Be Aware of Tax-Related Scams

Your first thought, spend it! But how? Is it the house project you and your spouse have been discussing for the last several months? Should you pay down your credit card balance? Go on a trip? Wait, you’re excited about the refund, but in retrospect you should have adjusted your allowances so that you didn’t give the government an interest free loan over the course of the last twelve months. With that said, should you fire your accountant? Well, it’s too late now. Take a moment, and think through the best use of this money? What are your short-term priorities? How do those priorities align or even conflict with other priorities that are further down the road? Should the refund have just one focus?

Let’s first sort through what we need to consider. Is this refund enough to actually complete the house project or will you actually have to put the remaining balance of the project on a credit card? Do you have your three to six months of savings in your emergency fund? What are the interest rates of your current credit cards? What is the current state of the market? Are you comfortable with market risk if you were to invest your refund? How secure is your current career? How variable is your current income? These are significant questions and require more diligence than, quickly hiring the contractor to install heated floors in that master bathroom. Give some intentional thought to this prior to your refund arriving in your bank account. Meet with a Certified Financial Planner to not only consult about what to do with your tax refund, but also your current planning situation and existing investment accounts and risk management plan.

Prior to the receipt of your tax refund, create a pie chart, sort through your most important priorities and time frames, then allocate accordingly, without heavily weighting one priority over the next. Make your refund go further. Start with savings, then, make a larger credit card payment than the monthly minimum if a balance exists, assuming the interest is in the teens. Tuck a portion into the stock market. If you anticipate needing or wanting the money prior to retirement, establish or contribute a portion of the refund to a non-retirement investment account. Only after taking these steps should you allocate funds to a home project. Why? You have now considered long-term planning first, then addressed short term priorities. Life happens, homes need upgrades, and travel is always an option. These plans will ALWAYS be available and present. Retirement and long-term planning will not happen, if you don’t plan now. Meet with a Certified Financial Planner to sort through what to do with your tax refund. Finally, discuss this with your CPA in preparation for next year’s taxes to sort through how you can limit the refund and have more cash available over the course of the year.

We all know we should save more. We all want to save more. Yet, month after month we face the same Groundhog Day scenario: paying all of the bills only to realize that – yet again – there is simply nothing left to save. Sound familiar?

Think about it for a minute. In our Groundhog Day scenario, you are dutifully paying every creditor in your life except for the most important: yourself! It’s time to change the narrative: moving forward, think of saving money as paying yourself. You spend all month working hard. You deserve to keep some of the compensation for that hard work. You on board? Great! To keep you honest, we’re going to set up automatic contributions.

Automatic contributions to savings or investments are a crucial step in building a stable financial foundation. Establishing automatic transfers tied to your paycheck schedule ensures that you will pay yourself for all of your efforts at work and invest in your future. It codifies the “pay yourself first” mentality and aligns your monthly spending with your available discretionary income. For example: if I see extra money sitting in my account, I’m likely to splurge on a fancy meal, or buy a plane ticket to visit my sister. Then the end of the month rolls around, and there is no money left over for saving and investment. On the other hand: if I never see the money in my account, I don’t miss it!

By paying yourself first (saving as money comes in), you will see less money sitting in your account and, accordingly, you will spend less. Over time, you won’t even notice the money being set aside. Your spending habits will have auto-adjusted to your new, post-savings cash flow. (I promise!)

One of the best parts of a “pay yourself first” system is that you don’t have to feel guilty about spending the money in your checking account. Having automatically set aside your monthly savings, you’re free to spend the rest of your money as you wish! Regardless of your balance at the end of the month, you can rest easy knowing your financial foundation is secure.

As a financial advisor, I find a “pay yourself first” savings model to be far more successful than any strict budgeting system. Budgets require line item expense tracking and don’t adapt easily to unexpected expenses. Establishing automatic transfers to “pay yourself first” allows you to maintain a more flexible budgeting system – while still sleeping well at night knowing that your saving objectives have been met.

If you would like to talk about establishing an automatic savings plan or your personal situation please contact me at zach.swaffer@trilogyfs.com.