Taxes: Refund or Pay More

Today, I started working on my taxes for 2010 using Tax Cut software from H&R Block. For the most part, I plugged in last year's numbers into this year's tax code. My preliminary conclusions:

1. It looks like I won't be getting a refund. Since I had a child during the year, I expected my taxes to go down. Each year, I try to have my withholdings set up so that I have a small refund.
   
2. I need to give more money to charity in 2011. With the child on the way, I forgot to make some of my annual contributions to my favorite charities: the Salvation Army, the Universities that my wife and I attended, and the American Cancer Society.

2010 Investment Returns - Report

While it is important not to count one's chickens before they hatch, it was nice to get positive returns in 2011. The 401k was up 15%. Unfortunately, the IRA, which contains most of my fixed income investments was only up 4.5%.

Savings v. Debt Reduction

Even with internet banks, the rate available to savers is not great. For example, one of my banks, ING Direct, is paying about 1% on their savings accounts and CD rates top out at 1.25%. While the 1% interest rate easily demolishes the 0.20% rate paid by Bank of America on savings accounts, the after tax return is barely worth the effort.

Instead of putting money in savings vehicles like CD's and/or money market accounts, I recommend directing any excess cash to paying down debt. Instead of earning 1% on savings, you can save 15% on credit card debt, 4-7% on car loans, and 5% on mortgage loans by reducing the principal balance of those loans. The only downside is that you may give up some flexibility by paying down the principal on a loan. Think about it this way, the mortgage company is not going to let you get the $1,000 principal payment you sent them with your tax refund money.

Don’t forget Coupon Codes

If you are buying anything online, don't forget to google the name of the vendor and "coupon code" before you order something. We got 25% off of our photo printing order from CVS using this strategy.

Christmas Spending

Well, Christmas is over and we went a little bit overboard. My wife and I got Nooks because we like reading. I bought a Nikon D7000 Camera because I enjoy taking pictures of our new daughter. Our daughter got lots of love because 3 month old children need clothes, diapers, food, and a place to sleep. Next year, Santa is going to be really good to her.