Ask Dr. Per Cap

Dear Dr. Per Cap: It’s tax time and I have a lot of money coming to me. I was thinking of taking out a loan against my tax refund because why should I wait if I don’t have to?

Signed, Tired of Waiting

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Dear Waiting: How you would feel if you loaned someone $2,000 and they waited a year to pay you back? Then, to make matters worse, they only gave you $1,700?

Sound ridiculous?  Most of us would probably think so, but if you’re like millions of Americans who pay to have their taxes prepared every year, this might be what is happening to you.  Here’s how.

The refund you receive after filing your tax return often comes from having more money withheld from your paychecks throughout the year than you actually owe in taxes.  And for many, this over payment of tax amounts to thousands of dollars.  Now you might prefer overpaying to avoid owing the IRS additional money at the end of the year.  That’s fine as long as you understand that your refund is not free money or a bonus, as some mistakenly believe.  But rather, money (that belongs to you) that the government “holds” during the year and then pays back the following year.  It’s really like giving a loan to the U.S. government … but Uncle Sam does NOT pay interest on it. 

I made the mistake one year of taking out a loan against my tax refund so I could my money sooner. When all the dust settled, I figured out I had paid $400 to someone just to get my money one week faster. Those tax preparation fees and loan fees really add up!

So watch out for those high fees that many tax preparation businesses charge to complete fairly simple returns (close to $300 in some cases).  If you choose a high-interest refund anticipation loan that promises a faster refund than direct deposit, then you’ll pay even more. 

Does this sound like free money to you? 

If you don’t like people getting a cut of your free money, consider consumer friendly tax-preparation options such as Volunteer Income Tax Assistance (VITA).  VITA sites serve many Native communities and will prepare your taxes for free if you meet certain income requirements.  And finally, stay clear of those loans against your tax refund. With direct deposit or the IRS debit card, you’ll get your money quickly in 5-7 days anyways. You shouldn’t have to pay extra to get at your free money!  

Dear Dr. Per Cap: I can’t save money!  No matter how much I think about it and really want to do it, I just can’t seem to put anything aside out of my paycheck. What’s up with that?

Signed, Buffalo Nickel

Dear Buffalo Nickel:

Living paycheck to paycheck and not saving a dime is a habit – a bad one!  You need to replace it with a good one.

How about the habit of paying yourself first?

On your paycheck stub, there are always deductions made before you get your “net” pay or take-home pay.  They are things like federal and state taxes, insurance premiums, charity donations you chose to make through your company’s payroll deduction, and perhaps other things.  All of these items are getting “paid first” before you ever collect your take-home pay.

So make yourself first, too, by way of setting aside money for YOUR savings.

You can do that in a few ways, or use a combination of them. 

• If you signed up for direct deposit into your checking account, you can probably arrange with your bank to automatically divert a portion of it into a savings account each time a paycheck deposit is made. You can choose the amount, and the bank will help you set up a savings account if you don’t already have one.
• If your company has a retirement plan, sign up to funnel some of your pay into that plan each paycheck.  These are usually invested for you in some way so your money may even grow over time. At some companies, your funds might be matched at a certain level with “free money” provided by your employer. Take advantage of that. It truly is free and should not be left on the table.
• If neither of those options is available, then make a conscious effort to do it yourself.  If you actually cash a paper check every payday, then take some of it and put it into a savings account right away, or at least stash it in the cookie jar or mattress at home.  If you have direct deposit, take the time to actually transfer a consistent amount into your savings account each and every paycheck.

The key is to just get used to doing it.  By repeatedly doing this, you’ll get into the habit of regularly setting aside some savings and paying yourself first.  You don’t have to start with a big amount. You can make it nearly painless by starting with a small amount that you won’t even notice, then increase that amount as you get more used to saving money while finding other ways to save on expenses.

Finally, if you don’t think you can spare even a small amount into your savings each paycheck, here’s an exercise that will help you find out that you CAN spare it.  For a week or even a month, carry a notepad with you and write down each and every expenditure you make and what it’s for, whether it’s paying the rent or buying a cup of coffee, paying on your credit card bill or plugging a parking meter. After a week or a month, look at where you are spending your money and how much of it you are spending.  No doubt you’ll see places where you can easily save a few bucks, or even a lot more, without much effort. Stop spending on those things you decide are unnecessary and begin putting that amount into savings each pay period. Remember: pay yourself first, and make savings a habit!

Ask Dr. Per Cap is a program funded by First Nations Development Institute with assistance from the FINRA Investor Education Foundation. For more information, visit www.firstnations.org. To send a question to Dr. Per Cap, email [email protected].

Dear Dr. Per Cap,
I have a “payday loan” and now I can’t seem to get my head above water. What can I do to get outta this mess?

Signed, Nothing Left

Dear Nothing Left,

At first glance, those payday loan stores appear to offer easy money. I could tell you the story about my aunt Sue who took out a payday loan one month so she could have money to go play Bingo. Well, you probably know how that turned out. Three months and a couple hundred dollars in fees later, I paid it off for her for her birthday. She agrees that was not the best use of our money!

Payday loans are rarely a solution to financial problems. These loans are designed to trap you in a cycle of debt – it’s true. The fees are so high that while the loan might help you make it to payday, by the time you get there you will probably find yourself short on money and need to take out a new loan.  And then they got ya.  And once they got ya, they look forward to seeing you every two weeks to collect those loan fees, which can really add up.

Everyone experiences financial emergencies at some point or another and a payday loan might look like a good option. And usually those people at the payday loan store are happy to help. But remember there are a lot of more affordable options available to you – ones that don’t come with high interest rates and high fees. Consider these:

1. Use your credit card, if you have one. Even for a cash advance, it will be less expensive than a payday loan.
2. Ask family or close friends for a loan to float you to the next payday.
3. Go to a local credit union, small bank or Community Development Financial Institution (CDFI) and borrow money at a more reasonable cost.
4. Practice saving and budgeting your money if you can – it helps to have savings to get you through a tough time.

Just keep in mind that if you taking out a payday loan it probably indicates a bigger problem – getting your expenses to match your income. You probably signed up for one of these loans to make ends meet for regular day-to-day expenses or to pay for a sudden “crisis” expense. In any case, it now has you in its grip, and it’s not a pretty sight.

So if you have a payday loan, pay it off as soon as possible. And while you are doing that, let’s look at the bigger picture to get your expenses in line with your income. That will help you avoid the need to borrow money in the future and, hopefully, keep you out of the grip of high-interest payday loans.

You need to create a budget – I covered that in one of my previous columns. Budgets are the best way to see and understand 1) how much money you have coming in and, 2) how much is going out each month.  It also helps you see just what you are spending your money on.  If you have more coming in than going out, that’s good!  Start saving and investing that extra money (and pay down any debt you owe first, such as that payday loan). 

But my guess is the opposite is true – you have more going out than coming in each month.  That means you’ll have to find ways to cut back expenses in order to live within your means.  By tracking where you spend your money, it will give you some good ideas where you can cut back or eliminate altogether. These can be very hard choices: Can you take your lunch to work instead of eating out? Can you watch DVDs instead of going to the movies? How can you reduce or eliminate bills for phone, cable TV, electricity, water or natural gas? Do you really need more expensive “name brands” or will generics or less-costly alternatives be acceptable? Can you cut back on “impulse” purchases? To improve the income side of your budget, can you get a part-time or second job?

If there is just no way you can get ahead of your expenses, it might be time to seek the help of an accredited nonprofit credit counselor or counseling agency.  To learn more about payday loans and lenders, the Corporation for Enterprise Development has some great consumer information at http://cfed.org/. As well, First Nations Development Institute has several publications on payday lenders and a Financial Skills Workbook to learn more about taking care of your money at http://www.firstnations.org/knowledgecentre.

Good luck!