• Multicultural Financial Advisor Forum

Don’t Go Spending That Tax Refund: How to Budget and Save

Managing Director Marilyn F. Booker believes that the best use of your tax refund this year is to put it towards your savings for retirement.

Financial education is one of the pillars to our approach in strengthening the uniqueness of inner-city communities. As head of the Urban Markets Group of Morgan Stanley, I travel across the country teaching underserved communities how to manage their money, and I help fill the significant void of information when it comes to personal finance. With that same goal in mind, this is the first of a series of blog posts that I hope will promote the financial health of individuals and families who live and work in the communities we serve, expanding their knowledge—and prosperity.

While I teach primarily in inner cities, the lessons and themes apply universally, regardless of one’s net worth or assets. Everyone needs to plan (a budget), to spend wisely (save), to see their money grow (invest) and prepare for the future (retirement). The only variable is the amount, not the method.

With tax refund checks arriving and too many splurging instead of saving that money, I thought it would be a good time to tackle the importance of budgeting—and saving. Everyone should be saving money on a regular basis. For those who feel they barely earn enough to cover their bills, the idea of saving or investing might seem unattainable. But every little bit helps, and you have to start somewhere. Your tax refund might be the perfect place to begin. Now, I’m not saying you have to put it all away, but at least save some of it, with intentions of making it grow. 

Savings vs. Investing

By “saving” I mean putting the money into a savings or checking account at a bank that allows you access to your money at any time.  Banks pay a low rate of interest each month for keeping the money in your account. Saving differs from “investing,” in which you take on more risk by putting your money into products—such as stocks, bonds or mutual funds  The trade-off for the higher rate of return    is a greater risk that you could lose the original amount you invested, which is referred to as your “principal.” The more you can earn on your money, which is referred to as your “return,” the greater the risk, which is why the first step always should be to save and have enough cash on hand for that rainy day, then start to invest.

Why Invest

You may ask, if I can lose my money, why should I invest? The answer is pretty simple. “Inflation,” simply defined, is the increase in the price of goods and services. Inflation erodes the purchasing power of your money. If you keep your money in a traditional savings account that pays a little above 0% interest and inflation is several times that, the value of your money is not rising at a rate equal to inflation. Although you will have the same dollar amount in your account over time, you won’t be able to buy the same amount of goods that you could have when you first put those dollars in that savings account. Therefore, many invest to keep their buying power on par with inflation.

Everyone Needs a Budget

To determine how much to save and invest, the first step involves budgeting. Even billion-dollar, multinational corporations have budgets! If they need one, certainly everyone else does too. First, you need know how much money you have coming in every month, or your total monthly income. Next, figure out how much you spend every month. This includes your fixed regular expenses (such as rent, utility bills, car payments, car insurance, other transportation costs and groceries) and irregular expenses (such as medical bills, tuition, entertainment and clothing).

Wants vs. Needs

After you’ve totaled your expenses, which should not exceed your monthly income, perhaps the hardest part is assessing whether all of your spending has been wise or necessary, and where you can cut back. Look at your budget from a standpoint of wants versus needs. Basic needs include shelter, food, clothing and transportation. Wants are the extras, like paying to have 1,000 cable channels. Ask yourself, “What can I live without?” If you can eliminate some unnecessary spending, even small amounts can add to your savings over time.

Too often I hear people say that they don’t make enough to save. But there is always a little excess that can be trimmed, and it’s crucial to get into a savings mindset and make a habit of it. In fact, some savings can be automated, like having a small amount deducted from your paycheck and set aside in a savings or employer-provided retirement account. If you don’t see it, you won’t miss it.

Going forward, you should monitor your spending—and savings—patterns. Compare your budget to what you actually spend. Take time to review your financial progress and revise your budgeted amounts. And don’t forget to save some of that tax return!

Marilyn F. Booker
Managing Director and Head, Urban Markets Group
Morgan Stanley Wealth Management