It’s that time of year where dreams come alive – the season of tax refunds. The one day a year we feel a strange gratitude to the IRS for holding OUR money and finally returning it to us. Each year the list of ways to spend the money gets longer – new curtains, new windows, new vacations. But this year, consider turning that tax refund into the gift that keeps on giving. Here’s how to spend your refund wisely:
WISE IDEA #1.
Pay down your credit cards. If you carry a balance from month to month, pay it off with the refund, tear up the cards and start living within your means. Harsh, yes – but you’ll get a clean slate and a load off your mind. If you just commit to going six months without carrying a new balance on your cards, you will have kicked the spending habit.
Can’t quite bring yourself to write that check? Download your credit card statements and take a look at the interest you paid the credit card companies last year. Those $100 shoes may have turned into $200 shoes… If not now, when?
WISE IDEA #2.
Fatten up your emergency fund. Credit card balances are what happens to people without emergency funds. Calculate 3-6 months of living expenses and make sure you have that separated into an interest-bearing checking or savings account ONLY FOR THIS PURPOSE. You need it to be liquid, safe and accessible, but not too accessible. And no, being the first to own an IPAD does not constitute an emergency.
WISE IDEA #3.
Contribute more towards your retirement. Make a Roth IRA contribution if you are eligible. Make a non-deductible Traditional IRA contribution if you’re not. Buy an annuity. Very few people have saved enough for retirement and all of those ways to save come with tax benefits. If you happen to get your refund before April 15, you can make a 2009 contribution AND a 2010 contribution at the same time.
Why delay your gratification? The power of compounded growth pays for a lot more than just one new vacation when you are older – oh, and have time to enjoy it.
WISE IDEA #4.
Send your kids to the college of their choice by making a contribution to a 529 plan or a custodial account. They won’t thank you now, but someday they will…hopefully. With tuition costs increasing 6% or more a year, don’t count on financial aid covering all your college costs.
WISE IDEA #5.
Make your year end charitable contributions now. Many non-profits get the majority of their donations in December, so contributions now are usually pleasant surprises and much appreciated. You still get the deduction and have more to spend on gifts for the holidays! Everyone wins!
And one more –
Treat yourself to a comprehensive financial plan or at least a quick financial tune-up with a fee-only financial planner. Getting a better plan in place for your financial future is definitely money well-spent.