Three Tips for Using Your Tax Refund

1040 tax_forms.jpg

Many folks are about to come into a mini-windfall of cash. For these same folks who often complain about not being able to save money, fund an IRA, add to investments, or pay down debt, this is an opportunity. That mini-windfall is a tax refund. Instead of envisioning all of the lovely, disposable, soon-to-be-forgotten things you could buy with your refund, consider buying some financial peace of mind. Here are three things to do with this windfall that would be financially beneficial.

First, pay off debt. Look at your debts; is the refund you are getting enough to completely payoff a debt. If it is, this could be a good choice. Use the monthly payment amount you were making on that paid off debt to make a larger payment on another debt. Work with your financial planner and pay off the debt that gives you the greatest bang for your buck and you’ll be debt free in no time. Your financial planner can tell you which debts and in what order provide the shortest payoff time, or saves you the most money.


Second, build an emergency fund. If you are a two-income household, the emergency fund should be, at minimum, the equivalent of six months total expenses. This includes all discretionary and non-discretionary spending. If you are a single-income household, you should really consider having nine to twelve months of total expenses as an emergency fund. Your tax refund can add nicely to your cash stash.

Third, start or add to investments. If you have your debt under control, and your emergency fund is sufficient, now is the time to add to investments. Your tax refund could be just the ticket. Consult your financial planner and decide whether you should be starting, or adding to, an IRA, a taxable fund, or topping up an existing investment account.

A note about tax refunds; if you are receiving an unusually large refund (and tend to do so every year) now is a great time to meet with a financial planner to figure out why. You should be receiving a smallish-to-zero refund. That way, you are enjoying the benefit of your funds all year and not making a free loan to Uncle Sam.

Keep in mind that using your refund for one of the recommended tips does not have to be an “all or nothing” approach. Be sure to use a small amount to reward yourself and do something like a nice dinner, a day retreat, a spa, or take a cooking class with a friend or significant other. Just don’t blow your windfall on things you don’t need and won’t notice in a few weeks.

As an independent Certified Financial Planner™ I can help you decide how to put your windfall to work for you. Contact me and let’s get started! #talktometuesday #refund #Hireaplanner #bonus #income #cash #CFPPro #tax