I am anticipating my tax refund any day now and would like to use the money wisely. Do you have suggestions on what I should with it, once it arrives?
Finding a check in the mail (or a direct deposit in your bank account) from the IRS is always an exciting event. Many people would quickly turn the refund into a vacation or other large purchase. We applaud you for using your tax refund as an opportunity to better your financial position.
It’s important to think through and review alternative ways that you can use the money wisely. Are you financially stable? Do you have an emergency fund? Do you have credit card debt? This is a great time to review your budget, your short- and long-term goals, and discuss how to get the most out of your tax refund.
These are the suggestions we often give to our clients.
Reduce your debt
If you have credit card debt, paying it off is one of the best investments you can make with your tax refund. You will receive a guaranteed return on your money equal to the interest rate you were paying your lender. You can also apply your refund toward other debts, such as a car loan, student loan or a high interest rate home equity loan. Paying down outstanding debt should always be a priority item in your budget.
Invest in your future
Consider investing your refund into your 401K, 529 Plan or IRA to assist with college or retirement planning. Even if you can’t invest the entire amount of your refund, consider applying part of it with future needs in mind.
Expect the unexpected
If you don’t have one already, start an emergency, or “rainy day” fund. You should be prepared in case something unexpected occurs, such as a job loss or expensive car repairs. Ideally, you should aim to have enough in your emergency fund to cover three to six months of must-pay living expenses.
Expect the expected
Many people are still paying down credit cards from the previous holiday season. If you struggled to pay off credit card debt after the holidays, consider setting aside a portion of your refund to pay for the gifts, entertainment or travel costs you’ll likely incur this year. It will help lessen the stress and carrying cost of debt.
Get that business up and running
Have you been waiting for seed money to start your own business? You can use your tax refund to do just that. Consider engaging a professional to assist you in determining how your refund can help get your business up and running. Starting your own business is an opportunity to turn your refund into income for the future.
Invest in you
Consider using your tax refund to pay for additional education and training to obtain skills allowing you to advance your career or professional designation. This type of investment will pay off for many years in terms of bigger paychecks and a more fulfilling career.
Revise your withholdings
Even though it is nice to get a tax refund, remember this is your money and you have allowed the government to use it interest free. Consider reducing your withholdings so that you can keep more of your current earnings. Use the extra net pay to contribute to a retirement plan or pay down debt.
Spending a portion of your refund on a family vacation certainly isn’t a bad thing—it usually arrives just in time for summer booking. Just be sure to weigh all your options. Perhaps you could take a less expensive vacation, pay down a portion of your credit card debt and still put some of your refund in an emergency fund. No matter what you choose to do with your refund, it’s always a good idea to consider strategies that will continue to pay off for years to come.
Tom Cooney and Crystal Faulkner are partners with MCM CPAs & Advisors, a CPA and advisory firm offering expert guidance and beyond the bottom line thinking for today’s public and private businesses large and small, not-for-profits, governmental entities and individuals. For additional information, call 513-768-6796 or visit us online at www.mcmcpa.com.
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