It’s tax time and many homeowners receive large tax refund checks. Here’s some advice I’ve put together for you on different ways to use that money.
This is my first article in a new series “The Affordable Home.” In the series I intend to focus on the intangible benefits of homeownership by making them, well, tangible. I believe the affordable home is the sensible and proper approach to homeownership; so many new clients I meet today specifically focus on the affordability of the mortgage loan instead of the “HGTV” aspects of a house. I find this new attitude refreshing for two reasons.
First, it’s an “old” attitude: in decades past the idea of buying a home revolved around diligent budgeting to save up the down payment and the concept the monthly payment should be affordable. The features of the house—granite countertops, high end appliances, paved driveways—were minor considerations and certainly did not make for sound decision-making when buying a home. Those features could be added later, if one so desired, and those “old-timers” (I was once one of them) knew that.
Second, during the past decade, during the “Boom” the focus was on something I considered completely nuts: buy a home, an amazing home packed with big rooms, big features, and big monthly payments, at any cost. Affordability be damned. I struggled as a mortgage professional during those years to try to talk sense into people.
I saw a TV advertisement yesterday: “Just in time for your tax refund we’ve received a new stock of bamboo flooring!” It occurred to me that this is the time of year when many people, especially homeowners, get large tax refunds and the sharks start circling looking to take a bite out of that Government check. To this I say, “STOP! Take a minute to reflect on what you should do with your money! You worked hard for it, and you bought an affordable home so you could get that refund, don’t throw it away without giving it due consideration.”
Here are some suggestions:
1. Consider investing the money for your future. I had dinner at the Westside Steakhouse last Saturday with old friends I haven’t seen in 25 years. The owner, Nick, was at one time a stock broker. He provided this very thoughtful advice: “Never spend more than you make and save some money every week.” Awesome advice and I believe that fits very handily into my concept of the affordable home. Especially in this day and age of doubt over pensions, we consumers must be smarter and more responsible with our planning for retirement. Follow Nick’s advice and invest your tax refund to begin or supplement your savings plan.
The New York Times “Your Money” section featured a wonderful piece recently about a new vehicle that makes it easier for us to create a sound investment strategy without all the costly bells and whistles. Here’s the link to that article: Financial Advice for People Who Aren’t Rich
I have long advised my clients to consider retaining a Financial Advisor to provide counsel on all things finance-related: investing, budgeting and insurance. You can find a local Financial Advisor in the your area here: National Association of Personal Financial Advisors
And here is sound advice from a CPA about investing not just your refund, but investing throughout the year and the tax benefits/ramifications: Fund Your Retirement Or Your Child’s College?
2. Do something you LOVE and open your own business. At the dinner last Saturday I discovered that not one, but four of my old work-mates left their jobs to open their own businesses. You might consider taking your tax refund and doing the same. These old friends are not only successful in their respective businesses, but they are all doing something they love.
The Small Business Administration offers excellent webinars and advice on opening a small business. You can find out more information right here: SBA Starting a Business
3. Pay down debt. This tends to be the long held standard amongst many homeowners I’ve known over the years. I believe this is an admirable activity, but I believe taking your tax refund to pay down debt should be part of a comprehensive plan for debt management. To take a page out of my friend Nick’s finance playbook: don’t spend more than you earn. I advocate tending to your credit use respectfully and as part of your total family budget every month. This way you won’t necessarily have to take your hard won refund check and pay down a credit card balance. Of course, if, during the year you experienced an emergency and needed to access your credit to assist with that emergency, then paying off that debt at tax time is a sound strategy since it’s a one time event.
I’ve found that Consumer Action is the best site on the ‘net for sound advice on all things credit related, including how to obtain lower credit card rates and fees and great counselling on preparing and maintaining a family budget. Find them here: Consumer Action
Another Smart Strategy for The Affordable Home: Take home more money in your paycheck; get a smaller refund at tax time.
I hope my suggestions are useful to you at this exciting time of year. Of course, I also advocate that you really shouldn’t get such a large refund at tax time if you’re a homeowner. I’ve long believed that you should incorporate into your homeowners’ “network of advisors” a great tax professional or CPA. By doing so, you can lean on your tax professional/CPA to advise you on the correct withholding throughout the year to increase your take-home pay, reduce your end of the year tax refund (and prevent having to pay!), and enjoy the benefits of homeownership every month instead of once a year. Here’s the IRS page on how to calculate correct withholding, but I recommend you do this only under the guidance of your tax professional/CPA: IRS Withholding Calculator
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Hope that helps!
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