Some people see their tax return as found money and use it on splurge items. I know I’d like to run away to Maui in the middle of winter but alas it’s not going to happen this year. However tempting it might be to spend your “found money” take a minute to really think how it could be of better use. Tax returns are not savings accounts or a gift. A tax refund simply means you paid too much in taxes and Uncle Sam was holding it for you. So, how can your tax return be put to smart use?
1.If you have credit card debt, pay if off!
With credit card rates averaging 16.53%1, concentrate on paying down high interest debt prior to spending your money elsewhere. Once your debt is paid, do not carry a balance over each month. What you save in interest fees can be put to better use.
2.Give yourself a raise.
No, I’m not kidding. Consider giving yourself a pay raise by adjusting your tax withholding which will increase your take home pay. Why give Uncle Sam your money to hold throughout the year when you could be putting it to good use now?
3. Rebuild your emergency fund.
As a general rule of thumb, it is suggested to have three to six months of expenses saved in the event you have an emergency. Use your tax return to make a deposit into a money market or savings account that is readily available to you while also earning interest.
4. Increase your retirement savings.
Is your debt under control and emergency fund sufficient? Maximize your 2016 contributions to a Traditional or Roth IRA. You have until the tax filing deadline (April, 18, 2017) to increase your 2016 contributions. The limit is $5,500, plus an additional $1,000 if you are age 50 or older. If you haven’t maximized your 2016 contributions, consider putting money into one of these investment accounts to help increase your retirement portfolio.
5. Fund a college savings account.
Do you have your savings and debt covered? If so, a 529 college savings account might be a great way to save for your child’s education. You’ll be able to use the money tax free for secondary education bills.
The suggestions above, of course, are just suggestions and speaking with a financial advisor can help you confirm your strategy or set you on the right path. We also recommend revisiting your financial plan each year to help stay focused. Often, priorities in life shift and so may your financial goals.