Get More out of Your Tax Refund with This Strategy
It’s tax return time. Many households are receiving tax refunds now or will over the next month or so, but too often, these refunds – which can amount to several thousands of dollars – are spent on consumer goods. Such emotion-based consumer spending typically has no significant impact on the household’s net worth or financial stability. Instead, it tends to perpetuate the mindless spending cycle that keeps too many American households stuck in the rut of paycheck-to-paycheck living.
Here is what we and other financial experts suggest such households ought to consider doing with their refunds instead:
- Set aside 25% of the refund for spending, if the head(s) of the household feels “the urge to splurge.” This should help to satisfy the primal spender within. Though, we encourage the spender takes the time to carefully consider what purchase would be the most meaningful.
- Add 25% of the refund to the household’s emergency fund. This should be held in accounts that are fairly liquid (or easily accessible). A savings account is a standard option, though its rates tend to hover somewhere between the average inflation rate and zero. Other possibilities include Certificates of Deposit that earn a little more interest than savings accounts. Money market accounts are also decent options, as well as interest-earning online savings accounts. Rarely will you find an account that offers quick access to your cash but pays interest above the current rate of inflation. If growing your money is your goal, then it’s not necessarily a bad thing that it will be further out of reach.
- Use another 25% of the refund to pay down debts. Either send it to the account charging the highest interest rate or to the account with the smallest balance. Where I differ from many financial experts is that I also suggest that you consider paying down your mortgage debt. Even though there currently are tax incentives connected to mortgage debt, debt is still debt. Until a mortgage is paid off, the home owner’s freedom (to move, to rent out the home, etc.) is restricted, just as with any other type of debt. It may seem like a long journey, but often households who double down on their mortgage can pay it off in nearly half the time.
- Lastly, use the final 25% to add to long-term retirement investments, including 401(k)s, 403(b)s, and Individual Retirement Accounts. Compound interest is a key driver in your retirement fund. If you put in more money now, it will grow exponentially over the extra amount of time you will be giving it.
Although some of these suggestions might not be relevant to some households, the remaining suggestions probably are.
Please feel free to share your own successes and experiences with your tax refunds. What do you plan on doing with yours?
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