How to be smart with your tax refund
With Tax Day around the corner (April 18 for 2016), it leaves me wondering what people have planned for their tax refund this year?
At a state level, the average tax refund in the U.S. in 2014 was about $2,700.
In my state of Connecticut, the average was $3,125 and New Jersey and New York being around $2,960. That’s no trivial sum of cash. So, it comes as no shock that most people view their tax refund as a windfall. So what do most people do with their refund?
According to a recent Bankrate poll, people are actually planning to use their refund to improve their personal finances. Impressive. How awesome. I’ll have to contribute it to the credit crisis in 2008/2009 that lead to the hard-felt recession. That sucked.
how did people spend their tax refund in 2015?
About 34% of Americans said that they were going to pay down some debt, and another 33% said that they were going to save or invest the money. However, there’s still a large chunk of people that have cash flow problems. 26% of those surveyed say that they needed the refund to use towards necessities. They need the money to pay the bills. It’s a sign that they are living beyond their means and can probably benefit from some budgeting. Only 3% wanted to use the money towards vacation or have it earmarked for an expense. That’s a little surprising.
What will you do when you get that glorious tax refund? Whatever you have planned, you should carefully consider your options, and then make a choice that will further your important goals.
Should I Save, Invest, or Pay Down some Debt?
Saving or investing your tax refund can be a very smart move. When you use your tax refund to buy something, the money gets consumed. It’s gone. And all that you’re left with is the piece of plastic that you’ll inevitably toss in a closet. When you use your tax refund as a down payment on a car, you’re getting into debt. All you have to show for it is something that’s depreciating , as well as another monthly bill.
On the other hand, when you save or invest your tax refund, you are effectively creating your own personal money machine. So instead of trading your most valuable resource -your time for money- you start trading money for money. This is, effectively, the only way to achieve financial freedom: they ability to do what you want, when you want, and with whom you want, at a level of happiness you desire. Smart people save and invest to earn compounding interest. Compounding interest is the most basic of concepts to understand. Those that take on debt pay compounding interest.
The rich rule over the poor, and the borrower is slave to the lender.
Start an emergency fund
If you don’t have a dedicated emergency fund yet of at least $1,000, consider making that your first priority. Open a Savings account with your bank or credit union, tuck this money away and forget about it. Do not commingle it into an account that you use to transfer balances. If things get tight, you’ll want to transfer some of this money. That’s not an emergency. If you don’t have an emergency fund, you will always resort to debt and
Open a Savings account with your bank or credit union that’s separate from your personal checking and savings account. It’s not sexy by any means, but tuck away the $1,000 and forget about it. The reason why you don’t want to use your personal savings account for your emergency fund is because when things get tight, you will be tempted to transfer a portion of your emergency fund. Do this enough and it becomes a habit. If you don’t have a dedicated emergency fund, you will resort to debt and paying interest. This is called revolving debt.
Pay down student loans
Another option is to pay off your student loans, credit cards and other debt with your refund. What would you think if I said:
I have an investment that will guarantee you a 6% to 24% return and will never lose money
And what if it’s for real? Would you be interested? It’s called paying off your student loans and credit cards. Unfortunately, you’re probably dismissing it right about nowAnd, I bet right about now that investment lost it’s luster. It usually does and I don’t know why. No financial advisor can guarantee you a return on any investment. And no advisor from any large brokerage firms care about you paying down debt. It doesn’t earn them a commission. Most will have you invest into some mythical mutual fund and do little or nothing to help you get out of debt.
I know that you’re itching to have your tax refund. If you’re a business owner, you probably owe taxes. Let’s make this an amazing year by making a really good decision with this money. Tuck some money away for your children’s college fund -but don’t use investments with high fees. Do it yourself or find an advisor that has your back. Contribute to your retirement goals. You have until tax day to contribute to your Roth IRA for a 2015 contribution. Create an automatic investment for that house purchase. Try to save 20% as a down payment.
Life’s short and there are more important things in life than money. Focus on your family, your hobbies, your spirtual walk -most certainly your health. Stop procrastinating on achieving financial stability. Let us worry about your long-term plan. God bless.