March 02, 2017
The average refund for federal tax returns is nearly $3,000. And I know plenty of you also end up getting some money back when you file your state tax as well.
Don’t blow it! Look, I know how easy it is to see your refund as a windfall. And that triggers thoughts of vacations, new wardrobes, or a new gadget or two.
But a tax refund you spend isn’t nearly as valuable as a tax refund you save.
Three of my favorite ways to use a tax refund to build financial security.
Pay Down Your Credit Card Debt. This year paying off credit card debt is more important than ever. Now that interest rates are beginning to rise, credit card companies are boosting what they charge in interest for unpaid balances. The average is around 15%. There is no better investment than to use a tax refund to pay down your credit card balance. That’s like earning a 15% return on your money!
Boost Your Retirement Savings. Let’s say you are getting a $3,500 refund this year. Invest that in a Roth IRA that earns an annualized 6% over the next 20 years and your tax refund this year will eventually be worth more than $11,000. You can’t tell me tripling the value of this year’s tax refund isn’t a great deal.
Be Ready for Emergencies. It is so upsetting for me to read the surveys that say a majority of Americans don’t have $1,000 or so set aside to deal with emergencies. This is your chance to start an emergency fund, or top off a savings fund that doesn’t yet equal eight months of your living expenses. Just think of the peace of mind that will come when you know you have more money set aside for dealing with life’s what-ifs.
Answer Yes or No to the follow statements.
I pay all my credit card bills in full each month.
I have an eight-month emergency savings fund separate from my checking or other bank accounts.
The car I am driving was paid for with cash, or a loan that was no more than three years, and I sure didn’t lease!
I am contributing at least 10% of my gross salary to a retirement plan at work, or I am saving at least that much in an IRA and/or regular taxable account.
I have a long-term asset allocation plan for my retirement investments, and once a year I check to see if I need to do any rebalancing to stay on target with my allocation goals.
I have term life insurance to provide protection to those who are dependent on my income.
I have a will, a trust, an advance directive (living will), and have appointed someone to be my health care proxy.
I have checked all the beneficiaries of every investment account and insurance policy within the past year.
So how did you do?
If you answered yes to every item, congratulations. If you are working on improving on a few items, I say congratulations as well.
As long as you are comitted to truly creating financial security, I applaud you. If that means you are paying down your credit card balances, or are building up your emergency fun with automated payments, that’s more than fine. You are on your way!
But if you found yourself saying No to any of those questions, and you’re not working on moving to Yes, then I want you to stand in your truth. No matter how good you feel, you have some work to do before you can honestly know what you are on solid financial ground.