Wednesday, April 13, 2016

What Should You Do With Your Tax Refund?

https://www.flickr.com/photos/armydre2008/5507884992/So you're getting a tax refund, huh? Great! For many people, a tax refund represents "extra" or "found" money that they didn't plan on having. (In reality, it's simply their own money being returned to them after the government borrowed it interest-free the previous year, but that's another discussion...) In 2015, the average tax refund was over $2,800, which is a significant amount of money. It can be tempting to spend that money on hookers and blow something fun, but if you are reading this blog, hopefully you are looking to be a little more financially savvy and are wondering what a better use of that money might be. Well, let me give you some ideas. I'll list them in order of importance.

First, Treat Yourself

Look, it's human nature to want to spend newly found money. Until you do, doing anything else with that money will be hard, so give in to temptation a little bit. The key here is a little bit. Spend no more than 10% of your refund or $50, whichever is less. Do whatever you want with that money - go out to lunch at a fancy restaurant, buy that new video game you wanted, get that Tesla tattoo, whatever. Now, with that out of your system, let's move on.

Start Your Emergency Fund With A Bang

If you don't have an emergency fund, take this opportunity to start one. Put that money into a savings account. Consider that your emergency fund seed. Now, water that seed by adding some more to it every week or two weeks. One dollar, five dollars, ten dollars. Whatever you can afford. Better yet, set up an automatic transfer to this account with your bank so you don't have to think about this ever again. That's like installing an irrigation timer to keep your money tree growing. Eventually, you'll end up with a nice sum of money and you'll no longer live in fear of an unplanned emergency wiping you out.

Pay Off Debt

If you've already got an emergency fund established, good for you! The next option is to use your refund to pay down some credit card debt, if you have any. My recommendation is to apply it towards whichever credit card is charging you the highest interest rate, but if your refund is enough to completely pay off a balance, you may want to send it to that card instead. Whatever floats your boat. The important thing is to also stop running up those bills. You just paid down the outstanding balance; don't go out and run it back up again, dumbass!

Fund Your Retirement

Saving for the future typically always gets put off. It's hard to deny yourself money today for money twenty or more years in the future. Since your refund is money you probably weren't planning on having, saving it for your future self will seem like less of a loss to your current self. If you have an IRA, deposit your refund into that. If you don't have one, use your refund to open one. Depending on how close or far you are to retirement, your refund could increase tenfold or more by the time you retire. Your future self thanks you.

Add To A College Fund

If you have a kid, put the money in his or her college fund. (Yes, fund your retirement before a college fund.) If you have more than one kid, put it in the college fund of your favorite one. Just kidding. Split it however you want.

Invest It

If you've made it down this far in the list and still haven't used up your refund yet, congratulations! You're in pretty good financial shape! You could always be in better shape, however! (Look! Lots of exclamation marks!) Invest your money in a low-cost mutual fund. Perhaps start an account to save for a Tesla. Then pat yourself on the back for being so smart.

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