Spend It or Save It? What to do with your tax refund

by Wade Barnes 12. March 2012

Average Annual Tax Refund

It's that time of the year again, and if you haven’t already started working through the process of filing your taxes, now is the time.  While it likely isn’t the most favorite chore you’ll tackle this year, it might be one that pays off.  According to the IRS, the average tax refund this year is about $3,000.  Some might argue that getting a tax refund isn’t the best way to manage your money throughout the year, as you essentially gave the government an interest free loan.  Nonetheless, using your tax refund wisely can greatly benefit your financial position and might even help you get a bigger refund when you file your taxes next year.

Resist the urge to spend the money before it hits your bank account.  Most certainly avoid refund anticipation loans unless absolutely necessary to deal with an emergency, as these are expensive and might even leave you owing more money than you get back in your refund.  Consider having the money refunded via direct deposit from the IRS directly into your bank account.  Direct deposit isn’t only a safe way of receiving your money, it is also the quickest way of getting your refund from the IRS.

Once you know how much you can expect to receive in your tax refund, make a plan and consider spending the money in the following three categories to invest in your future.

Emergency Fund

Nobody wants to think that something bad might happen, but it’s always a possibility, and planning for an emergency in advance can help lessen the burden if it happens to occur.  Experts suggest you should have 3-6 months of salary tucked away in an emergency fund.  With this money in savings, you should be able to offset hardships that could come from illness, unemployment, or other unexpected events.  Another way to plan for an emergency is to stock up on nonperishable food items and household supplies that are not only good for natural disasters but can provide a source of stability if an unexpected event, such as job loss, was to occur.  While providing for an emergency isn’t a fun way of spending your tax refund, according to Maslow, by securing fundamental needs we can move on to talking about ways to maximize your full potential.

Invest in Yourself

There isn’t much in life more important than your future, so be sure to spend some money to ensure your future is strong.  Consider going back to school or taking a class that can help you learn new skills or techniques that will help advance your career and earning potential.  Attend a conference relevant to your industry – not only will you be exposed to cutting edge information, you’ll also be exposed to networking with people you may not have otherwise met.  Spend some money to update your professional wardrobe.  We all know first impressions are important, so be sure your professional attire is sharp.  Invest money in a retirement account.  Even if you love your job, the time will come when you want some time for yourself.  By investing in a retirement account, you can look ahead to life after work.

Tax Deductible Activities

Consult your tax advisor on this topic, but there are ways you can spend your tax refund that could potentially reduce your future tax burden.  Tackling home improvement projects like purchasing energy-efficient windows or doors, adding insulation, and installing energy-efficient appliances or solar panels are all good ways to improve your home and potentially lessen you tax burden.   Consider saving for or buying a house, as there are many tax benefits to being a homeowner.  Make a donation to your favorite charitable cause.  Not only will you feel good about making the donation, you’ll being doing good for the community.  Many self-investments that are career oriented might also help reduce your tax burden.  Again, consult a tax advisor to understand the details, but using your refund to improve your house, your retirement, or your community might mean less tax in the future.

While the above activities are all important, it is just as important that you treat yourself too.  Don’t blow it all on a weekend in Vegas, but make a smart plan to further your financial progress and after making smart investment decisions, do something to reward yourself as well.

Are your Children Financially Savvy?

by Wade Barnes 24. October 2011

Financial Literacy Throughout my years working for 1st Mariner Bank and observing credit trends across the country, I've learned how little most young adults (and even some older adults) know about managing their finances and what affects poor management might have on their life. Because of this, I've spent some time working with local schools to help bring financial literacy into the classroom. There are many great programs that exist to help educate students but we may have a chance to help further this effort by making this part of the curriculum for Maryland students.

I feel strongly that our future and that of our students will be brighter by providing them with financial literacy courses. Through these courses, students will learn about saving, investing in the future, managing budgets, and how to manage credit. This will not only help them personally but will also provide an excellent foundation for our next generation of future leaders.

To find out how you can help, please visit: http://www.marylandtaxes.com/comptroller/initiatives/literacy/.

How to Decide: Home Equity Loan or Line of Credit?

by Wade Barnes 14. September 2011

Home Equity Loan or Line of Credit?

So, you’ve decided to add an addition, pay tuition expense, or have a cushion for life’s unexpected expenses. As your home is one of your greatest assets, many people decide to borrow against the equity in their home by obtaining a Home Equity Loan or a Home Equity Line of Credit. The tough decision is deciding which product will best suit your situation.

When working through the decision of whether to obtain a Home Equity Loan or a Home Equity Line of Credit, there are 4 categories to consider: Access to Funds, Interest Rates, Monthly Payments, and Potential Tax Savings*. By understanding each feature you’ll be well positioned to decide between a Home Equity Loan or a Home Equity Line of Credit.

Access to Funds

Home Equity Lines of Credit are great when you need to access the funds in various increments or need a revolving credit line to pay expense as they occur. With a credit line, you are free to make advances just like you are with a credit card, up to your credit limit within the terms of the agreement.

With a Home Equity Loan, the full loan amount is disbursed in one lump sum, much like a car loan. This is great when you need a set amount and don’t need reoccurring access to the loan.

Interest Rates

For the most part, interest rates tied to Home Equity Lines of Credit tend to be variable, tied to the Wall Street Journal Prime Rate. With a variable rate loan, you get to take advantage of current market rates as they shift throughout time.

Home Equity Loans tend to be fixed rate loans, where the interest rate established at settlement will be the rate you assume for the duration of the loan.

Monthly Payments

Home Equity Lines of Credit are typically interest only for a portion of the term. This means you have the option to pay interest only each month or make additional principle payments as you see fit.

Home Equity Loans generally bill for principle and interest each month. You’ll never have to guess what your payment will be as it will be fixed for the duration of your term.

Tax Deductibility

I would advise you to discuss this with your tax advisor but given your individual circumstance, the interest paid towards either a Home Equity Loan or Home Equity Line of Credit may be tax deductible at the end of the year. As this applies to both Home Equity Loans and Home Equity Lines of Credit evenly, this shouldn’t be a deciding point in your choice between either product.

In short, if you’re looking for flexibility, a Home Equity Line of Credit might be the best product to suit your needs. If you prefer stability, you may want to narrow your search to a Home Equity Loan.

Click here for more information on our Home Equity Loans and Home Equity Lines of Credit.

*Please consult your tax advisor.

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