Your Tax Refund

BudgetFree Approach
by S. Nanavati

This year the Internal Revenue Service reports an average tax refund over $2,700. Use the principles of the BudgetFree for Life System to prioritize how to use your refund.

Survival Needs:

Food, Warmth, Water, Shelter…

Utilities: If you’re having trouble fulfilling critical survival needs (electric, water and heating, for example) your refund should be used to address these matters.

Mortgage: For those without debt and job insecurity consider lowering monthly housing payments. Refinancing isn’t for everyone – you need home equity, a high credit score to qualify for the lowest rates and $2,000 - 3,000 for closing costs. To figure out whether refinancing is right for you, try this online calculator: http://www.bankrate.com/.

Safety Needs

Are you protected against uncertainty or disaster (insurance, home security, etc)? Do you have an emergency fund? Is your job secure? Do you have the skills necessary to compete in the market place? Are meeting your long-term retirement objectives?

Emergency Fund: If your survival needs are met, building a cash fund should be a priority. My September 2008 Newsletter “Your Emergency Fund,” discusses the importance of maintaining a 6-month emergency cash fund.

Tip: Beyond security, a cash fund allows you to save money. Insurance deductibles are one example. According to the Insurance Information Institute raising your deductible from $200 to $500 can cut 15-30% off your premium. Increasing your deductible to $1000 can bring up to 40% in savings. If disaster strike, your emergency fund will cushion the blow of a higher deductable.

Credit Card Debt: Putting money in the bank when you are paying a higher interest on debt doesn't make financial sense. If your job situation is secure and you're carrying credit card debt use your refund to pay down high interest obligations. Start by addressing the cards with the highest interest.
Long Term/Retirement Investing: The correction in the stock market has created an investment opportunity for those with a long-term horizon. If your credit card debt is paid off, you have an emergency fund and don’t have a need for your refund money for the next 3-5 years put it towards your long-term/retirement goals.

Retirement versus College Fund: There are many ways to fund a college education (loans, scholarships, ROTC, work study, etc), but saving is the only way to fund your retirement. Make certain your retirement plan is on track before addressing a college fund.

Social Needs:

If you're on top of your debt, secure in your job and up-to-date with short/long-term financial planning focus some of your refund on personal aspirations – vacation, membership, whatever lifts your sense of belonging and acceptance.

Esteem Needs:

Invest in Yourself:
• Hire a career coach or personal trainer
• Attend classes that enhance knowledge and skills
• Attend a conference to network, increase knowledge and possibly find your next job

Tip: Adjust your withholding so next year’s refund isn’t so large. The IRS provides a withholding calculator so you can fine-tune your taxes to get more in every paycheck. Make sure to automatically transfer this extra money to a savings account so it’s put towards your goals, not your whims.

BudgetFree Investing

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GivingGrinch.com
BudgetFree for Life!
Editor: Shreyas Nanavati
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Blog: http://www.givinggrinch.blogspot.com/
Website: http://www.givinggrinch.com/
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BudgetFree Investing

Having short-term financial security and a long-term savings are crucial SAFETY needs. Whether you invest individually or work with a professional it is important to understand how your money is invested and the risks involved.

Know Your Goals
Planning for retirement is an on-going process. You must know how much income you’ll need to live comfortably, provide adequate health care and ensure financial security for dependents. Online sites like http://www.schwab.com/ and http://www.bankrate.com/ provide tools to help you with this process.

Know What It Takes
North Americans are notorious for living beyond their means. Saving rates are very low and in decline.

Because of this, an above average return on our investments is a requisite to meet retirement goals. To get higher returns, one must take higher risks. A simple example:

Assumptions
Work Life: 40 years
Historical Inflation: 3%
Historical 5-Year CD Rates (lower risk): 5%
Historical Stock Market Returns (higher risk): 8%
Calculator: http://www.bankrate.com/calculators/savings/saving-million-dollars.aspx

Saving $275/month for 40 years (8% market return) will result in a million dollars. Saving $675/month for 40 years (5% CD return) will also result in a million dollars. The difference goes beyond risk and $400/month. Historical information does not account for market timing or inflation fluctuation. In the past 20 years the average stock market return, adjusted for inflation, has been 8%. Over the past 10 years, that number falls to 1%. Since January 1, 2000 the number falls to -4%. Meanwhile inflation rates in the past 20 years have fluctuated between 1% and 6.3%. Higher inflation impacts real income invested in less risky vehicles (CDs, Money Market, Treasuries, etc). Source: http://www.moneychimp.com/features/market_cagr.htm

Bottom Line: Market volatility has hampered the retirement plans of millions – especially the average investor who takes greater risk to make up for lack of savings. I’m not advising you how to invest, but I am pointing out the importance of saving so you are not completely dependent on the market to make up the difference.

Know Your Investments
Underfunding your retirement is unsettling. Not understanding what is in your portfolio is downright scary – especially when the market takes a turn for the worse. Before making an investment decision make sure you understand the investment, its upside and downside. Three suggestions:

1. Beware of False Promises: There is no such thing as a no risk investment or a get rich fast scheme (the only person getting rich is the one selling the scheme). Do not agree to anything on the spot or act on testimonials from strangers.

2. Don't Gamble With Money You Can't Afford To Lose: The less you can afford to lose, the more conservative you should be in your choice of investments. A young person with a long-term horizon can absorb more risk because they have the benefit of time. If you’re close to retirement a volatile portfolio can wreak havoc on your golden years. Tip: If you are meeting your investment goals and want to invest for fun set up a separate account that is isolated from your essential savings.

3. Diversify: Don’t put all your money in one stock, bond, fund family, sector, commodity, industry or region of the world.

Self-Help
Even if you choose to work with an investment advisor it is important to understand a wide-range of investment topics. My recommendation is to subscribe (or read at the library) one or more of the following every month: Kiplinger’s, Money Magazine or Smart Money. These magazines cater to a general audience. If you are new to investing, don’t get frustrated if topics seem foreign. Over time you will gain familiarity.

Know Your Advisor’s Place
If you choose to work with an investment professional, remember you are buying their service and they must work for you and your interests. Interview several before settling on one. Although I personally do not work with an investment professional, I would recommend a fee-based advisor rather than one who makes money on commission (annuities, mutual funds and frequent trading generate a lot of commission for a broker).

Secure Your Short Term
Make sure your current financial needs are addressed. For advice on an Emergency Fund, see my September 2008 Newsletter: http://givinggrinch.blogspot.com/2008_09_01_archive.html


BudgetFree for Life Consulting
Tailored for individuals, couples or families, this package comes with all the training, tools, techniques and support you’ll need to live BudgetFree for Life. It’s an affordable way to bring fiscal and personal balance to your life. To learn more, check out my 60 second presentation:

Reader Tips

Survival: Explore the Bulk Section and Eat Healthy for Less

The food industry makes it easy for us to eat processed foods, but they good for us or the environment. With food prices rising and incomes shrinking it’s time to make grains and beans the centerpiece of our diets.

Begin your day with whole grain cereals topped with nuts and dried fruit. For lunch combine whole grains with beans, veggies and a sauce or dressing. For dinner casseroles, pilafs and stir fries. Need a quick snack? Try Bulgar, couscous, instant black beans or re-fried beans with veggies. Submitted by Susan B. in Hancock, Michigan

Social: Road Trip Clip

I clip coupons from restaurant chains and keep them in the car to use on road trips.