It is tax season and many households look forward to receiving a tax refund. To some this is extra money, above and beyond the normal income. They spend it as quickly as they receive it, and sometimes even before! They buy electronics, book vacations, go to an expensive restaurant, or some other unnecessary item or activity.
Don’t get me wrong, I’m all for enjoying life and money, but only AFTER you have been responsible. A tax return isn’t really extra money either. Let’s be honest, the IRS isn’t that kind and your tax return isn’t a free gift from them.
Receiving a large tax return just means you overpaid on your taxes and didn’t make as much throughout the year. Basically you loaned the government your own money and didn’t charge them any interest!
So don’t go blow your tax return! It is your hard-earned money that you should have had throughout the year. If you received a large return maybe consider working with your tax professional to decrease your withholdings and make more money with every paycheck! For now let’s put your return to use!
Here are 5 Smarter Ways to Use Your Tax Return
1. Build a Starter Emergency Fund
Set aside just $1000 of your tax return for a starter emergency fund. This is a simple financial step that can make a big difference.
Think of this as the temporary tent giving you protection from the rains of life. If a car battery goes bad (which happened to me last week!) you won’t have to put it on a credit card.
It is tough to get out of a hole while digging it deeper.
2. Pay Down Debt
If you have already set aside $1000 the best thing you can do with extra cash, like a tax return, is pay down debt. Debt is the enemy of wealth. If you want to build wealth all the research shows you have to eliminate and avoid debt.
Start by paying off your smallest debt first and work your way down to your largest. Pay no attention to interest rates.
To keep on track you need the psychological win of paying off the smaller debts. This also opens up more income to throw larger amounts at the larger debts so you feel like you are making an impact.
Most people have more debt than one tax return will pay. That’s okay. It is a great opportunity to jump-start the process and eliminate some of the smaller pesky debts.
3. Build a Full Emergency Fund
I call this your Fortress Fund. It protects your family against a job loss, a medical event, a car accident, or just life in general. Life is unpredictable; things are going to happen that are out of your control. Having strong fortress walls is essential to protecting your family.
A Fortress Fund should equal six months of your household expenses. This is NOT six months of income, this is simply ESSENTIAL expenses to keep your family fed, clothed, housed, and transportation for the working family members.
This is much better than relying on credit cards or a home equity line of credit for an emergency. Again, the best way to win with money is avoiding debt. It is also essential to have the proper insurances to make sure that large events are covered.
4. Pay Cash for a Car
According to research done by Experian the average car payment in the first quarter of 2017 was $509 per month. Paying cash for a reliable used car is one of the best ways to save money and build wealth.
Cars, and most things with a motor, go down in value quickly. The typical new car loses 70% of its value after 4 years.
That means the new car that you just paid $30,000 for will be worth $9000 in four years. Cars are NOT an investment.
If you invested just $509 (the same as the average car payment) a month into a good retirement fund you would have over $107,000 in 10 years! In 20 years you’d have over $384,000. In 30 years you’d have over $1.1 million! That’s right, your new car is robbing you of over $1 million. I hope you like driving that car!
Set aside your tax return as the start to your car fund. Then save a little bit every month toward your next vehicle. Then when your current car is done for pay cash for your next car, ditch the car payment, and start building real wealth. Or drive a new car and lose out on over $1 million dollars. The choice is yours.
5. Invest in Your Retirement
According to a recent study by the Economic Policy Institute over 75% of households have less than $18,000 saved for retirement! This includes people in the age range of 56-61 who are approaching retirement.
Let’s put this in to perspective. Let’s say you were unable to work starting tomorrow. Someone hands you a check for $18,000 and tells you to enjoy your golden years.
That doesn’t sound so golden does it? Most people can’t survive on $18,000 for one year, let alone their entire retirement.
If you think you can rely on Social Security for retirement think again. Last year the average monthly Social Security check for retirees was barely $1400, according to The Motley Fool. For most that isn’t even enough to cover medical expenses in the later years of life.
If you’re out of debt, do yourself a favor and boost your retirement savings with that tax return check. You will thank yourself later.