Finally, it is that tax refund time of year again. All of the stress, worry, and frustration that go into tax season finally start to culminate into that little extra income that you can play around with.
Now it’s time to decide what you should do with your newfound sense of fortune. Splurge on that HD TV you have been drooling over? Add it to your retirement fund? Or maybe just set it aside for a rainy day? For many Americans, their tax refund is the single largest chunk of money that comes in all year besides from their paycheck, and this can lead to a lot of excitement but also a lot of confusion. Recent surveys estimated that American taxpayers are looking forward to an average tax refund of over $2,500. Not a bad chunk of change at all considering how much we all loathe doing our taxes.
Just a few years ago these tax refund checks were used as an opportunity to reward oneself, a chance to plan a nice vacation, renovate the house, or just head out and paint the town red for a night or two. However, with the drop in the housing market and the spiral of the stock market all of that has definitely changed.
While the stock market has slowly been climbing back out of its hole, and the housing collapse is far less of a nightmare these days, most consumers are far more interested in how they can save and re-invest rather than blow their money on material purchases. With this new sense of responsibility, what should you do with your tax return this year?
As always, we here at Rate Rush are here to help.
Pay off Debt with High Interest
One of the best ways to use your tax refund is to build up your financial security by paying off some of your debt that comes attached with a high interest rate. One of the best places to start is with your credit cards. If you owe $2,500 on your credit card that comes with a 15% annual rate and if you just continue to pay the minimum payment it could take as many as 100 months to pay off that debt. By using your tax refund to pay it all off at once and wipe out the balance, you would be saving close to $1,200 in interest, as well as helping to reduce the stress of those never ending monthly payments.
You could essentially then turn around and invest that $1,200 that you have saved by not paying the interest, and double the benefits. Obviously this just one example and exact figures will vary significantly depending on size of your debt and the amount of your tax refund, but the main idea remains the same.
Stockpile your Emergency Fund
The economic crisis has done everything to reinforce the need for maintaining an emergency fund at all times. You never know when things could take a turn for the worse, so having money to fall back on has become an absolute must. You may lose income on your investments, you could get laid off from work unexpectedly, or you may just hit a bad stretch where unexpected expenses continuously pop up. Ensuring that you have a few months of expenses stockpiled away in a safe place could be life saving should your finances take a turn for the worse.
So if you have no emergency fund to speak of at this moment in time or if you have spent all your previous savings trying to recover from the hardships of the past few years, then now may be the time to use this year’s tax refund as the concrete foundation you can lean on in the future.
Just always keep in mind that this money you decide to put aside is strictly for emergencies, and that you may have to rely on it, so avoid any risky investments and try sticking with savings accounts that are insured and other guaranteed, low-risk investments. While the safe bets won’t earn you a fortune, they will give you stability and a better opportunity to sleep easier at night.
Invest Your Tax Refund
Maybe you have already set up your emergency fund and have already paid off all of your high interest debt. Good for you! You’re well on your way and give yourself a little pat on the back before doing anything. When you are done doing that, it is time to figure out how you can still make the most out of your tax refund this year.
A simple search of the internet will bring you a vast array of predictions, investment advice, and articles telling you to get into certain mutual funds or stocks that are the hot topics of the hour. The problem lies in the fact that by the time you read the articles all of those stocks are more than ready to start cooling down, and you will have jumped on board too late.
That is why you are much better off in the long run to set yourself up with a good mixture of mutual funds, bonds, and stocks rather than dumping everything into one ‘sure-fire’ investment. If you already have a portfolio set up, then consider splitting your tax refund up into each one of your investments. If you have yet to start a portfolio, then now may be the perfect time to do so.
Just remember that your focus should not be on throwing money into the stocks or investments that the so called experts are going on and on about, but instead you have to stick to creating a well thought out investment strategy. This type of strategy does take some time, so be patient and be willing to do your research.
Unless you have really hit it big with your tax return this year, there isn’t much of a chance that your refund is going to drastically alter your financial future. However, if you continue being smart with your investments and start saving regularly, then you will have one foot in the financial freedom door and be on the path to a much more stable future.
Who would have thought that tax season could be so rewarding?