on what to do with your tax return
January 18, 2010, 4:22 pm
Filed under: advice, financial | Tags: , , , , , , ,

dear spoonah,

it’s tax season. i’m getting scores of w-2s and other letter/number combinations of forms that i don’t understand. it would normally be frustrating, but i manage to stay un-stressed based on the possibility of getting a large return. so let’s just theoretically say that happens, and i end up with a pretty reasonable check from the government. do i:

a) buy those boots i’ve been wanting for oh-so-long?
b) finally purchase that sex toy i’ve been eyeing since aught seven?
c) follow my thrifty instincts, put it all into savings, and try to forget about it until an emergency comes up?
d) spoonah’s choice

please guide me. i am lost, bewildered, and need to be spoon(ah)ed.

in christ,

broke but eager, in portland.

dear broke but eager,

the answer to this is going to vary based on a few factors. namely, how much you get back and how much these things cost. according to the IRS website, the average personal tax refund was $2,345. however, the average American filing tax returns is (and I am just guessing here) married, with children, and has a family income of $50,233.00 (in 2007, via wikipedia). since you have not indicated that you are either (and since I know for a fact that you are neither) your tax refund is probably going to be pretty different (read: lower). I couldn’t find a lot about average tax refunds for single people with lower incomes and no children, but an article from 2005 by Intuit states that the average refund for people between the ages of 18-24 is $900. so let’s assume we’re working with somewhere around $1000, shall we?

I would like to think (but do not know) that neither the boots you want or the sex toy you want cost anywhere near $1000. if that is true, and you’ve been pining after them for years, then by all means, go at it. another thing I know about you (not included in your letter) is that you are an exceptionally hard worker, so you should learn to treat yourself. let’s say that between the two of them you spend, say, $300. that leaves you with $700 left to put in savings, pay off debt, or shred and bathe in. up to you.

but spoonah, you say. how do I know whether to pay off debt or put it in savings?

a good rule of thumb is this. if you have no savings and some (or a lot) of debt: take the first $500 you have beyond daily expenses and put it into an emergency fund. use the rest on debt. $500 is the smallest emergency fund I am comfortable recommending, though I feel a lot better about $1000 or more. However, since interest rates are such shit right now for deposit accounts, you’re undoubtedly better off clearing out some debt that you’re paying more interest on. especially if they are credit cards that you can then have available in case of a serious emergency.

happy spending!