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Personal Finance From a Biblical Perspective

8 Things You Can Do With Your Tax Refund

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Many people will be receiving (or have already received) a tax refund in the near future. Most people that I know plan to blow it on something that will not provide a benefit for their lives. Instead of wasting your refund and regretting your decision, try one of these 8 tips!

Tax Refund

What To Do With Your Tax Refund

Start An Emergency Fund

Probably the most common characteristic of a financially stable household (besides the idea of living within their means) is an emergency fund. The point of this emergency fund so you can have money stashed away when something unexpected comes up.

If you are not financially prepared for emergencies, then you may be forced to rely on high-interest credit cards, or tap into your retirement savings in order to get by.

Pay Down Debt

Another great use of your tax refund is to pay off debt. This may seem like a boring option (especially when compared to how most people use their tax refund), but it will automatically earn a rate of return that is equal to the interest rate on your debt.

For instance, if you pay off a credit card that had an interest rate of 20%, then that is equivalent to earning 20% on an investment!

If you use it to pay off/down an installment loan (such as a mortgage or car loan), then you may have to specify that your extra payment should be applied to the principal.

Consider Paying Infrequent Expenses

Many times it can be difficult to remember those expenses which only come once or twice each year. Instead of being taken by surprise and sent scrambling for extra cash at the last minute, either pay or put aside money for these expenses using your tax refund.

Some of these can include your car insurance premium, a maintenance fee on a timeshare (don’t get me started on this one) or other property, roadside assistance fee, and any other types of subscriptions.

Save For Retirement

You can easily fund a retirement account, such as an IRA with your tax refund. If you have more than the current IRA contribution limits, then you can fully fund your account while taking advantage of one of these other options.

If for some reason you are not reaching the 401k contribution limits at work, you can use this extra money as a way to increase what you currently contribute. Of course, you can’t add outside money into a 401k; however, if you fall short of the contribution limit due to other expenses, you can use your tax refund to pay those other expenses and increase the amount that goes into your 401k!

Save For A Large Purchase

If you are looking to purchase a car (learn how to save money on car costs), new laptop, vacation, or any other large purchase, this may be your chance. Instead of going into debt to buy the item, you can use your tax refund.

Even if the amount of your refund isn’t enough for you to purchase the item outright, it can greatly reduce the time it will take to save up for it. You can also pad the account with bonuses, raises, and future tax refunds.

Give

Giving is a very important part of any financial plan – especially for a Christian (we are commanded to give). I know many people who have a strong desire to give, but are not able because things are too tight for them financially.

If you are in a situation like this, a large tax refund can provide you with the perfect opportunity to give. There are plenty of organizations that are looking for donations in order to fulfill their mission such as, your local church, a missionary, food banks and homeless shelters, and any other charity that is fighting for a worthy (to you) cause, and has proven to be reliable!

 

Start A “Blessing Fund”

One of the things that my wife and I want to do (once we are out of debt) is to establish a savings account that will only be for the purpose of providing financial blessings to others. By having a separate account for this, we never have to worry about depleting our emergency fund or any other “dedicated” savings when we come across someone in need.

If you have a desire to help people out at various times, but don’t always have the means when these times come up, use your tax refund to start a “blessing fund”.

Spend Your Tax Refund

I’ve talked before about celebrating small victories during your financial journey.  Use some or all of your tax refund and do something that you have wanted to do, but couldn’t. Maybe go out to a fancy restaurant, or buy a New iPad or some clothes!

No matter what you choose to buy, use all or a part of your tax refund to treat yourself. Then take the rest and put it toward your highest financial priority. This way, you can celebrate achieving a financial milestone, without diverting funds away from your current plan.

Reader Questions

  1. Did you receive a tax refund this year? If so, how did you spend/save it?
  2. Do you purposely have excess taxes withheld during the year so you can have a large refund?
  3. Do you regret how you’ve spent a previous tax refund, bonus, or other “windfall”?

Using Morningstar for Mutual Fund Research

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[This is a guest post from LaTisha at Young Finances where she writes about investing, budgeting and planning for retirement. To see more from her visit www.YoungFinances.com]

Using Morningstar for Mutual Fund Research

What is Morningstar.com

Morningstar.com is a great resource for first time investors and experienced investors. There is a wealth of knowledge that is absolutely free! I have been using Morningstar ever since I worked with the Student Managed Investment Fund in college. We had to use the site to research stocks, download annual reports and gather general company information.

It is a reputable source and I use it often when I evaluate my own trades. I even wrote a tutorial on Morningstar that provides a step by step breakdown on how to get the most out of the service.

Morningstar on Mutual Funds

I was contacted recently by a friend that mentioned investing in mutual funds, rather than buying a share of stock, for retirement. She asked my opinion on a few mutual funds that she was considering purchasing. After I warned that I am not a financial advisor with no qualifications whatsoever to give investing advice, I suggested she check out Morningstar.

Mutual fund evaluation is something that they do very well. But then I started thinking about how to use Morningstar.com best for mutual funds.

No-Load And Load Funds And Management Fees

Before we get into how Morningstar can help you choose a mutual fund there are a few characteristics of mutual funds that you should know. There are two main types of mutual funds, load and no-load funds. The main difference between the two is the cost. No-load funds have no front or back end commission. If you purchase $1000 of a no-load fund, all of that $1000 is invested in the fund. A load fund has a commission either front or back-end. A fund with a 5% front end load fee would have $950 working in the mutual fund.

However, both types of funds could still have expense ratios. Also known as the management expense ratio, this is typically the fee that goes to the mutual fund manager. There could also be marketing fees or administrative fees, so you’ll want to check on what fees could be charged before investing.

Finding the Best Mutual Fund

The best mutual fund will obviously vary from investor to investor, but the idea here is simple. Take a look around and familiarize yourself with what’s out there. Once you are on Morningstar, the first thing you’ll want to do is click on the Funds tab once you are on the site. You will notice that there is news on the first page with information on various mutual funds. You will want to scroll down to the middle right-hand side of the page. Under a section that says Find a Fund, you will want to click on Fund Screener.

There is also a premium fund screener that will take into account the rating provided by the Morningstar analysts, but the free fund screener is also good. You’ll have to login to your free account to access the screener. The screener includes criteria for fees, returns and fund type. Take some time and see what options come up based on your screens. Once you narrow down your results you will want to take the research a step further by checking out the prospectus.

What’s your process when choosing a mutual fund?

photo by digitalart

Do You Really Need An Emergency Fund?

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Most people have heard of the concept of an emergency fund. In fact, I even wrote about creating a $500 cushion in your checking account with the thought of an emergency fund (EF) in mind. Here were my thoughts about the connection between this cushion and an EF:

Let me first say that I believe that every healthy financial household will include an emergency savings account with at least 9 to 12 months of living expenses. If one is still in debt, I usually recommend having about $2,500 in emergency savings until the debt is paid off (then boost that up to 9 months). However, many people are not in a situation to make that a reality. So, this should be the first step toward financial freedom.

The point of this emergency fund so you can have money stashed away when something unexpected comes up. If you are not financially prepared for emergencies, then you may be forced to rely on high-interest credit cards, or tap into your retirement savings in order to get by.

Do You Really Need An Emergency Fund

So, this is why I recommend having about 9 to 12 months worth of living expenses saved up for emergencies. I would suggest having the money in an account that’s pretty liquid (easy to convert to cash or write a check from), so you can have easy access to it if and when an emergency hits. You can also shop around to find the best CD rates and possibly put your emergency fund in the one with the best rate.

A Common Argument Against An Emergency Fund

There are some who believe that the emergency fund is overrated. They will tell you that you are better off plowing all of your money into investments and putting any emergency purchases on your credit card.

The logic here is that instead of earning 2% interest in a high-interest savings account while you wait for an emergency to come, you can earn a lot more if you invest the money instead. The difference in interest income would be more than enough to cover the interest paid on your credit card.

The Problem With Investing In Place Of An Emergency Fund

First, you would have to be able to calculate the difference between the rate you would earn from your investments and your savings account. No problem, right? It’s pretty easy to figure out how much your savings account would pay you – just go to your bank’s website.

But how about your investments? If it’s anything more than a CD or Money Market account, you can’t be sure. So, you don’t know what the difference between these accounts will be.

Next, you will need to know how much interest your credit card will charge you, how much the amount would be, and how long you will take to pay it off. Estimating the interest rate is pretty easy – if you have good credit and your bank is not about to go under, just use your current rate.

But, how can you possibly know how much you will borrow and how long it will take to pay it back? If our “emergencies” came with that much detail beforehand, I probably wouldn’t be writing this article!

So, we don’t know how much we will earn from our investments, and we can’t predict how much our emergency will cost or how long it will take to pay off.

That situation sounds much too unpredictable for me!

Why You Need An Emergency Fund

  • Because life is unpredictable, and many of those surprises come with a price tag!
  • Having an emergency fund will help you to avoid running up your credit card when something unexpected comes up.
  • It will also protect you from having to sell your possessions at a loss.
  • It will protect you from raiding your retirement  accounts
  • Save you from having to take out payday loans
  • You will go a long way from removing a common source of stress (financial insecurity). Find out what the bible says about being satisfied and content!

Many Common Emergencies Are Related To:

  • Losing a job/reduced income
  • Huge medical bills
  • Major car repair
  • Anything else that takes money to deal with and you didn’t see it coming

How Much Should I Save For An Emergency?

I recommend doing this in three stages:

First, create that $500 cushion in your checking account that I talked about earlier. In the article that I linked to, there are a number of tips to get you to that goal fairly quickly.

Second, if you are still in debt, I would recommend saving 1 month worth of living expenses. This is on top of the $500 cushion. Once you hit this goal, plow all of your extra money into paying off your debt. Be sure to cut all necessary expenses as well.

Lastly, once you are COMPLETELY debt free, bump this up to about a year worth of living expenses. Of course, if you have irregular income – this is especially true for artists/musicians and small business owners – then you may want to extend this even further.

What Isn’t An Emergency?

For many of us saving this much money will be a new experience. We may be tempted to spend our EF and a few “non-emergencies”. Here are a few guidelines:

Do not use this fund to save for any future purchase, such as:

  • Your Carribbean cruise
  • New wardrobe
  • Big screen TV before the Superbowl
  • New car
  • Down payment for a house
  • Tuition
  • Investing in a “sure thing”
  • Any other planned purchase

These are not emergencies!!!

Setting up an emergency fund and getting out of debt should be at the top of most of our lists. This will allow us to have the financial stability to handle shocks and the freedom to choose an unconventional path!

Reader Questions

Do you have an emergency fund? How much?

Are you currently in debt? If so, do you still save?

Have you ever had to face an emergency with nothing but credit cards?

photo credit: gadgets.co.uk

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