Millions of households have received or will be receiving income tax refund checks from both the state and federal governments. What will you do with your refund check?
The best ways to spend the tax refundPay down credit card debt. It’s been a few tough years and maybe you, like many people, have used the credit card to get through difficult times. With credit card interest rates often exceeding 20%, the carrying costs can devastate a monthly budget. Paying off credit card debt with these high rates is like having an investment with an equivalent rate of return.
Set up a rainy day fund. Unexpected expenses or disruptions of income frequently occur. Having a stash of cash is a good idea. Capital One, ING Direct, American Express, and Ally Bank have money market accounts currently paying over 1% interest. These accounts typically beat the interest rate at local banks.
Get financial planning advice. Financial planning can help you in three areas: 1) the areas where you know you need help, 2) areas of opportunity you may not be aware of, 3) the areas you think you understand but may not be right about. Be sure to go to a fee-only planner who will not sell you products but rather give you unbiased advice. Go to www.garrettplanningnetwork.com or www.NAPFA.org to find a planner near you.
Establish estate planning documents. One never knows when disability or death may occur. Being prepared can help safeguard you and your family, and your desires as to what happens with your assets. Always consult an attorney who specializes in estate planning for the preparation of these very important documents. Be sure to include powers of attorney to administer your affairs if you’re incapacitated, and provide instructions regarding: health and healthcare, who should care for your minor children, and how your assets are to be distributed. These laws vary from state to state. Note: do not trust online services or CDs from Suze Orman.
Fund retirement plans more fully. Sticking the tax refund into an IRA or an equivalent amount into a 401(k), 403B or 457 will not only provide tax-deferred growth for retirement but gives you an immediate tax break for next year.
Investing in yourself. Taking a course or class to improve your job skills or qualify for you a new job can provide a high return on the investment.
The worst ways to spend your tax refundSplurge on things that make you feel better. It is very common for people to buy things to make themselves feel better. It may be clothes, a bigger television, or going out to fancy dinners. Unfortunately these better feelings dissipate quickly and people are left in no better position than when they started.
Taking a “great” vacation. It is somewhat natural after working hard all year to think that we “deserve” a vacation and use the tax refund to pay for it. Taking a break and relaxing for a while to recharge the batteries is a good idea, but resist using the tax refund to splurge on a vacation. Take satisfaction in making a more prudent decision about the use of these funds.
Using the refund as a down payment. It is very tempting to buy things over time by financing the purchase. Having the down payment is only the start of many payments to come. It is far wiser to save the money so that you can purchase the item out right. The exception of course would be a house or car. Don’t finance anything unless you’re certain you can meet the monthly payments thereafter without impacting other obligations or your ability to fund other short-term and long-term goals.