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What to do with your tax return

Thursday, April 28th, 2011

Do you remember the good old days when spending our tax refund frivolously wasn’t such a big deal? Our jobs were stable, house values seemed to be on a never-ending climb and the stock market was booming. Things were looking pretty good.  Well, we are all feeling a little less wealthy these days; our portfolios have been beaten up, the wealth in our homes have taken a blow and on top of all that, we are worried about our jobs and the stability of our income.  There is a lot of insecurity or fear out there and so spending our tax refund on a great vacation or a new flat screen TV may not be the most financially savvy thing to do.

 So what should we do with this year’s tax refund- spend it or save it, invest it or splurge?

Well, that all depends. In these tough times, it is a good idea to give some thought to your overall financial health with the first and most obvious area being your emergency reserves.  Lets take Karen for example, a 42 year old marketing executive with a small independent firm who wants to know what she should be doing with her estimated $10,000 tax refund. In past years, Karen just reinvested her refund into her RRSP but this year things have changed. Karen’s company has been hit hard by the economic slump and has been hinting that layoffs are eminent. Although Karen is a long time employee with seniority she is not immune to layoffs.

The first thing Karen needs to do is evaluate her existing emergency savings funds to ensure that she has at least 3 to 6 months of living expenses set aside. Knowing that you have some backup money just in case can definitely ease some of your anxiety about what may happen. If Karen has little in the way of savings, a tax refund can give her the means to start building up a reserve. I would also suggest that Karen open up a low rate line of credit to help make up for the shortfall in savings. It is easier to qualify for debt when you have income, keeping in mind that this line of credit is ONLY to be used to help pay bills or pay emergency expenses.  

Let’s assume that Karen does have an adequate emergency savings fund, how then should she best use her tax refund?

Karen should review her overall debt load and either consolidate her loans into one low rate loan or start aggressively paying down any high rate loans.  You would be quite surprised at how many people have no idea how much they owe and what it is actually costing them to borrow it. Most often this is because we have way too much debt and it’s all over the place.  So we need to simplify our debt. We can do this by taking all our loan statements to our banker and ask if they can consolidate them into one, low rate, manageable loan. If you have only one loan payment, it not only makes life much simpler but also makes getting out of debt much more ‘doable’. Now if you have some high interest rate loans that you cannot negotiate into a lower rate loan then I would highly advise you to make it a priority to start aggressively paying them down. Use your tax refund here.

What if you have already paid off your debt and have a sizable emergency fund- then what? 

Lets say that Karen has a healthy savings accounts and no debt with the exception of her 4% mortgage, what then should she do with her refund?  Today’s low interest rates and stock markets make it a good time to invest versus paying down debt. Karen is in a high tax bracket, has a long time horizon and is a moderately aggressive investor who should yield between 7-8% over the long term. With all this in mind, investing versus paying down her 4% mortgage makes more sense for her. And since Karen’s tax refund was earned by making contributions to her RRSP, then why not continue the cycle and invest back into the RRSP creating an ever-growing nest egg. The $10,000 contribution would generate a $4,000 refund at the 40% marginal tax bracket, which she can throw back into the RRSP again next year.

So what should you do with your tax refund?

It’s important that you understand your unique financial circumstances before making any decisions. Use the refund productively and resist the temptation to spend it on frivolous items. In the long run you will be better off having money in the bank, with little to no debt then a big TV or just the memory of a two week vacation……..

5 simple money principles to teach your kids

Thursday, October 1st, 2009

Whether you know it or not, you are teaching your kids every day about the value of money by how you spend it, save it, invest it or waste it. Qualified or not, you are their money coach and they will learn by watching and listening to your every move.

If this concerns you, not to worry as all is not lost… yet. If you want to raise financially healthy kids it’s better to start late then never at all and an allowance is a great way to start. Among other things, it teaches your kids how to manage their ‘own’ money. Even though it should be up to them to decide how to spend the money, it’s a great opportunity for you to teach some practical skills. I suggest starting with 5 simple money principles: earning, spending, saving, borrowing & giving.

Earning:

An allowance is your child’s ‘pay-day’. Establish the amount based on their age and the family finances. Be consistent and pay on time. The purpose of an allowance is really to teach your kids firsthand about money management. Don’t tie it to chores. If you are a member of the family then you are responsible to share in the household chores. This is not something you or anyone else should get paid for. However, give your child the opportunity to be able to earn extra money for taking on additional chores or responsibilities. Also, don’t pay or reward for your kids getting good grades. That is a personal accomplishment and should not be tied to a financial benefit.

Spending:

Have a discussion with your child about what exactly they are expected to pay for using their allowance. This is the start of them learning to live within their means. Something many adults don’t even know how to do successfully. Teach your kids age appropriate budgeting. For example, you have $5 to last one week and you are responsible to pay for any treats when we go to the grocery store. As your child gets older, their allowance increases as does the expenditures they are expected to use it for.

Savings:

Just as financial gurus advise you to save 10% of your income, so should you advise your kids. Teach them to pay themselves first by encouraging them to take 10% of their allowance and put it towards savings. If your child earns $2 a week, then suggest they take .20cents and put it into their piggy bank. If they earn $10 a week, again suggest $2 go towards savings. I often recommend creating ‘savings jars’ and act as the Bank of Mom. Open a ‘real’ savings account for each child and when the jars get full have the kids take the money to the bank to deposit. There will be nothing more exciting and encouraging for them, then to see their own money grow. Remember, it’s not the amount their saving that matters as much as the lessons and habits they are learning.

Borrowing:

You may think this is one aspect of money management you don’t want your kids to learn too early, if at all, but your child needs to be taught from an early age that ‘borrowed’ money is not free money. So teach your kids ‘age appropriate’ lessons on borrowing. If your child wants $10 to buy something and they have already spent their allowance, you now have a perfect opportunity to teach some valuable money management lessons.

You have the option to take a hard line, no money, no purchase. You can teach your child how to start a savings plan to build enough money to make this purchase – delayed gratification. Or you can lend them the money from the Bank of Mom. I suggest creating an ‘IOU’ jar and have your child sign an IOU. You may want to add interest on the borrowed amount to teach an authentic lesson on how the real world works. When allowance day comes, be sure you take the agreed upon amount off the top as payment for the loan.  When your child realizes they have little cash flow and nothing going towards their savings, they may think twice about the next item they so desperately need.

Giving:

Last but definitely not least, teach your child the importance of giving back. Whatever charities or causes the family supports encourage your child to take a portion of their allowance and ‘give back’ If they happen to love animals, your child can buy a can of cat or dog food and take it to the local shelter. Or buy a toy for a child who is not so fortunate. There are also many non-monetary ways to give back; donate unused clothes or toys or volunteer your time, just to name a few. It’s not about what or how much, just that you are giving back.

It’s never too late to teach your kids about money. Just remember 3 key points, lead by example, start young and let them learn by doing. Although making mistakes is a part of life when it comes to money, it’s better to make them early while the ante is still small.

A man is NOT your retirement plan!

Tuesday, March 10th, 2009

I always advise women of two things, first take care of your personal finances throughout your years ‘as if you had to’. And  second, save regularly regardless of your financial health. This was the adage of a client I dealt with years ago. A lesson learned when her husband of 25 years walked out and left her and their 3 kids in a state of financial shock. As she said, “how I wished I had paid attention to our finances over our marriage”.  Twenty years later she is retired and fulfilling her dream of travel.  (more…)

Why women need to plan for their own retirement!

Tuesday, March 3rd, 2009

As women, we are likely to outlive our spouses or partners by an average of 5 years. Although this may seem financially insignificant when planning for a 20 to 25 year retirement, it could potentially be our most expensive years.

Things Women Need To Know (more…)

Do you have an emergency plan in place?

Sunday, August 10th, 2008

In the last few issues of ‘itsHERmoney’ we discussed the importance of organizing the 5 rooms of one’s financial house; our personal debt room, our savings plan room, our retirement plan room, our estate plan room and our insurance needs room. Last month we tackled the topic of managing and understanding our ‘debt room’. In this issue we will deal with our ‘savings plans room’ or more specifically the importance of establishing an emergency savings fund.

Why are emergency savings so important? (more…)

Tips to spring clean your financial house

Tuesday, April 1st, 2008

The flowers are blooming and the birds are singing – Spring seems to have finally sprung. It’s a great time to start new and clean out those cobwebs hiding within each nook and cranny of our homes. And although our intentions start off good, somehow we always find an excuse to dodge the hefty job of cleaning our ‘financial house’. This is usually the largest and most cluttered areas that we need to sort through.

Here are three simple strategies to help make decluttering and reorganizing your financial papers a less daunting task: (more…)