Financial Basics and the Tax Refund

Kari Lewis

I recently had the opportunity to present a basic financial class and thought I would share some of that information today.  For many folks, it’s Tax Refund time, but we want to be strategic in how that money is potentially spent.  Whenever money comes in, we have three options – Save it, spend it, or Give it away. 

We want to first put any extra money towards any necessities (not wants) that we need, such as housing, food, transportation, and utilities. 

MSU Extension Credit Card sliders provide
a great visual for the real cost of credit cards.  

The tax refund is a great place to sock away some savings for future expenses.  In the workshop we looked at John and Sally who have four kids and when August rolls around the school supplies, school clothes, and sports fees pile on so they put the $2,000 in “unexpected expenses” on their credit card.  They will end up paying a total of $3,654 for that $2,000 charge due to the $1,654 in interest charges and will be making minimum payments for 11 years!  This illustrates how critical it is to save for purchases instead of using credit cards. 

According to research, 70% of Americans have less than $1,000 in savings.  Building up a $1,000 emergency fund is a critical piece of a basic financial plan.  An emergency fund should be saved for anything that is truly an emergency.  If you receive a tax refund, be sure to save at least $1,000 for a starter emergency fund.  This should be placed somewhere where you’re not tempted to use it for anything other than a true emergency.

After building the $1,000 emergency fund, any debt should be attacked.  Make a list of all debts, smallest to largest and begin throwing as much as possible towards the smallest debt while continuing to make the minimum payments on the other debts.  Once the smallest debt is paid off, move to the next debt, throwing as much money as possible at it, this is called the ‘Debt Snowball Method.’ 

Lastly, if considering making a purchase, think about any potential upcoming expenses that should be saved for such as summer daycare, camp for the kids, graduation or wedding gifts, back to school supplies, etc.  These dollars can be stretched by purchasing at thrift stores, on the online yard sale, at cash and carry sales, etc. 

Any purchases should have a long-term benefit.  For example, this may be the time to purchase an upright freezer to take advantage of frozen fruit and vegetable sales, purchasing a used vehicle if needed, a washer and dryer versus using the laundromat, etc. 

In the class, we looked at two couples who both received a $2,000 tax refund.  The first couple purchased new smartphones, a new flat screen TV, some PS4 games, and enjoyed a weekend in Great Falls at a hotel, eating out, and doing a little shopping.  The second couple put $1,000 towards an emergency fund, purchased a 7 cubic foot chest freezer and filled it with a processed hog they bought.  They then set aside the remaining funds for summer swim lessons for the kids, a family summer swimming pass, back to school supplies and clothes.  Both couples received the same amount of money, but one family chose to make long lasting decisions while the other family’s tax refund was gone within a weekend. 

Before beginning to spend, consider where you want to be financially in 1, 5, and 20 years, and then make your decisions.