If you’re being graced with a tax refund this tax season, whether big or small, you are now faced with the fun but important decision of how to spend it. The options are limitless! Pay rent, or buy the new iPad? Pay down some credit card debt, or go skiing for a long weekend? Of course, choosing to simply have the money directly deposited into your checking account and not having a plan for it is making a choice, too. I’m pretty sure you know what will happen with it if you let it sit in your account. It will disappear after a pedicure, an extra clothes shopping trip, and the couple of dinners out that you can “magically” now afford.
If you treat your tax refund as “free” money, I think the odds of you spending it on things you don’t really need will be very high and the chances of you putting it towards something practical and extremely helpful will be diminished. Think of it this way: you just gave the government a tax-free loan. They just paid you your money back. Am I saying you should put the entire check towards something boring and not at all fun? No. There’s tons of ways to slice and dice it. You can use a percentage for something fun for you, and put the rest towards some truly useful cause. Below are a few ideas to get you started if you choose to put some or all of your refund into something that will help you down the road and could even save you money in the long run:
1. Pay off that Debt
Come on, you knew this was going to be my first suggestion. It’s a no-brainer because credit cards with high interest rates are only going to continue to cost you more money the longer you are in debt. So reducing the amount you owe, or paying it off altogether, can save you hundreds if not thousands in the future. Not to mention if your credit report score is not looking so hot, there’s no better time to clean that puppy up by wiping out some debt.
2. Open an IRA, or add to an existing one
It’s never too soon to start thinking about the future, especially when the annual return rate is anywhere from 6-8%. Meaning if you opened an IRA at age 27 and contributed $1,000 per year, you could have as much as $247,000 by the time you’re 65. Check out the Roth IRA Savings Calculator to play around with ages and numbers, and to get a feel for the annualized return rates. Another benefit of an IRA—in some cases, you can use contributions as a tax credit on the following year’s returns.
3. Take care of your car
I actually did just this with my last tax refund. My car was in serious need of new tires, two of which I’d replaced the year before but had been putting off buying the last two because I admittedly did not want to spend $200 per tire. I put the bulk of my tax refund towards new tires, an oil change, and an alignment and have never felt safer on the road. Making car repairs with your refund money is so smart because it won’t eat into your day-to-day funds or go on a credit card.
4. Take care of your health
Who wants to spend hundreds to thousands of dollars on having cavities filled or getting a crown put in? Nobody. Even with insurance, dental and medical bills can be so expensive. However, if you know you’re going to need it eventually, it’s wisest to bite the bullet and put your tax return funds towards it. I bet you’ll breathe a sigh of relief after it’s done, knowing it’s not hanging over your head, threatening to inflict severe pain or get put on a credit card. The same goes for chiropractic, acupuncture, or simply a couple of much-needed massages. You’ll be grateful you put your health first, and put yourself in a better position to work and enjoy life.
5. Take care of your house
Do your gutters need to be replaced or the lawn completely redone? Sure, it’s not the most fun check you’ll ever write, but it could boost the value of your house and I’m sure leave you feeling happier in your home. I even heard from one couple that they put their combined tax returns into getting a better heating system for their house, which saved them money in the long run and increased their quality of life at home. Win-win. Bottom line, find that thing about your house that has been bugging you for awhile now and take care of it already.
6. Pay your Mortgage or Rent
If you are a homeowner, making an extra mortgage payment could help you save on interest a bit in the end. And if you’re a renter, you could think about paying last month’s rent with your tax return, which would free up some money for yourself down the line when chances are you’ll need it for moving expenses or maybe even purchasing a place of your own.
7. Start an Emergency Fund
I’ll admit it’s not exactly fun taking excess money and stashing it away to prepare for an emergency or major catastrophe in which you might need it. But it is perhaps one of the most realistic and smartest moves you can make, at least in my book. It can really turn out to be a lifesaver if you ever do find yourself or your family in an unexpected bind, and you’ll be grateful when that day comes that you planned ahead and had a cushion to fall back on.
8. College, college, college
We all know that the cost of college these days is out of control, so putting aside a few hundred dollars here and there into a college fund might not seem like much. But trust me, it does add up. Every little bit you can put down on tuition is money that you or your kid doesn't have to borrow, decreasing student loans down the road. Again, never too early to start a college fund.
9. Get some Utility Payments out of the Way
If you are looking good on the credit front, and you want to put your refund money towards something practical, there’s always good old utilities: gas, electric, phone bill, internet, cable, water. Chances are you have a good idea of what you owe for each monthly, so put a couple months of payments aside in a separate account and pay them from here when the bills come. That way it feels like you have more money in your account when you don’t have to deduct utilities for the next few months.
So here’s the fun part: deciding how much to put towards the responsible, practical uses above, and how much to keep as fun-money. If you have the will power to put all the money towards debt or bills or home improvement, more power to you my friend. What I tend to do is break it down into the 90/10 rule: I have to use 90% of my refund on one of the above, or divide it amongst a couple of those things. The other 10% is mine to have fun with, whether that means a new gadget, movies, shopping, or nice dinner out. For example, if my tax refund check was $1200, I’d have to use $1080 of it wisely, invest or pay debt and bills, and the other $120 would be mine to have fun with. Happy tax season!
Dk is an avid finance blogger. You can find him blogging at RoadFish.com
No comments :
Post a Comment