Our first blog of our Financial Planter 2014 series, we are focusing on the “Know!” phase focused on topics for 20s to 40s phase. This week our Guest Blogger, Bob Jennings, CPA, CFP with 30 years of experience in finance talks about tax refunds.
When we get back a huge tax refund, we sometimes lose the focus that this money was coming out of our own year-long savings plan. Would you take money out of savings to spend it or would you rather take the money out and do something smart for your future? Here are some common-sense ideas to do with that fat refund check this year, in order.
1. Pay off credit card debt. This is the highest interest debt you have and the most costly. If you have more debt than refund choose a lower balance card, pay it off completely and set a goal to reduce another one.
2. Put some money in a retirement account, even a few hundred dollars. An IRA may even get you a bigger refund next year!
3. Make an extra car payment or two, and keep making the regular ones on time. Car loans often have a low rate of interest, but they are just money pits on wheels and building any equity in the car helps in the long run and improves your credit score too.
4. If you have student loans, pay toward the balance. The student loan interest deduction is gone for now, so getting rid of this loan gets rid of the non-deductible interest.
5. If you've made it this far and still have something left, go out to a nice dinner and then move back to the practical side.
6. Get a will. Few of us think of this immensely practical idea, but a few hundred dollars will make sure what you have goes where you want instead of where the state decides, and might protect your kids or parents, as well. While you are at it, get a durable power of attorney and health care provision at the same time.
7. Set up or increase a rainy day savings account. If you don't have an account, set it up and do not sign up for the debit card or electronic access because the harder it is to get to the money, the more likely it is that it will be there for the rainy day.
8. If you have kids, put a few hundred dollars in a Coverdell education savings account. Dollar for dollar, it is the best savings account there is for just getting started, and because it’s the kid's college money, you will think twice (and then a third time) before you tap it for daily needs.
9. Here is a little trick I do every year: I go ahead and prepay a few months of utility bills so that the refund benefits me for several months instead of just today.
10. If somehow you are still with us and there is some money left from that refund, we need a daily double of advice. First, change your withholding for next year so that you don't get such a large refund, and second, invest the excess in something that will give you a long-term benefit, whether a home improvement or a down payment on a much needed replacement vehicle or life insurance.