March 19, 2014

What You Should Do With Your Tax Refund

Credit: David Castillo Dominici
Hopefully, you’ve already started working on your taxes. If you’re a real overachiever, maybe you have already submitted your taxes. With a little luck (or conservative withholding), hopefully you’re expecting a refund. If you are, I’d like to make a few suggestions for what you should do with those funds.
  1. Go have some fun. Take 10%, take a couple hundred bucks, take whatever you feel is right and go buy that snowboard, get that new dress, or eat at that new, expensive Italian place everyone is raving about. I’m not your typical financial advisor, and I’m not Scrooge: go take some of your check from Uncle Sam or your home state and enjoy yourself!
  2. Pay off your credit cards. There are very few things you can do that help your financial health more than paying off that Visa debt you’ve been carrying around since college. Maybe you’ve been making steady progress in recent months and need a surge to finish the drill? Luckily, if you’re getting a refund, the Department of the Treasury could be about to provide that cash surge.
  3. Boost your cash / rainy day fund. If you’re working, I’d advise you to have three to six months’ worth of living expenses in cash. If you’re retired, I’d propose one to three years’ worth of living expenses, just to make sure you’re in good shape and can sleep comfortably. If you just checked your account balance and it isn’t at my suggested threshold, take advantage of this unbudgeted (and maybe even unexpected) cash inflow.
  4. Put a little towards your long-term debt. An extra mortgage payment every year can sometimes cut five or six years off a thirty-year mortgage! If you’ve got an outstanding car loan or student loan, go ahead and consider putting some of your refund there. Seeing people debt-free or working towards being debt-free makes me happy, and it usually makes them happy as well!
  5. Make an IRA contribution (or a bigger IRA contribution). If you’re 49 or younger and have earned at least $5,500, you can contribute $5,500. If you’re 50 or older and you have earned at least $6,500, you can contribute $6,500. Now it’s important to note that $5,500 (and $6,500) is the limit, not the requirement! Every dollar saved towards retirement gets you one step closer to that recliner, newspaper, and having your wife bring you your slippers – wait, strike that last part!
Getting a tax refund is a great feeling and as I mentioned in #1, you should do something fun with part of the money. Don’t just throw it all away on a March Madness bet, a golf weekend, or a shopping spree!
Many people, myself included, sometimes view a tax refund as money you were never expecting to have. On some levels, that may be true, but it can also be said that a tax refund is money you should have never agreed to loan the government in the first place! When you look at a tax refund that way, I’d suggest you look at options #2 though #5 and decide for yourself what you should do with your tax refund.

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