Being Wise with Your Windfall: Tips for Using Your Tax Refund

coins-currency-investment-insuranceIf you’re expecting a hefty tax refund this year, you may, like many people, intend to have some fun with your windfall. After all, it’s your money and you worked hard for it. There’s nothing wrong with heading out for some much-needed vacation time or buying a big gas grill for those summer cookouts. As tempting as that may sound, before you buy anything, consider the benefits of using a tax refund to better your financial situation.

Savings

If you’re among the many Americans who lack a rainy-day fund, think about setting all or part of your refund aside in an interest-bearing savings account. You never know when the transmission in your car may give out or an aging roof might start to leak. These are costly repairs, and the average American is unprepared for them; in fact, just 39 percent of Americans are capable of covering an emergency costing $1,000 or more. If you lack at least three months worth of emergency savings, that tax refund may serve you better as an emergency financial reserve.

If your roof could use some work, repairing it is an excellent use for a tax refund. You’ll head off more serious problems resulting from neglect somewhere down the line. But be diligent in looking for a qualified roofing contractor, and ask yourself several questions to determine what, exactly, you need. Check with the Better Business Bureau to make sure your contractor is accredited, and check out the BBB website for complaints or any disputes or scams a company may have been involved in, as well as tips regarding what to look out for.

Pay Down Debt

Debt is a fact of life for most Americans. If you struggle with credit card debt or are behind on the mortgage, your refund can help you out. Paying off debt is a smart move because the high-interest merry-go-round can be very hard to get off when you’re just managing it by paying the minimum every month. That can take you years to pay off even a moderate amount.

College Savings

According to CNN Money, most Americans can expect to pay about $57,000 for a degree at a public college, and more than $100,000 at a private institution. That’s a lot of money for anyone. Why not use your refund to open a 529 or Coverdell education savings account? And investing in your state’s 529 plan may result in a nice state income tax deduction. However, beware of using the money for unqualified purposes, which can earn you a 10 percent penalty.

Roth IRA

A Roth IRA lets you stash money away that becomes tax-free after age 59.5 as long as it’s been open for at least five years. You can contribute to it as you wish and withdraw the sum of your contributions without being hit with a tax or penalty. Your Roth earnings can be used tax-free for education expenses or for a first-time home purchase.

Invest in Yourself

You are your own most valuable resource, your best hope for earning and growing your assets. Improve your ability to do that by investing in training, additional education, or by joining a professional association. It’s a good way to sharpen your skill set, pick up new knowledge, and make valuable new professional connections. The more you can improve yourself, the more valuable you’ll be to an employer or to clients.

Travel

Speaking of self-improvement, are you aware that travel broadens perspective and helps you keep problems, challenges, failures, and successes in their proper context? Think about spending a portion of your refund to go someplace new, a destination that’s always interested you.

Think of a tax refund as an opportunity, an annual chance to improve your financial situation and personal prospects. Think carefully before heading off to the Jacuzzi store or ordering a season football ticket package. By being strategic with your financial prospects, you can put yourself in a much better position to acquire those “toys” you really want and achieve financial security.

The Difference Between Payday Lenders and CDFIs

Loans

Economically challenged individuals do have some options available to them when it comes to loans and other types of business and personal financial assistance. Two types of entities in the United States that provide financing of different types, and in different ways, to economically disadvantaged individuals are community development financial institutions and payday lenders.

 

CDFIs did have something of a checkered past three decades ago. In this day and age, there is governmental oversight of their operations and the generally are regarded as proving access to financial services and loans to individuals who might not otherwise be able to obtain this assistance.

 

Payday lenders remain controversial and under scrutiny today. They are not regulated by a governmental authority in the same manner as a bank or savings and loan. The have been subject to litigation and governmental investigation with considerable regularity in recent years.

 

There are a number of other differences between CDFIs and payday lenders. It is important to understand these differences if you are seeking some type of financing.

 

 

Overview of Community Development Financial Institutions

 

A CDFI is a financial institution that is designed to provide financial services and credit to underserved segments of the market in the United States. A CDFI comes in a number of forms that include:

 

 

  • community development bank

 

  • community development credit union

 

  • community development loan fund

 

  • community development venture capital fund

 

  • microenterprise development loan fund

 

  • community development corporation

 

 

 

A CDFI is certified by an entity of the U.S. Treasury Department. The certification authority is the Community Development Financial Institutions Fund. The Community Development Financial Institutions Fund provides funding to individual CDFIs through a variety of different programs.

 

The Community Development Financial Institutions Fund and the legal underpinnings for CDIFs came into being via the Riegle Community Development and Regulatory Improvement Act of 1994. Although the conceptual legality of CDIFs was recognized in this law, CDIFs were in existence for at least 20 years prior this Act.

 

The broad purpose behind a CDFI is a primary mission associated with community development. The target market can come in the form of a geographic area or a demographic group of residents in a community. Although certified by an agency of the federal government, a CDFI is not a governmental entity itself.

 

The Housing and Economic Recovery Act of 2008 authorized certified CDFIs to become members of Federal Home Loan Banks. Each of the 11 Federal Home Loan Banks evaluate applications for membership submitted by individual.

 

The regulation of CDIFs varies. So-called regulated CDFIs are regulated by the federal government. So-called unregulated CDFIS are in fact regulated by state authorities.

 

There are approximately 1,000 CDFIs in operation today. CDIFs originated about $3.6 billion in loans and investments in 2016. These loans and investments provided funding for about 13,000 businesses and 33,000 affordable housing units in targeted communities in the United States.

 

Overview of Payday Lenders

 

At their essence, payday lenders are companies that lend consumers small amounts of money at high interest rates. The loan is made with the obligation on the part of the borrower to repay the loan, together with accumulated interest, on his or her next payday.

 

Payday loans are typically in amounts that range from $100 to a maximum of $1,500. The average loan is in the neighborhood of approximately $300 to $400.

 

Oftentimes, a person who obtains a payday loan does not pay if off o the date if his or her next paycheck. Rather, they roll the loan over for another period, accumulating even more interest.

 

Laws have been enacted since the Great Recession of 2008 to make payday lenders more transparent. The Truth in Lending Act does require a payday lender to disclose interest rates and other costs associated with a loan. The reality is that many people ignore this information.

 

Unlike a CDFI, a payday lender has not connection whatsoever to the government. Indeed, a notable number of payday lenders have been targeted by state and federal governmental agencies as a result of their business practices.

 

Finally, a payday lender makes only short term, low dollar personal loans. A CBFI can make higher dollar business loans in addition to personal ones.

 

Summary

 

Many individuals and businesses have benefited by accessing the services of a CDFI. A considerable number of consumers have obtained a small amount of quick case from a payday lender. More often than not, in the long run, these consumers paid a considerable amount to get that cash.

 

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Jessica Kane is a professional blogger who focuses on personal finance and other money matters. She currently writes for Checkworks.com, where you can get personal checks and business checks.