For American taxpayers, it’s that time of year — the sometimes dreaded time spent preparing and filing tax returns before the April 15 deadline. Yet for some, it’s also tax refund season and time to decide how to use the refund check headed your way. Tax refunds are not a small matter. In fact, the average refund in 2011 was $2,985. As the area president at Wells Fargo for the San Antonio market, I’ve had the opportunity to meet numerous customers when they were ready to cash in a big refund check. When that happens, I try to take a minute to talk to these customers about their financial goals, then often ask them to consider at least one of five other ways to better use the money to meet those goals. These include:
Pay down debt – As the economy recovers from recession, many Americans may not feel a personal economic recovery until they reduce debt. America’s total household debt was nearly 114 percent of annual after-tax personal income at the end of the second quarter of 2011. Applying your refund toward high-interest debt — such as balances on credit cards — can move you in the right direction. Even a payment of $10 above the minimum required monthly payment will help you make huge gains in cutting repayment time and reducing finance charges. As you pay off debt faster and start paying down principal, you can set a budget to meet future goals — whether it’s your next vacation or your retirement.
Jump start your savings —
When your debt is under control, increasing savings may be the next best way to use your refund for your financial goals. As a rule of thumb, it’s good to have at least enough savings to cover three months’ worth of expenses in case of an unexpected event, such as job loss or injury. To calculate your target savings number, add up your monthly living expenses — total spent on groceries, mortgage payments and more — then multiply by three. Your banker can help you determine the best place to save your refund for your specific needs, such as a savings account or certificate of deposit.
Save for retirement —
Following the economic turmoil of the last several years, saving for a secure retirement is a topic of greater interest. Make it more than a one-time event; start a new routine. Check with your financial adviser to determine your options. Your adviser can offer ideas for the refund — such as investing in an IRA or Roth IRA — and for making retirement saving automatic each pay period going forward. What’s more, your adviser can review your portfolio to ensure you have the right allocation of cash, stocks, bonds and other investments for your time horizon, keeping you on track toward your retirement.
Invest in your kids’ education —
The market downturn caused many parents of young children to re-evaluate college savings plans. College remains one of the single biggest expenses for families, and it’s rising — the retail cost of a college degree more than doubled in the last 20 years, outpacing inflation. It’s a good idea to consider how the refund can help.
Again, your financial adviser is the best starting point to consider options. One option is Coverdell Education Savings that can be used to pay expenses from kindergarten to graduate school tax free, when used for qualified expenses. Another is a 529 College Savings plan — a state-operated investment that enables families to save for accredited post-secondary education expenses with tax benefits, including tax-free earnings. Consult with your tax adviser for more information on these investments.
Give back to charities important to you —
From local food drives to storm relief, we all know that the charitable organizations in our community and world need our support as much as ever. If you’ve been looking for an opportunity to give, using a tax refund may be a good way to make that contribution.
With your trusted financial adviser’s help, the refund can be your first step in planning ongoing charitable giving. The best use of your tax refund depends on you, your needs and goals. Make sure to resist the temptation to spend your check before you consider all your options. When you know a refund is headed your way, talk to your banker or financial adviser about the best way to use the check toward your future goals, plans and dreams.
By: Steve Arnold
Steve Arnold is the area president at Wells Fargo for the San Antonio market.