The rain fell so hard that the personal savings rate, as compiled by the Bureau of Economic Analysis, started growing at a rapid rate. Consumer spending during 2009 has also dropped considerably. 

Is this a good thing that Americans are saving more? Maybe. With all this extra cash you can finally build up your emergency fund, or boost your other savings goals. But are Americans really saving more – or just momentarily spending less? What is happening to those savings? If the extra money is just sitting in your checking account, it will likely float away when the economic weather improves. Stashing large sums in your savings account, besides for an emergency fund, isn't very practical right now, either. Your money should have a purpose or a goal. Make money work for you! If it is for retirement, get it back out there into that crazy rollercoaster stock market. Missing out on 2009 gains in the stock market only served to exacerbate the losses from 2008. 

The Total Money Makeover: A Proven Plan for Financial FitnessDo you have debt? Get to work paying it down if it is an adjustable rate. Look into getting your debt refinanced, too. Interest rates are lower now than they have been in years. The future of interest rates will be going up only too soon. Now is the time to start a Dave Ramsey debt Snowball not a new LCD flat screen.

Because interest rates are so low, Certificate of Deposits, CDs, are dismal places to lock up your money. I shudder to think that my cash might only be earning a paltry 2% for the next few years once interest rates start rising again. When interest rates are high, debt is expensive, and saving pays nice dividends. When interest rates are low, debt is cheap, and saving pays poor dividends.

What you should do with your money today largely depends on current interest rates and future projections of those rates.




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