We are quickly approaching that special time of year again. What time is that you ask? Tax time of course! Tax season and I have a love/hate relationship. I hate doing the paperwork to file taxes and I sure hate paying taxes, but man, I love it when I get money back in the form of a refund! Are you lucky enough to be looking forward to a tax refund check this year? If you are, lets talk about some ideas for what to do with it. No, that doesn’t mean we are going to talk about what awesome 120” TV you are going to buy or that sweet kitchen remodel that you’ve been eyeing all year. Stay with me here.
Our first stop on the not-so-fun bus ride is debt. Are you carrying some credit card balances? Maybe you have some student loans still out there. Making an extra payment to those outstanding debts can make a huge impact on the overall amount you end up paying back in the long run. Make sure those extra payments are going directly towards paying down principal amounts and not interest. Now, not all debt is the same, so if you have a home loan or car loan that is carrying a lower interest rate, say 0-5% for example, it may not make sense to use all your check on those debts. You may be able to do better with your money in another place. Which leads me to idea number two!
It’s possible your money can be better used investing in the market and saving for retirement. Have you started a Roth IRA yet? If not, why not save that extra money in a place that can grow tax free, along with many other benefits. If you are under 50 years old, you are allowed to put up to $5,500 ($6500 for those over 50) into a Roth IRA account. From there you can select from thousands of investments to grow your money for the long run. Picking the right investments can help you earn more than your checking account or the interest that you pay on those low interest debts I mentioned earlier. If you don’t need the money now, put it back for your future.
Idea number three comes is hopefully something you already have established, but if you don’t, let’s talk emergency funds. What happens if you unexpectedly lose your job? Maybe you fall ill for an extended period of time or your car breaks down. Where you do you come up with the funds to cover you and your family. Most advisors recommend keeping back three to six months of your fixed living expenses back in an emergency fund for these cases. I know, not a sexy option, but a very important one.
Have a project you have been thinking about doing at your house? What about a big trip you’ve always wanted to take? A lot of us have some ideas for things you want to do in the next few years, but we aren’t always sure where we will come up with the money to do them. Think about starting a fun money fund in a brokerage account. Like a savings account, a brokerage account allows you to put money back for later, but where it differs is the ability to choose your investments. Bank savings accounts carry an interest rate that is determined by the bank, based on what interest they can earn on your dollars. A brokerage account lets you choose stocks, bonds, mutual funds, ETFs, etc… to invest your money in. Choosing the right options for your goals will hopefully lead to earning more than your standard savings account and help you do some of the fun things you would like to accomplish.
Tax refunds can be a great tool to help stabilize your financial well being if you are smart with them and these are just a few ideas of how you can utilize yours. I know the temptation is there to blow it on a down payment for a new car or that pool you’ve always wanted to put it, but think outside the box a little bit and you may be able to make that tax refund go a lot further. Consider talking with a professional advisor to help you decide what path is right for you this tax season!