It’s that time of year when we begin collecting our W-2’s, 1099’s and other documents to prepare our tax returns. For some of us, there is a reason to get excited about tax time. Why? A tax refund!
A couple of years ago a car salesman told me that the car industry loves tax season. Why exactly? Because many people end up using their tax refunds to help with a down payment of a new automobile.
If you get a tax refund, you might view it as a “bonus”. Unexpected money just fell into our lap. We get the urge to spend this money on a luxury that we might otherwise have not been able to afford. It’s YOUR money, do with it as you please, but I will offer some advice on how to spend your tax refund wisely:
Pay down Debt: Instead of buying a new car with your refund, use it to pay down an existing car loan if you have one. Make an extra payment or two to a student loan you might have. Debt is an obligation you will have to pay down eventually, so why not use the extra money to give you an extra step to being debt free.
Go on a Vacation: Maybe you feel like you have worked hard, and you probably have. Use the money, or part of the money, to treat yourself to a vacation. The enjoyment and peace of mind you can get out of an experience far outweighs any “thing” you might want to purchase. You will have created lasting memories. Plus, more than likely, you will be more focused upon your return.
Just save it: Suppose you are 25 years old and receive a tax refund of $1000. If you used that money to open a Roth IRA or put it in a taxable brokerage account, you will be well on your way to creating future financial freedom for yourself. Let’s use the following example: You take the $1000 and open a Roth IRA. If you put in just $100 a month into that Roth IRA, then assuming an 8% return annually, you will have an account balance of well over $300,000 in 40 years. Granted 40 years is a way off, but that money can help supplement your retirement. You can also use the refund to build up an emergency fund or to contribute to a taxable brokerage account.
A tax refund is welcomed by everybody who receives one. You worked hard last year, you paid a little more in taxes then you should have, now it’s the government’s turn to give a little back to you. Treat yourself to that vacation you’ve been craving, or use it to help put yourself in a better financial situation at the beginning of the year.
Budget Smart, Invest Wise