Financial confusion
Rolling over your refund

Scott Denne

Tax time is here again. You may be ignoring the w-2s, 1099s and other tax forms sitting unattended on your desk, coffee table or to-do pile; but you have probably already thought about how you are going to spend those pennies from heaven that are scattered to the masses once a year by Uncle Sam.

Although the X-box 360 does have fantastic graphics, financial planners urge you to take a look at where your tax return could help you most, rather than where you could help Mr. Gates.

“My experience has unfortunately been that young people come out of school with credit card debt in addition to their student loans,” said Dan Galli, CFP of Daniel J. Galli and Associates, “We like to see people get in the habit of saving right away but often the debt can’t be ignored.”

But before you can begin saving you must get rid of credit card debt, said Galli. According to the Federal Reserve the median credit card debt for households under age 35 is just over $1,000.

But tax returns alone will not help young people get out of debt.

“The only way to get out of a negative balance sheet is to live within your means,” said Ken Steele a senior financial planner for Metlife in Waltham.

Credit card debt is the worst form of debt to have for two reasons said Galli: the interest rate is variable and can be raised significantly by just one missed payment and it is not tax deductible, unlike student loans or mortgages.

Not all debt is as potentially dangerous as credit card debt. It is not necessary to become debt free before you can begin save.

“When I have clients who have a low interest loan I advise them not to pay it off any quicker than is necessary,” said Edwin Ofgant, past president of the Massachusetts chapter of the Financial Planners Association, “anytime you can borrow money at a low rate and invest at a higher one you should do so.”

Once the credit card debt has been dealt with it is a good idea to have an emergency fund built up before you begin saving money in places where it will be difficult to get to.

“Everybody should have 3-6 months of living expenses saved up as cash that can be easily withdrawn,” said Steele, this will avoid the temptation of many twenty- and thirty-somethings to use their credit card as their emergency fund.

When it comes to saving for the long term Ofgant recommends investing in mutual funds rather than stocks because “anything can happen to one company as we saw with Enron.”

But there are many options available for those who are ready to begin saving for the future even on a tight budget.

Payroll savings, such as a 401k or its nonprofit equivalent the 403b, is a good way to begin saving for several reasons say financial planners. For one it is done automatically so it avoids the temptation to spend the money elsewhere. Also it is not taxed until you take it out and your employer will match the amount you put in up to a certain limit.

If you are a little more disciplined you can put your money in a Roth-IRA, which is not tax deductible but grows tax free and can be removed tax free.

“These are a terrific way for someone in there twenties to save,” said Galli because if you have one that grows at about eight percent your money will double every nine years.

These are also good on a budget because they can be set up for as little as $250 and sometimes even $50 if you contribute to it every month.

“Your twenties is absolutely the most critical time to begin saving for your future,” said Galli.

So take your big tax return dream and ……..

Scott Denne can be reached at sdenne@theoysteronline.com

02/22/2006   |   Permalink