Collection Services Agency Discusses 5 Considerations for Tax Refunds

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Following recommendations from the Wall Street Journal about how consumers should use their tax refunds, John Monderine, CEO of Rapid Recovery Solution, says that the windfall represented by the refunds is “a tricky situation” and that consumers should choose wisely when deciding to spend, save or invest.

On May 2, 2013, collection services agency Rapid Recovery Solution discusses the best ways to use a tax refund.

Last year, taxpayers were able to receive an average of $3,000 in refunds, according to recent reports. One question that looms large over taxpayers’ minds is what to do with the money. Financial planners say most people opt to spend it and treat it as gravy. Martha Ferrari, a financial advisor, observes, “I find most clients treat tax refunds as 'found money' and use it for 'wants,' not 'needs.’” She recommends spending half the refund and saving the other half.

The Wall Street Journal outlines five recommendations to adhere to when deciding what to do with the refund money.

1. “Pay off your credit cards”: Paying down high interest debt is the equivalent of earning an interest rate, risk free. According to the Federal Reserve, consumers owe over $848 billion in personal credits and due to that, the average credit card is charged 12% interest.

2. “Take a Course”: Invest in learning a new skill by taking a course. This will increase your knowledge base and potential for employment. The unemployment rate for those with a bachelor’s degree or higher is 3.8% and for those who never finished high school it is 11%.

3. “Increase your 401(k) contribution”: A dollar invested in a retirement plan can have double or triple the effect later on, especially with employers offering matching contributions. According to a survey from the Employee Benefit Research Institute, “Fewer than half of workers over the age of 45 are confident they have saved enough for retirement.” With longer lifespans, and increasing medical costs, social security is being squeezed out as less money can go around to more people. The Boston College Center for Retirement Research reported from a study that, “just 6.7% of eligible workers contribute the maximum amount possible to their 401(k) plan.”

4. “Pay down your mortgage”: Many people can use the tax refund to pay down their mortgage. According to the Commerce Department, ”The average homeowners are paying 4.9% on their mortgage.” This may not be the best option for everyone, though, says the Wall Street Journal: “Some of those have less-than-perfect credit scores. Others live in areas hit by the housing crash, where troubled banks are now more reluctant to lend. Still others have loans left over from times when interest rates were higher. Refinancing may not be worth it, even if possible: The fees may be too high.”

5. “Gamble on... Italy”: If you find yourself scratching your head asking what to do with the refund, says the article, try investing in the Italian stock market. Contrary to popular opinion, “Italy's woes are exaggerated. Italian households are in good financial shape, note economists. National savings rates are higher than most countries, and debt levels lower. Stocks are inexpensive on many metrics.”

John Monderine, CEO of collection services agency Rapid Recovery Solution, says that in the current economic climate, fewer people are inclined to treat their refund as a free windfall and spend it frivolously. “Therefore many people are now faced with the choice of investing the money, saving it, or using it to pay off debt. Which option is best varies from consumer to consumer – it depends on what kinds of debt have been accrued and what the debtor plans to do with his or her personal savings. I like the idea of taking a course, but many people I know wouldn’t have the luxury of taking this option.”

Monderine says individuals should figure out some of their financial particulars in order to assess the best plan. “Check your credit report and score. Figure out what interest rate you’re paying on any debts – the higher the rate, the more you gain by making it a priority to pay them off. Figure out what kind of return you can expect from any savings you are able to accrue. A recent survey showed that almost half of the taxpayers receiving a refund in 2013 planned to use it for debt payoffs, while about a third were using it for savings – that shows where the line falls for most people. Remember, paying down debts is good for your credit score, and a good score puts you in a better position to save.”

Founded in 2006, Rapid Recovery Solution, Inc. is headquartered at the highest point of beautiful Long Island. Rapid Recovery Collection Agency is committed to recovering your funds. We believe that every debtor has the ability to pay if motivated correctly. We DO NOT alienate the debtors; we attempt to align with them and offer a number of ways to resolve not only your debt but also all their debts.
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