According to USA Today, the average tax refund last year was over $3,000. If you are anywhere near average, you will soon have thousands of dollars in your pocket – money which will disappear if you do not have a plan for it. Not everyone should have the same plan, but all should create a strategy which will mesh with their overall financial well being. What is the best plan for you? Read on.
- If you have consumer debt, jump-start a debt snowball. By using that $3,000 to get rid of your smallest debts, you will be able to make bigger payments on your remaining debts. Continue to knock them off one at a time, from smallest to largest, and watch your debt snowball grow. Note: I would not include my house payment in this snowball.
- If your consumer debt is paid off, build your emergency fund. Most financial planners recommend an emergency fund of at least six months expenses. Therefore, if your monthly spending budget is $4,000, you need an emergency fund of $24,000. If you are not there, your $3,000 refund will definitely help.
- If you have no consumer debt and your emergency fund is in place, invest for retirement. A good rule of thumb is to invest 15% of your take home pay for your retirement, so if you are not quite there, put that $3,000 to work. In 20 years, at an 8% rate of return, $3,000 annually would grow to nearly $150,000.
- If you have satisfied steps 1-3 above, save for your children’s college. Consider a Coverdale Educational Savings Account or a 529 plan. Each has its own advantages, but both will earn tax free growth (as long as the investment is used toward a college education). I like tax free, don’t you?
- If you have already satisfied all of the above steps, take a cruise. Surprised? Don’t be. You are doing great with your finances, so loosen up and enjoy yourself. You deserve it!
Bonus plan: bring the money home each month. Many mistakenly think that they somehow “win” when they get a refund from the IRS. Not true. A refund simply means that the IRS is returning your money after hanging onto it for a year. You can keep your Uncle Sam’s hands off of your money by upping the number of exemptions you claim on your W-4 form. Doing so could give you as much as an additional $250 each month throughout the year instead of a $3,000 refund after the year is over.
Zig Zigler once said that those who aim at nothing will hit it every time. Don’t let your refund vaporize…have a plan and follow it. You will be glad you did.
Readers: Are you expecting a tax refund? What is YOUR plan?
Nice post Joe and so true. I lot of people will end up with cars, tv’s and vacation money. Our refund is going to make sure we max out last years Roth investments. I am all for trips with whatever is left over from making sure savings and investments are taken care of.
Well don Thomas. Always good to have a plan!
With my wife in school, we’re getting quite a bit extra because of the lifetime learning credit. Gotta love tax credits 🙂
Tim — You DO have a plan for that extra big refund. Right?
The debt snowball!! Thats a good one. Most people are so anxious to reduce their large debts and forget about the small ones lingering in the shadow. Your tax refund has a better impact when you start with the smaller debts.