Image courtesy of ddpavumba / FreeDigitalPhotos.net
Over 100 million Americans received refunds in 2013. Undoubtedly, the effects of such windfalls wore off long ago. Were these bonuses used wisely?
Here are three ways you can get the most from your income tax refund:
1. Prepare for an Unexpected Event
This sounds like an oxymoron, being prepared for something unexpected, but this could be the smartest move for anyone – even someone in debt. Nothing could be smarter than to cash the check and put it into a savings account for emergencies. Let’s face it – something bad is going to happen someday and those things usually cost money.
Having a stash of cash to buy our way out of a crisis could turn out to be more valuable than gold.
2. Buy a Guaranteed Return
Do you want a guaranteed return from your refund? Take a look at the interest rates on your credit cards, car loans, and student loans. Pay off as much as you can and you will immediately save the interest that you would have been charged.
For example: Pay off a credit card with a 14.99% interest rate and you just make 15% on your money.
You just bought yourself a sure-fire fixed return and didn’t have to read any fine print or sign any contracts.
Nice.
3. Invest in Your Future Self
Maybe you feel like doing something special or blowing the money on yourself. I would recommend you consider spending it all on what I call the three-Rs: Repairs, Replacements, or Retirement.
If you know the furnace is on its last leg or the tires are approaching the end of their life then a tax check might just help you reach your savings goal a few months ahead of schedule.
Another option could be to start, or add to, a retirement account. Did you know that putting $2,000 into a Traditional IRA this year could save you up to $500 on your taxes next year? Better yet, put the money into a Roth IRA and you could turn two grand into $14,656.15 by 2034 (assuming a 10% rate of return)!
It’s not as immediately satisfying as a new big screen TV, but it might just get you a hologram projector or trip to the moon in the future.
What? It could happen!
Remember, the best things in life are NOT free!
The best thing to do with a tax return, or any “found” money, is to think past tomorrow. Thomas J. Stanley, author of The Millionaire Next Door, found the affluent make decisions based on what it will do for them in five years, not today.
Whether you pay off debt or save it for a rainy day, a tax refund will cost you in delayed pleasure and self discipline. However, it will pay the biggest dividend and could score you the most from your tax refund.
Great post! I love your suggestion to “Buy a Guaranteed Return” by paying down debt! But I think our 2014 tax returns are already earmarked for our 2014 Roth IRA contributions.
That’s awesome Dee! I’d be curious to see what your tax return (I mean ROTH) turns into 10 years from now.
Our refunds always go to our mortgage or our retirement accounts or a combination of the two. It’s probably been 15yrs since we blew a refund on total nonsense as if it was a lottery win rather than just getting our own hard earned money returned to us. Now that we have a clear plan of where every extra dollar is going it never even crosses our minds to spend it on something nonessential. When the refund arrives in our account it’s usually transfered out the same day and sent to where it can do some good.
Good suggestion using it to build up an emergency fund. Lots of people don’t have one and find it difficult to set the money aside while also paying off debt.
Oooooooh, I so badly want to throw our refund at our mortgage (we only have 22 payments left). How long do you have left on yours?
If we make only the standard required payments, we’ll be done in May 2018.
With the extra payments we make each year we’ll have it done by December 2016. This schedule assumes we carry on as we’ve been doing the past 6-7yrs, with no raises, bonuses, inheritances, or layoffs. All of which would alter the schedule.
Once the mortgage is dead, we’ll continue making the same pmts every two weeks, but to our retirement travel account. Three years of saving all our regular mortgage payment and our extra payments should do it (2017-2019). We want a budget for travel that’s completely separate from our regular living expenses so fluctuations in inflation don’t have to be subsidized by reducing our travelling.
Once that’s compete we’ll switch again and use the payments to do one last round of home repairs/replacements (roof, furnace, appliances, windows, hardwood refinishing, furniture, etc), so that we go into retirement with a home that doesn’t need any major work for the foreseeable future.
Then we retire in December 2020 with a paid for home with no major expenses on the horizon.
Hopefully our second vehicle will last us until then (we commute separately), and then we drop down to only our newer vehicle which should last us until 2028 (bought Sept/13 and assuming 15yrs as per usual for us). Our retirement budget includes a vehicle replacement every 10yrs to be safe but we drive them until they drop which is usually 13-15yrs.
We may not be able to stick to this plan but at least we’ve got a map to follow that we know gets us to our goal in a reasonable timeframe. If only we’d gotten this focused in our 20s or early 30s we could have retired at 40.
That sounds like a GREAT moneyplan. It also sounds like you have a built-in buffer in case something doesn’t go quite the way you planned, which is still very wise. We haven’t planned out that far ahead yet, just up to my daughter’s senior year in High School.
In Dec 2020 we’ll be retiring at 57/59 and our youngest will be 18 and in 1st yr of college/univ.
Good post Steve! We’ve always used tax returns (assuming we get one as we try to get it as close to 0 as possible) as found money that we can use to better ourselves. Sure, a new TV is fun and all but it does nothing to better us. So, any refund we get usually goes towards some sort of saving/investing endeavor as opposed to being wasted.
Thanks John.
You brought up a good point that I didn’t address in the article: Get a refund as close to 0 as possible. We strive for that too, so any refund we get only inches us closer to our savings goals too. Since we don’t give the govt too much of our money we are able to put inches into our savings goals every single paycheck throughout the year instead of waiting to get it back from Uncle Sam in one big chunk. I estimate that we earned $10 in interest on that money. It’s not a lot, but it’s better than nothing.
I plan on getting a guaranteed return by putting mine toward my student loans. I can’t wait! Before graduating, I put my returns toward my emergency fund. These are all good ideas.
Thanks E.M. How many “tax returns” do you have left before paying off the student loans? 🙂
My tax appointment is Friday (although I won’t know the damage for a week or so), so I’ll be curious as to what my year is going to be like. If I did get a refund though, I put that money back into my tax fund so I have it ready to go for estimated taxes.
You’ve had an interesting year, haven’t you (as far as income is concerned)? Have you been filing quarterly estimates so you have a general idea of how much you owed or is it really a roll of the dice for you (as far as a refund is concerned)?
I’ve always had side-hustles but never went freelance-only. I can’t imagine how scary it is for you – or how excited you may be if you get a bunch of your withholding back!
I handle my tax return the same way I handle any income, dividing it and putting some into savings, some into investments, and some into spending.
That sounds so simple and easy. Isn’t personal finance supposed to be hard? 🙂
I have some home repairs this year that will be costly. I will be putting my refund into that.
Aaahh, the Joys of Homeownership. I know what you mean. I really know what you mean