How can I save as much of my tax refund as possible?

A great question from one of my formspring followers:

As one of the fortunate folks who MAY be getting a refund, what tips would you suggest to save as much as one can of said refund?

I can't say this enough to people: getting a refund only means you've paid the government more than you should have all year long. They take that money, use it for other stuff and give it back to you months later with no interest. Great deal for them, sucks for you.

Were I you, I'd readjust my withholding to make sure you're only paying what you should and hold onto more money throughout the year. That's a better way to save because you'd get that full year to earn interest on all that money rather than getting it all at once having received no interest from the government at all.

But that won't solve the dilemma of how to save the refund you already have coming. My advice would be to start wherever you can get the biggest return. Often that's by paying down debt as opposed to putting the money into checking, savings or investments. Sounds counter intuitive but it's not.

Think about it: if you have a credit card balance that you're paying 18 percent interest on, you save more -- at least in the short term -- by paying that balance down or off than you would by putting the same amount of cash into an account or investment that returns you five percent.

If you have no credit card debt, then look to beef up your emergency savings. You should have at least three months' worth of living expenses stashed away in cash somewhere (and by somewhere I don't mean under a mattress).

If you've done both of those things, you're in great shape and might want to try this little trick that would help you save AND reduce your tax burden for next year. Open an IRA or contribute to the one you currently have by putting the money you got from this year's tax refund into that account.

When next year's taxes come around, some of that money that you put in might be tax deductible, as is the case with many IRA contributions. Check with your financial adviser of the bank handling your IRA to be sure of the rules and exact tax ramifications. Good luck.

image: Viola Joyner/photoxpress.com

Is saving most of my pay realistic?

Q: I had a few people tell me they save money by taking out a certain amount of cash a week & then putting the rest in savings. Is it realistic? Can you really save that way?
A: I say all the time that what works for one person's money won't necessarily make sense for another, and this is a clear example. This may be entirely realistic for one person and completely irrational for another person to try. Without knowing the specifics of those people's financial situations, I can't say.

My best educated guess is that arrangement would be ideal for someone who had little to no debt and very low living expenses compared with their income. For example, a working student who lived at home with parents should be able to live on a small amount of cash and put away the rest. Working people who live in houses they own with no mortgage or consumer debt should be in a similar position.

So the real question, in my mind, is about how low your expenses are. If your expenses are far lower than your income, you should be able to live on a small amount of cash and save the rest. Hope this helps.

photo: Simon Howden/freedigitalphotos.net

Track expenses daily to keep the budget in line

Last Friday was the final Friday of January and you know what that means: payday. Like I always do on payday, I woke up and texted my bank for a balance just to make sure I wasn't fired two weeks ago and hadn't been told. The good news is I still have a job. The bad news was that I had a balance in my checking account that was short of what it should have been after payday.

Fortunately, I'm not in a position where that means I can't make the rent. But it does mean I spent over my budget between this pay and the last and in fact, I've probably been less disciplined about my spending for a few months.

So this month I'm going back to the drawing board with an exercise I haven't done in a few years: keeping a running tally of all my spending for 30 days. This is something I think everyone should do at least once every couple years, or when you make a significant change to your budget. It's easy to make a budget by estimating fixed expenses like the rent, light bill, cable and car insurance. But seeing everything you spend on paper, including small things like the junk food you bought at lunchtime, shows you how much money you're really spending and more importantly, where you're wasting some money.

This past weekend, I spent about $220 that wasn't in the budget, for example. While that money came out of disposable cash that isn't set aside for any particular purpose, spending like that on a regular basis without tracking it can wreck a budget.

So if you're not tracking your expenses, you should try it. Get small notebook and keep it with you every day for a month. Every time you spend money, on anything, write down the item, the date and the exact cost. Add it up at the end of the month and find out how much you're really spending.

Take baby steps before you start investing

These are the questions I get most: young people who want to become investors but aren't sure where to start. And typically my answer is always the same: begin at the beginning.

Q: I am interested in investing but I do not know where to start. Is it better to do online investing? Or have a financial advisor? How do you find out when upcoming new projects are letting people invest in their company? Is it better to invest money into mutual bonds? insurance policies?

A: That's actually several questions but I'll try to give a thorough answer. As I said, I often get questions about how to start investing but many people aren't really ready yet. Pouring money into stocks, bonds, mutual funds or other types of market-based investments isn't a good strategy if you haven't done the financial basics.

What are the basics? Budgeting, assuring you're living within your means, having significant cash savings and investing in your company's 401(k) or other retirement plan if they have one.

My question to the reader who asked the question is have you done ALL of those things? Do you live by a strict budget under which you can see that you have money left over after all your living expenses to devote to investing? Are you living within your means every month or do you have revolving credit card or other consumer debt that you need to pay off? How many months could you live off what you have stashed in savings? Are you putting a significant amount into your 401(k) retirement account?

If not, begin at the beginning. Remember that becoming an investor isn't about how quickly you can get rich, it's about building assets over time. Of course the earlier in life you can begin that process, the better, but trying to pour a large amount of money into stocks, bonds or mutual funds before you have enough money saved up to last even a month in an emergency is a lot like trying to run a marathon before you can walk.

Take your time, crawl first and be sure your desire to become an investor doesn't make you trip all over yourself.

How moms can help their kids be better with money

Q: I am a mother and my daughters think money grows on trees. As a father with two sons are you currently teaching them the value of dollar? and how are you teaching them?

A: I'm constantly teaching my sons lessons about the value of a dollar, mainly by forcing them to work at wages that would violate child labor standards in Taiwan.

Seriously though, my philosophy on money is that as with other habits, children emulated what they've been taught. If they're not taught, they emulate whatever they see. So if your daughters think money grows on trees, it may be time to re-evaluate what you're teaching them about the value of money.

Are you prone to shopping sprees? Do they get an allowance? If they run out of their own money, do you still buy them the things they want or do you make them save? Teaching kids delayed gratification is hugely important.

I use every opportunity to teach my boys about the value of money, hard work and the difference between income and wealth. As a parent you can use ANYTHING to instill those values. For example: My sons are both Monopoly and chess freaks because I decided early on to teach them Monopoly to learn cash flow management, negotiation and real estate investing and chess to teach them to think ahead and strategize. My 13 year old could play circles around most adults in those games, and his business acumen is pretty high. He gets it.

There's other lessons: money they get for birthdays or holidays must be put in the bank. 15 percent of the oldest's allowance also gets stashed. If there's things they want, they have to earn it through their schoolwork or extra chores, or save for it out of their allowance.

Christmas gifts this year included shares of stock in the companies where they spend the most money: GameStop, the video game store for my oldest, and Heelys, which makes roller-sneakers, for my 10-year-old. I did the same for all my kid cousins and they were so enthralled by the possibility of making money from the stock that they made me sit down and teach them the basics of the market. If you want to do the same, you can check out OneShare.

My boys also have brokerage accounts for their college savings and I have them look at what's in them and how they're performing when I log in.

Your children's money habits start with you. They'll emulate what you do with your money and they have no choice but to follow your rules regarding their own. Take the lead as a parent and they'll follow.

photo courtesy photoexpress.com

I paid off the credit card! Now on to the next goal!

I'm a fan of big, audacious goals and try to live by this rule: if you shoot for the stars and miss, at least you get the moon. That philosophy was a big reason I was successful in paying off my credit card debt in less than one year. If I dedicated myself to paying off every last dime but didn't make it, at the very least I'd have much less debt than I started with.

And so it is that one day after I made the final payment and reached my $0 Balance Goal, I'm immediately planning my next big, audacious financial goal will be. My immediate thought was to beef up my emergency savings and investment accounts and that's certainly doable given the amount of free cash flow I now have (since I'm not making a credit card payment anymore). But why not think bigger than that, and eye something else that will push me to stretch for the stars again?

So I've decided that my next goal will be that over the next year, I'm aiming to save and invest at least $25 grand. That's right. At least that much. That means I'll have to push myself to do more than just stash a portion of my paycheck: I'll have to continue to limit spending, network and be creative enough to create new income streams and be diligent enough to live off only the money I make at my nine-to-five and stash any extras away. It'll also mean I'll have to figure out some new tax strategies so Uncle Sam doesn't come and take it all. Wish me luck.

In the meantime, I'm going to continue to write about eliminating credit card debt and keep up my $0 Balance Challenge push. If you've already eliminated all your credit card debt, great. Start thinking about the next goal (and post it here in the comments section so you can encourage others.) If not, think of eliminating that debt as your first big, audacious goal and get to work.

Good luck!

I have a little bit saved. Is it time to think investing?

Question of the day from @ayyitsrawb on Twitter:

I have a little money saved, is it worth learning about investment and stocks, or should I just keep saving it?

The short answer: learning is always worth it, whether it's about investments or anything else. The more you know, the better you can figure out which tools work best for you. Think of it this way: if you're going to be without any investments in stocks, would you rather that be simply because of ignorance of how the market works or because you made an informed decision that that kind of investing isn't for you? I know which I'd choose.

All that said, your question seems to also be a little about whether or not you're prepared to take the plunge, since you can start learning about any subject at any time. That's not an answer I can give, you but here are a few things to think about:

When you say you've got a little money saved, how much is a little? Are we talking about a few hundred bucks or enough for you to live off of for several months if you lost your income? Most financial advisers will recommend you have between three and six months living expenses saved for a rainy day and that's pretty sound advice given the recession we're going through.

Secondly, you shouldn't consider investing and saving money as an either/or proposition. They each have different purposes and the money you put toward them should be for different things. If I were to look at my own budget today (do you have one of these that you adhere to? If not...THAT'S what you should be learning how to do!), I'd see that every time I get paid I have money going into a savings account, a brokerage account, and my sons' college funds. Of course, not everyone has my resources or circumstances, but the point is by having a realistic picture of how much money you actually have coming in, you can realistically allocate it toward saving for all of your goals, not just one.

Good Luck.

image courtesy of freedigitalphotos.com

How do your finances look right now?

I know, I know, I know. The first quarter technically ended in March. Still, if you haven't already done an assessment of where your finances are at this point, a week after tax time is probably as good as any.

So take a look at your money right now: how are you doing on saving? Have you built up more reserve savings or are you depleting it because of job loss? Are you sticking to a budget? What are your main financial goals for this year and how far are you toward achieving them?

Post your answers in the comments section.

Horde cash or pay off a credit card?

Back today, as promised. This time, I've got a question for you:

I've written several times about the advantages of keeping spare cash in an online savings account, such as those offered by ING Direct or HSBC Direct. Everyone should have some spare "just in case" cash around for emergencies, and the online banks give you the advantage of paying far more in interest on the money than a traditional bank savings account.

That is, they used to. These days, I'm starting to question the decision I made to keep a decent amount of cash in my ING Direct savings because the interest rate they're paying me has fallen so far. When I opened the account in March 2007, I was earning a 4.1 percent APY (interest rate) on my money. Today I checked my balance and found that my rate was lowered to 1.638 percent yesterday. That's just the latest of several rate cuts that essentially amount to ING taking cash out of my pocket. ING cut the interest it pays me on my money four times since Dec. 30.

Which brings me to my question: Should I take the cash out of my ING account and use it to knock down my last remaining credit card bill? The cash I have with ING isn't enough to fully eliminate the bill, but it would cut it substantially and cut down the number of monthly payments I'm making and the amount of interest I'm paying to the card issuer. Beyond that, I'd get a much greater rate of return by paying on the than I would at ING, since the interest rate on the card is almost nine percentage points higher.

So, what would you do?

401(k) bootcamp

Yesterday I got another example of why financial literacy should be mandatory in schools and provided as part of a benefits package from employers. A woman in her early 20s found me online yesterday and had a line of questions a mile long about 401(k)s.

The questions were riddled with clues about her lack of knowledge of basic investing principles: What's the difference between a 401(k) and an employee stock purchase plan? Does the value of my 401(k) drop if my company isn't doing well? (Not unless all you have in your 401(k) is shares of your company's stock). The market's bad; shouldn't I be taking money out of my 401(k) and putting it into a regular savings account? (No, that'd be one of the worst things you could do.)

Beyond that, she wasn't sure what investments she had chosen for her 401(k), whether they were appropriate for her age and risk tolerance or even how the money she put in translated into shares in funds or stocks.

I'm glad she reached out and I'm not in any way belittling her for having the questions she had. But what's frustrating is that at a time when the country can ill-afford to have it's educated, employed, high-income potential young people financially unawares, our educational system and employers continue to do students and workers a disservice by equipping them to make money but not educating them on what to do with it next.

So all next week I'm doing a 401(k) bootcamp on the blog, going over basic terms and principles of a 401(k) plan, and answering any questions you might have. Now's your chance to learn if you're not sure, so don't be afraid to speak up.

What to do with all this cash?

What would you do with a boatload of cash? Sit on it? Pay off some debt?

That's the good problem one reader asked me about earlier this week:

I am sitting on a decent amount of cash right now. I have some consumer (credit card) debt but at very low interest rates, like 1.9% and the highest 7.9%. I also have one zero rate card that I am going to pay off. I also have a car loan with about $15K left at about 6%.

I have twice as much cash as consumer debt and theoretically I could pay it all off today but that would leave no cushion. I've lost about 15% in the market - so not so bad compared to a lot of folks. I had been putting aside money for a [home] down payment, but [my job] is talking layoffs. I don't think I'll be targeted…still I am cautious.

What would you do?

Well, since you asked: I wouldn't worry about the losses in the market that much, especially if the hits you've taken are in a retirement account and you're under age 40. You have time for those investments to come back from the grave.

As far as the cash, it's great that you have a lot of cash saved up (I wish I did!), but all that credit card debt isn't good. Take a glass-half-empty approach: on one hand, you have twice as much cash as you do debt. On the other, if you're laid, off you could wind up spending half your cash reserves on debt, leaving you with much less of a cushion than it looks like you have.

What I'd do is find a comfortable balance between paying off as much of the credit card debt as you can while keeping six months to a year of cash in case your job gets funky. If possible, pay off the highest-rate card completely, keeping in mind that credit card companies are under duress and are jacking up rates even on good customers these days.

Don't worry about the car note since as long as you're making regular payments and not falling behind, the lender can't jack up the rate. Lastly, start putting your feelers out about a new gig! If you're safe, that's good, but knowing your organization is shrinking should be motivation enough to see what else is out there, just in case.

Good luck.

Two financial pleddges you should take

I logged into my ING savings account the other day was redirected to their "Declaration of Financial Independence". It's 10 money practices they want people to commit to, and I gotta say it's a pretty good list.

Some of the highlights: "We will use our home as a savings account", a point in which they stress bringing a big down payment to closing and warns against borrowing against our houses; "We will invest for the long-term" and "We will ignore unsolicited credit card marketing."

What's interesting is that banks and investment companies have shifted their advertising to focus on more practical financial habits like saving instead of borrowing and bringing a down payment when buying a home instead of touting zero-down mortgages. The New York Times ran a story in August about how bank ads encouraged people to continue to go into debt. (A disclaimer here: ING Direct has always encouraged saving, given it's part of their business model. And by the way, they're not paying me to write about this).

ING isn't the first company to issue that kind of declaration. Check out Black Enterprise magazines' Declaration of Financial Empowerment, which they started promoting, if I remember right, in about 2000. It also has 10 good principles that everyone should try to apply (although #8, supporting African-American owned businesses, may not resonate with everyone).

The layoff ax is falling hard

This economy is really starting to hit people where it hurts: at work.

A few months ago, I knew many people who were cutting back on discretionary spending but most of them weren’t worried about their jobs. No one I knew had lost his or her job.

Unfortunately yesterday, two people I know were laid off. They worked in different states and at different companies. And that's hardly the end. The company I work for is planning to lay off 10 percent of its workforce. I read yesterday that Fidelity Investments in Boston is planning a major layoff. Those folks would join the hundreds of thousands already laid off this year

To be on the safe side, Single Ma, who writes the Fabulous Financials blog, says she's beefing up her emergency fund to cover her for a full year. Good idea if you can afford to do it.

Are you worried about your job right now? And if so, what kind of contingency plan do you have in place to make sure you're alright if you lose it?

Welcome to the Money Corner

If you read my old blog, thanks for following me over here. Newbies, here's an intro: I'm Keith Reed, a business reporter and economics commentator. I started blogging two years ago to share my answers to questions friends asked about how the economy, their spending habits, investing, saving and the like.

I'll take questions from anybody because I think there are few things more needed in America than more financially literate people -- check your credit card balance if you disagree.

Here's what I'm not: a day-trader, stock-picker or financial adviser giving out professional investment recommendations. Instead, this blog is a forum for your concerns and curiosities about money. I'm here to share my common sense opinions, informed by the hours I spend interviewing and interacting with entrepreneurs, analysts, executives and everyday people.

Hope you like the blog and find it useful.