Managing Tax Refunds and the Rule of 72
- Wednesday, April 10, 2013
Our family will be getting our tax refund soon. It’s not a huge dollar amount, but it’s not trivial, either. My husband and I are a working couple, and we can’t seem to decide whether to spend or save it. One of us wants to spend it all. Can you help us decide? Any suggestions?
It’s smart to discuss and decide how you’ll manage your tax refund. We know how easy it can be to fritter away money when there is no actual spending plan.
When we decide on our goals first, we can fund and achieve our monetary goals more quickly.
What are your family’s immediate financial goals? Make a list and prioritize them. Then see how far your tax refund can go toward the top two or three goals.
For example, if one of your short-term goals is to pay down a credit card bill and another is to set money aside in an emergency fund, you could contribute to both of these goals. You can divide and direct particular dollar amounts toward mutual financial goals.
It doesn’t need to be an all-or-nothing proposition. It may be possible that you and your husband can both be content with this approach.
What is the “rule of 72”?
This is an easy way to calculate how long it takes to double your money at various interest rates. Divide 72 by the yield, or interest, you expect to earn. The resulting answer tells you how long it will take for your money to double.
For example, if your investment earns 4 percent in interest annually, take 72, divide it by 4, and you get 18. It will take 18 years to double the money.
The rule works in reverse, as well. If you want to double your money in 12 years, divide 72 by 12 and the result is that you will need an average growth rate of 6 percent.
The rule of 72 offers a close estimate for growth rates as you save.
Copyright 2012 Deborah Nayrocker. Permission to reprint required.
Deborah Nayrocker writes on personal money management topics, showing others how to take control of their financial future. An award-winning writer, she is the author of The Art of Debt-Free Living and the 12-week Bible study Living a Balanced Financial Life. Her Web site is www.ArtofDebt-freeLiving.com.
Publication date: April 24, 2012
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