According to the Internal Revenue Service, 75% of tax payers will get a refund this year. Since the average refund is almost $2800, it’s time to start thinking about how to put that money to good use. A tax refund is not a windfall or a gift from the government. It’s your money, earned from work, that Uncle Sam has been holding all year long. Don’t blow your tax refund by treating it like found money.
Pay Off Debt
One of the best uses of a tax refund has to be paying off debt. While government won’t be paying any interest for holding your money, you’ve likely been paying interest to your creditors. Having a couple of thousand dollars to throw at credit card bills or high interest loans can be a huge morale boost for those struggling to get out from under their debt.
Start Or Top Off An Emergency Fund
We all know that not having anything in savings for emergencies is often the reason people go into debt. Most experts suggest saving at least three months of necessary expenses, but that number often seems too overwhelming for people who live paycheck to paycheck. Even having $500 or $1000 in an emergency fund is a great place to start and would likely cover an emergency car repair or trip to the doctor.
Invest Your Refund
If you aren’t stuck in consumer debt and already have an emergency fund, congratulations! You are doing better than the roughly 42% of Americans who carry credit card balances. Getting a tax refund is the perfect opportunity to invest for the future. I actually get a little bit giddy when I find extra money to invest, and luckily, there are a ton of ways to invest money wisely.
Traditional or Roth IRA
You have until April 15th of this year to max out an IRA for 2014 or you could start funding one for 2015. Not sure which is better? You aren’t alone. The traditional vs Roth IRA question is answered differently depending on who you ask. I won’t pick sides. It’s much better to invest on one or the other than not invest at all.
There are a variety of places to open an IRA. I use Vanguard and have always been very happy with their service and low fees. If you aren’t sure what to pick for investments, they have a variety of tools to help. A good rule of thumb is to pick a low cost index fund or target retirement fund until you are able to study and make more informed decisions.
Invest Outside of Retirement Funds
I hope to retire before age 59.5, which means I need another source of income before withdrawing from my retirement accounts. I’ve chosen to invest in real estate and with Betterment.
Real estate isn’t for the faint of heart. You really need much more than $2800 before considering an investment property, but that amount could make a nice start or addition if you’ve already started saving for this goal.
Betterment uses mostly automation and passive investing based on your risk tolerance. The fees are very reasonable, especially if you agree to automatically investing at least $100 a month. You can read more about my first year with Betterment here.
Get Your Legal House In Order
Nobody likes thinking about dying, but guess what? Death and taxes are about the only guarantees in life. Seeing my younger cousin pass suddenly last year certainly reminds me that we don’t know when our time will be up. If you have anyone who depends on your income, especially small children, make sure life insurance and a will are in place.
Jim and I made our will with Legal Zoom years ago and have updated it a couple of times. While not exactly pleasant, it was pretty painless and only took a couple of hours. We also got Living Wills and Power of Attorney documents drawn up so no one will have to ever decide what we might have wanted should we become incapacitated. Best of all, using a site like Legal Zoom is cheap, so you’ll still have refund money left over for other things.
Invest in Your Health
If you’ve been putting of medical or dental procedures due to finances, a tax refund is a great way to get back on track. We have tons of people who come in for eye exams and buy glasses or contacts with tax refund money. You might even be able to swing a cash discount by paying up front.
Home repairs sometimes fall in the bucket with doctor visits as things we tend to put off if the money isn’t there. While I wouldn’t recommend running out to buy a smart refrigerator, you could avoid financing and use your tax refund to replace an appliance on it’s last legs. Also, upgrading things like insulation or windows will make your home worth more while saving on energy.
Can’t I Have A Little Fun?
Absolutely, spend your tax refund on anything you want. Just make sure you’ve considered all the options. So many people spend tons of effort trying to get a leg up on the vicious cycle of debt, paycheck to paycheck, and little savings. At tax refund time, people often feel they deserve a little treat because having no money is hard. I’ve been there. While we haven’t had a tax refund in a long time, I can remember past refunds being used for skis, clothes, and even a trip to Vegas!
Before you go out and blow your tax refund on a flat screen TV or new wardrobe, remember how it feels to never have enough money at the end of the month. New shoes or golf clubs might seem better for a moment, but the new wears off pretty quickly when you don’t have your financial life in order. Use your tax refund wisely!
Are you getting a tax refund? How will you spend it? Do you ever just want to give up on all this saving crap and bet it all on black?