Money management
10 Smart Ways to Spend Your Tax RefundContrary to what you might think, most people who file income taxes actually receive a refund. This means that during the year, many Americans are giving Uncle Sam an interest-free loan. As a tax preparer, I often asked my clients why they didn’t adjust their with-holding in order to boost their weekly pay, instead of loaning it to the government with no interest. Many said they enjoyed receiving a sizeable lump-sum of cash to do with as they pleased, especially to pay off existing Christmas bills or to fund a vacation, or even to spend on a single trip to the mall. When I suggested that they’d be better off setting aside money in a separate account and earning interest on it throughout the year, most admitted that they weren’t disciplined enough to follow through. In effect, they were using their tax refund as a savings account that paid out zero percent interest. In addition, the vast majority of refund checks would be used to purchase items for the here-and-now rather than to help finance future goals. If this sounds familiar to you, I’d like to encourage you to read on! What did you do with your refund from 1998? From 2004? From last year? If you don’t remember, then chances are it was spent on something frivolous instead of on something that contributed to your financial well-being. I’d like to challenge you to do something different with this year’s refund… whether it is $250 or $2500. Just this once, forego the vacation or that big screen tv. Instead, use it to improve your future. Think about your goals and make your refund work for you. Here are 10 smart suggestions: #1. Make an extra payment on a loan. Whether a mortgage, car loan, or even a student loan, making one extra payment every year can save you lots of money in interest. In the case of a mortgage, it can save you thousands over the life of the loan and it can also cut YEARS off of the repayment period. #2. Contribute to an IRA. An Individual Retirement Account can help to ensure that you are able to enjoy retirement. Contributions to a traditional account will probably be tax deductible, which will save you even more money on next year’s taxes. Contributions to a Roth IRA aren’t deductible, but you’ll never have to pay taxes on the interest that accrues. In either case, you may be eligible to receive up to $1,000 in a Retirement Savers Tax Credit on next year’s taxes, as well! #3. Contribute to a 529 College Savings Plan If you have children, this is a great way to save for their future college expenses. As with a Roth IRA, you won’t have to pay taxes on the interest that accumulates (and if your children are small, this could be a sizeable amount!) If your state offers deductions for contributions, you’ll probably want to stick to that plan, but if not, you can invest in any state fund without restricting the colleges your children can attend. #4. Pay off a Credit Card Think of how nice it will be to get one less bill in the mail every month! Once you’ve paid off the card, the secret is to cut up the card and close the account, so that you won’t run up the balance ever again. If you’re not sure you’re ready for such drastic measures, place the card in a container of water and then freeze it. Since it’ll take a day to melt, this is a great way to prevent any spur-of-the-moment purchases. You’ll have plenty of time to think it over before your splurge! #5. Open an Investment Account. Many companies will let you open a brokerage or mutual fund account with as little as $50! While you’re at it, set up an automatic investment plan so that you’re contributing to this account every month. Since you’ll never ‘see’ the money, you won’t be tempted to spend it. #6. Purchase Adequate Insurance. This is one of the most important things you can do for yourself and your family. All service members are covered under SGLI, and families are eligible as well. However, these amounts might not be enough, and it bears reviewing. Remember that most Stay at Home Moms need life insurance, as well (if something should happen, child care costs need to be covered.) Most homes should be insured to 85% of their value, which, given current market trends, has probably changed dramatically since first purchased. It’s worth checking into. Those who rent or live in government housing should absolutely have Renter’s Insurance. Did you know that the average 2 bedroom apartment contains about $40,000 in property? Again, this is a great time to go room-by-room and record how much it would cost to replace your possessions. You will probably be shocked! Finally, I encourage you to review your car insurance policy and boost your liability limits if they need it. #7. Establish your Emergency Savings Account Experts recommend having 3-6 months of living expenses in an account where it is easily accessible. In the military, where job security is a little better than in the civilian sector, aiming for 3 months is a great start. I recommend a Money Market account, which pays higher interest than a regular savings account. Again, start an automatic investment plan while you’re at it. Start small if you have to ($25 a month is better than nothing!) and then gradually increase as you are able. #8. Invest in Yourself Whether it is taking classes to learn a new skill or to keep current in your field, an education is something no one can ever take away from you. Combined with resources available to military and their families, and several tax breaks, a refund check will go farther than you might imagine if you’re interested in furthering your education. #9. Get a car check-up Too often, costly car repairs catch us by surprise and cause financial strain. While you have the money in hand, make an appointment with your mechanic and make sure your car is in tip-top shape. Get the oil changed, replace the brakes if they need it, buy new tires… do what you can to prevent those unexpected repairs. #10. Get a face-lift If you are a homeowner, this is your chance to make some small improvements. Money spent to improve your kitchen and bathrooms is money well spent. Replace faucets, paint, or have the tub refinished… you could get back up to 85% of your investment when you sell.
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