I was recently asked what I intended on doing with my tax return.
To be honest, the question had me stumped. I really hadn’t thought much about it. Since I started filing my own taxes, I have always needed the tax return for something. New tires, new furnace, new roof, pay off a credit card or the classic “it’s already spent before I got it.”
This year, I find myself without any pressing need. I took steps to get my finances in order and have been fortunate enough to be able put away a nice little nest egg.
Without a “need” I will have to turn to the “want” side of my brain.
A new TV with all sorts of bells and whistles? Sure. A vacation somewhere sunny and all inclusive? Sounds nice. Invest in some real estate to further my status as mover and shaker? Maybe.
I am curious what everyone else has planned for their tax return. I know folks who treat the refund like it’s burning a hole in their pocket or the people who squirrel it away like the last walnut before winter. Which one are you and do you have any suggestions for what I should do with this moderate amount of money from Uncle Sam.
According to a few different financial advisors, these are the best ideas for your tax refund.
1. Put it towards the principal on your mortgage. Every single year you can decrease on a mortgage loan will save you huge money in interest. Minimums are what is expected and make lenders the most money. Think about this, let’s say your tax refund is $1,200 – which is equal to the average mortgage payment on a $250,000 home with a 30 year mortgage. So, if you put your tax refund towards your principal for 12 years, you would knock a full year plus off of that loan. Owning a home outright can be a pretty great feeling. Especially when you sell it and keep all the money!
2. Invest the money in your own. Not a loan this time. In up keep and improvements. Update that bathroom, add a deck, finish the basement. These are all things that add value to your home and up the cash you get out when you sell one day. Make sure you pick the right project. Sometimes you get a poor return on projects that are too niche or out price the home from the rest of the neighborhood. Ask a realtor their advice on what should be updated.
3. Pay off debt. Put some serious money towards existing debt. Examples, a car loan, student loans, your Uncle Joe who gave you start up money for your business, credit cards – anything that rests over your head and checkbook like a rainy cloud. The average American worries about money more than anything else in their life. Getting rid of debts takes a massive load off of that worry. Get on the up and up – you’d be surprised how much money you are throwing away on interest or Uncle Joe’s passive-aggressive holiday “reminders” about the moola you owe him.
4. Donate to charity. I know, this one comes from out of left field. Hear me out. Charitable donations can be a great way to offset tax you are paying in the next year. This is already money you don’t have in hand, so why not pay it forward to a worthy cause that you support AND take a tax break from the act of giving as well. Great charities exist locally and nationally. Make sure they are a legit 501c3 and provide you with a receipt for your generous contribution to Save the Whales or Relay for Life or The Big Brother, Big Sister Program. Your financial advisor can give you some tips on how much you should give and what you can expect to save next year.
5. Start a “Rainy Day” Fund. It’s inevitable. I believe the old saying goes, “Into each life some rain must fall.” Get a savings account that can for the night that the pipes freeze and flood the basement or an auto accident means you need to shell out some bucks for a repair. Have you ever had to wait for an insurance reimbursement check to come in – it’s always great to have some extra padding. Here’s a worst case scenario. You get fired or downsized. Your house payment is still due. You are still in your college friend’s destination wedding. Heck, you are still on the line to buy your co-worker’s child’s cookies and that check for $50 might be stretching your budget thin. A “Rainy Day” Fund is one of the smartest financial decisions and plans that a person/family can make. In a perfect world, you should put enough away to live for 6 months without any additional income. Scary – but doable, especially with that bump from your tax return.
OR
You could buy a jet-ski and invite all your friends to the lake. Whatever makes you happy!
(JJ Gordon is the host of It Takes 2 along with Amy Iler on KFGO The Mighty 790. Airing Monday through Friday 11am to 2pm CST.)
