April 12, 2018
Okay people, it’s that dangerous time of year. In the next month or so I know many of you will be receiving refunds on your federal tax returns, and some of you may also be in line for a state tax refund.
It’s dangerous because I know that once the money hits your bank account it might be spent on wants, not needs.
That’s such a sad missed opportunity. Please be smart and put your tax refund to work building your financial security.
This year there is an especially important move I want you to make. If you have unpaid credit card bills that charge you interest, I want you to seriously consider using your tax refund to pay it down, because credit card debt is getting out of control again, and more expensive.
There is now more than $1 trillion in credit card debt. For consumers who carry a balance the average interest rate is 15 percent. That’s about two percentage points more than just a few years ago. And I expect the rate to keep climbing.
You need to understand that most credit card interest rates are variable. That means rates can change. When interest rates in general are rising, credit card issuers will follow the trend and boost what they charge consumers. The Federal Reserve plays a bit role in this. When it raises a key interest rate –the Federal Funds rate – it sets off a general rise in short-term interest rates. And your credit card interest rate is based on what’s going on with short-term interest rates.
The Fed is now steadily increasing the Federal Funds rate every few months. It expects to make three hikes in 2018. That means credit card interest rates will keep rising.
That’s why I think paying off credit card debt is a very smart “need” to focus on this year.
Now that said, if you don’t have any emergency savings, I would be careful. Using your tax refund to fund a savings account is wise. Otherwise, what will happen in an emergency? You’ll end up using your credit card! That’s not financially smart. So please make an emergency fund your first priority.
But don’t you dare use that as an excuse to not focus on ways to pay down your expensive credit card debt. I bet that if you are determined you can cut your monthly spending by $50 or $100 or more. Add that savings to the minimum due on your credit card and you will be on the road to getting out of credit card debt.
Answer Yes or No to the follow statements.
I pay all my credit card bills in full each month.
I have an eight-month emergency savings fund separate from my checking or other bank accounts.
The car I am driving was paid for with cash, or a loan that was no more than three years, and I sure didn’t lease!
I am contributing at least 10% of my gross salary to a retirement plan at work, or I am saving at least that much in an IRA and/or regular taxable account.
I have a long-term asset allocation plan for my retirement investments, and once a year I check to see if I need to do any rebalancing to stay on target with my allocation goals.
I have term life insurance to provide protection to those who are dependent on my income.
I have a will, a trust, an advance directive (living will), and have appointed someone to be my health care proxy.
So how did you do?
If you answered yes to every item, congratulations. If you are working on improving on a few items, I say congratulations as well.
As long as you are comitted to truly creating financial security, I applaud you. If that means you are paying down your credit card balances, or are building up your emergency fun with automated payments, that’s more than fine. You are on your way!
But if you found yourself saying No to any of those questions, and you’re not working on moving to Yes, then I want you to stand in your truth. No matter how good you feel, you have some work to do before you can honestly know what you are on solid financial ground.