Tax Refund in the Bank? Learn How Your Windfall Can Boost Your Financial Security

With Tax Day behind us and summer ahead, many Americans face a choice – how to use a potentially hefty tax refund. Take a vacation? Chip away at debt? Pay bills?

The choice is personal and often depends on circumstances, but a few simple guidelines can help you avoid regret from a spontaneous week on the beach in Cabo.

“Receiving a windfall of money, like getting your tax refund, is a great time to develop your 30/40/30 habit,” said Dan McDonald, director of the Take Charge America Institute and Extension Financial Literacy Specialist. “Put 30 percent toward paying down outstanding debt, 40 percent to current living expenses, and 30 percent in savings.”

Although financial literacy has been improving, Arizonans lag behind the national average on some key facets of money management, McDonald said.

More than half on a recent survey couldn’t answer simple finance questions about interest, inflation, mortgages and investing.

“And Arizonans continue to be more ‘underbanked’ than the national average with 67 percent having a savings, money market, or CD account compared to 72 percent nationally, and 88 percent having a checking account compared to 91 percent nationally,” McDonald said.

Your financial literacy journey should start with a look at your values, said Cate Gore, a Gila County Cooperative Extension Instructional Specialist in Financial Literacy and Parenting.

“A lot of people don’t realize that those really do impact the way that we think about and how we spent our money, how we view it. It’s like the foundation,” Gore said.

For example, if you value giving, people can take advantage and lead you to spend money on others at the expense of your own needs. A commonly listed top value is family, and those two values can lead to money trouble, Gore said.

One woman in a recent class told Gore that she is close to retirement and pinching pennies. Her adult daughter, however, want’s help with a family Disneyland trip. Through an Extension class discussion, the woman realized that she could have boundaries with her daughter, Gore said.

“That’s why I think it’s so important to discuss values first, because it opens up all of these doors, and you get revelations,” she said.

There is no one-size-fits all money management solution, because every household has different circumstances, needs, and goals. What you want is also a factor, and you can build that into your budget, Gore said.

Strife in your house over money is a sign you should revisit your budget and ensure that it’s aligned with your family‘s collective needs and desires. Don’t get discouraged - financial responsibility is a process.

“You’re going to be revisiting this a lot, and that’s ok. You’re going to make mistakes, but mistakes are opportunities to learn,” Gore said.

Having SMART goals – Specific, Measurable, Attainable, Relevant, Timebound – is important, and start small. Small accomplishments can snowball into major financial achievements, she said.

Identify your spending leaks, such as eating out, nightlife, or “retail therapy,” and try to plug them. Gore calls this money we “consume,” because it disappears with little real gain. Gore suggests using a windfall like a tax refund to build an emergency fund before anything else, including paying down debt.

Pop-up expenses are inevitable, and putting them on credit cards only digs a deeper debt hole.

“Things happen. Cars break down. They need new tires. The washing machine goes out, and you’re going to have to have that replaced,” she said, adding that $1,000 is a good starting point for emergencies.

U of A Cooperative Extension offers numerous resources that can lead you to financial health, including:

• Where Does Your Money Go? An introductory money management class that helps participants develop spending and savings plans. It includes exploration of spending habits and help setting financial goals.
• Lunch-n-Learn – Online personal finance classes from 12-1 p.m. every Tuesday featuring topics from our Where Does Your Money Go? and Building Financial Security workshops.
• Take Charge Cats - A team of UArizona students offering workshops for students from 7th grade through college. Take Charge Cats give presentations on spending plans, saving, credit cards, credit reports, understanding paychecks, identity theft, and the value of education. They also conduct the annual Arizona Financial Face-off for high school students.
• Arizona Saves Pledge – McDonald is co-coordinator of Arizona Saves, a campaign aimed at helping Arizona residents set and achieve financial goals.