Savvy Allocation of Your Tax Refund

By: Xavier Epps, Financial Adviser and Owner of XNE Financial Advising, LLC

With the end of the calendar year right around the corner and the holiday season coming to an end, many Americans are gearing up for another busy season…the TAX SEASON! Some already know what they’d like to do with a tax refund if they receive one, and some have embedded plans into their minds on how to utilize refunds right after they’ve received it (i.e., when someone blindly comments, “I know what I’m going to do with my tax refund next year” after they notice they didn’t do anything of significance with the current refund). Learning how to plan wisely for usage of a tax refund is the key to financial success in 2014 and many years to come.

Internal Revenue Service recently issued statistics for the 2013 season and 147.2 million individual income tax returns we’re processed by the IRS (down 0.04 percent from 2012). Of these 147.2 million returns processed, 74.2% received a refund which equaled $299.86 billion distributed with an average refund of $2,925. A creative way to utilize a tax refund is supplementing it with your regular monthly earnings. Assume you receive the average refund of $2,925 in February 2014, instead of spending it all in one or two months, place the whole refund in a high-yield savings account (more interest than a traditional financial institution) and draw off the refund each month over a ten month period ($292.50 per month). If you’re unable to deploy that tactic, try to use these four allocation breakouts instead:

·         15 percent emergency savings

·         20 percent personal savings

·         25 percent debt reduction

·         40 percent discretionary purchases (you’re going to spend, let’s do it wisely)

As money touches our hands (or bank accounts), we tend to forget about all the financial issues we may have experienced the previous year (i.e., car issues, health procedures, unexpected home expenditures, etc…). In order to prepare for these issues, we should be ready to allocate funds from tax refunds to cover most or some of possible issues in 2014 (76% of Americans are Living Paycheck-to-Paycheck). Using the 2013 tax refund average of $2,925, an emergency savings will have a balance of $438.75, personal savings $585, and debts reduced by $731.25. By saving funds and reducing debts, you’re establishing a solid foundation towards a better year financially compared to the last, it also means less earnings needed to pay down debts each month (smaller minimum monthly payment) throughout the year which allows for more discretionary spending as well as funds to be allocated towards a savings account each month.

Now it’s time to re-think how to utilize a tax refund to achieve maximum optimization of your household finances in 2014!

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