Money Management

It’s that time of year again.
Only three weeks left to go.
No, I’m not talking about Passover, I’m counting down to tax filing day.

Earlier this year, the students in Personal Finance learned how declaring “allowances” on Form W-4 filed with employers, determined how much federal tax was withheld from each of their paychecks. We traced how withholdings flow from paychecks to Form 1040 filed annually, and discussed how filers have a balance due to the government, or get a refund for overpaying taxes.

A survey released this week, commissioned by NEFE, the National Endowment for Financial Education, revealed that 30% of filers intentionally withheld more from their paychecks so they can receive larger refunds when they file their returns. "Conventional advice says receiving a tax refund is like letting the IRS have your money interest-free all year," says Brent Neiser, CFP®, senior director of Strategic Programs and Alliances for NEFE. "But for most people, it makes sense to take a larger refund." Neiser says Americans should base their withholding decisions on how they will behave with their money. "If you’re afraid you’ll waste that extra money each pay period, electing to receive a refund could be a wise strategy—as long as you use the lump sum carefully toward financial goals," says Neiser.

Experts suggest several options for using your tax refund wisely.
• Pay down debt – especially balances on high interest rate credit cards
• Start an emergency fund – unexpected expenses should be anticipated, strive for accumulating six months worth of living expenses in reserve
• Save for the future – take advantage of the tax benefit of contributions to an IRA
• Prepay bills – prepaying a mortgage payment or loan can save you interest in the long run

As with all budgeting tips, the important thing to remember is to make informed decisions about money management. Hopefully, our Cardin seniors have learned that lesson well.

~Jan Schein
CFO, Instructor Personal Finance