Ok I am going to challenge my readers to change their thought process. I am going to suggest something very taboo.
DON’T SPEND YOUR TAX REFUND!
There I said it. I know it won’t be a popular suggestion but every year, nearly eight out of 10 U.S. tax filers get a federal tax refund. The average amount paid over the past few years was roughly $2,800, according to the most recent IRS data from 2014.
Getting a refund is not a bad thing. In fact having had to pay the past several years I appreciate not having to worry about whether I owe more than I paid into the treasury.
Now I am going to offer you 4 suggestions of what to do with your tax refund before you go rushing out to buy a new TV, furniture for the house, or that long overdue vacation.
- Fund Your Emergency AccountMost people don’t have any money saved in a liquid account. According to Bankrate.com 24% of Americans don’t have any money saved for emergency purposes. That’s a scary stat. 20% have enough saved to cover 3 months of expenses. These are sobering statistics. If you fall in either of these categories I strongly encourage you to take your tax refund and place it in a savings account. Resist the urge to spend the money and know that it is there in case you have a true emergency.
- Fund Your Retirement:If you are eligible to invest in a Roth IRA or Traditional IRA it may make sense to take your tax refund and fund your retirement. For example if you are 25 years old and can invest $5,000 into a Roth IRA and earn a hypothetical average return of 7% when you are 65 that $5,000 account would be worth approximately $75,000. Compounding is a powerful tool when you have time on your side. (Please note, the hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.)
- Fund your kid’s education:If you have children you may benefit from investing in a 529 plan. Education expenses continue to rise and student loan debt just crossed $1.3 trillion nationally, according to the department of education. 529 plans allow for all income and growth of earnings to be accessed tax free if it is used to pay for higher education expenses. Also as an added benefit some states allow taxpayers to deduct 529 plan contributions from their state tax returns. Consult your tax professional to see if you are eligible for the deduction.
- Pay Down Debt:According to the Federal Reserve the average US household has $15,611 in credit card debt at the end of 2014. I know I carry a balance on my credit card and am going to use some of my tax refund to pay down my credit card balance. Paying down your debt means you will pay less in interest and improve your monthly cash flow by reducing your payments every month. It becomes a win-win. You pay less and will be able to save more every month.
I know it is tempting to use the refund on something fun and spoil yourself or your family but as Dave Ramsey says, “Live like no one else will now so you can live like no one else can in the future.” I hope you will join me in doing something different with your tax refund.
Another thought from The Factory on Main
Peter Huminski, AWMA
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with a qualified tax professional.