Smart Uses For Your Tax Refund
As I write this, "tax season" (as we CPAs have come to know it) is just a couple of weeks from coming to a close, so many of you will have filed your tax returns and be waiting on tax refunds, if not already received them. Scores of others who are on extension will do so in the coming weeks.
It surprised me some to find out that the average refund received by Americans runs about $3,000. And while I personally consider that to be making what amounts to an interest free loan to the government, many folks plan it that way intentionally – sort of a forced savings plan.
I admit receiving a nice fat check from any source always feels good.
Unfortunately, without some intentionality, many people find their annual bonanza quickly squandered. Maybe this year it's time to do things a bit different. If you have tax refunds headed your way, this year let's invest it in YOU!
Here are some things you can do with your tax refund that can help you do just that:
*Pay Off Credit Cards or Other Debt – just think, if you pay off that 25% interest rate money gobbling credit card you have, that's like making an investment that gives you a 25% return. It may not seem as sexy as a home run stock hit, but it's effective.
*Start or Add to College Savings – this is a great opportunity to help begin or grow your savings to help your child pay for college. Tax-wise ways to do this include using a section 529 plan, Coverdell education savings accounts or even investing in an zero coupon municipal bond.
*Build an Emergency Fund – everyone needs emergency funds available to meet unexpected needs, like when the car breaks down or appliances blow a gasket. Having a fund helps you prevent having to borrow the money to pay for such things, thus avoiding unnecessary interest charges. Planners recommend a fund of anywhere from 3 to 6 months living expenses.
*Save for Retirement – it's difficult to think about retirement savings when day to day bills constantly demand your attention, so your refund presents a great opportunity to address this. Consider setting up an IRA or funding an existing one with your refund. If you choose a Roth IRA, you will never pay tax on the IRA earnings.
*Consider Life or Disability Insurance Needs – becoming disabled or premature death are among the greatest risks to your family's financial well being. Consider investing in appropriate policies to guard against this risk.
*Prepay Your Vacation or Start a Christmas Fund – now we're talking about something more fun! Taking these simple steps may help you avoid having to use those credit cards you just paid off and the wealth destroying interest that comes with them. Too many people end up paying on them long after the fun is over.
And finally, a word about future refunds. Earlier, I called your refund an interest free loan to the government. Consistently letting Uncle Sam keep large amounts of your money is not sound financial practice.
If your refund was considerable, why not just keep more of it for yourself to begin with. You can do this by adjusting your tax withholding so they keep less and YOU keep more. Then take the difference, and apply some of the ideas above.
Many happy returns!
