Many of us are about to receive, if we haven’t already, a big fat refund from the IRS. Perhaps you’ve even spent it. If not, here are some ways to put your newfound money to good use.
1. Pay Off Debt
Focus first on loans that charge the highest interest rates, such as credit cards and cash advances. Be careful though. If you don’t have the discipline to keep yourself from racking up a new balance on your Visa right after paying it off, don’t bother. Instead, focus on paying off a loan, such as an auto loan, which can’t be reused. Loans which generate a tax deduction or have a relatively low interest rate, such as student loans and mortgages, generally should be the last ones paid off.
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2. Fund a Retirement Account
Not only will you be putting money away for your golden years, but you may even reduce your future income tax burden. Ask your employer whether you can either make a lump-sum contribution, or temporarily increase your payroll deduction, in order to add that money to your 401k. Alternatively, consider adding some or all of your refund to either a traditional or Roth IRA. Any earnings that accumulate in the retirement account will do so either tax-deferred or tax-free (depending on the type of retirement account) until you withdraw it. There are rules and limits as to who is eligible and how much of this contribution is deductible, so you should first consult with your tax or financial adviser.
3. Replace a Money Pit
In order to get our money’s worth, or simply because we don’t have the money to replace it, sometimes we may keep something well past its life expectancy. For example, an automobile, bicycle, vacuum cleaner, or lawnmower. There comes a time, though, when the cost of maintaining or repairing an item is more expensive than replacing it. If you’re constantly paying to have something repaired, find out what it would cost to replace it with a new (or newer pre-owned) model. Here’s your opportunity to spend a little now but save more in the long run.
4. Hire a Financial Adviser.
We all have our areas of expertise, and a competent financial advisor can help you save money now and increase your net worth down the road. For $1,000 or less, you can hire an objective financial advisor who will spend hours with you helping you make sure everything you are already doing is the best option given your circumstances. You can search for a fee-only financial advisor (an advisor charges you a fee for his or her time rather than getting paid by earning commissions when your purchase investment and insurance products) by visiting The National Association of Personal Financial Advisors. Alternatively, you can choose to work with a professional who has earned the CFP® designation by searching the Certified Financial Planner Board of Standards, Inc. home page.
5. Invest in Yourself
Consider using your refund to improve or acquire new skills. Especially skills which make you more valuable to your current or potential employers. Appearing more valuable to your current employer could keep you from losing your job at the next round of layoffs. Perhaps you’ll even get a raise. And if you are looking to, or are forced to, change jobs, you’ll boost your standing on the selection list.
6. Invest in Your Home
In addition to increasing the value of your home, you may even lower your ongoing utility bills. Consider updating any items if they are old and energy inefficient. For example, appliances, toilets, water heaters, air conditioning, windows and doors, insulation, and pool equipment. Prior to doing so, check with your local power company to see if they have any efficiency inspection or financial subsidy programs of which you can take advantage.
Interest rates are still very low, but that won’t last forever. If you own a home or investment property, and haven’t recently refinanced, check with a mortgage broker to see if you can get a lower rate. There may be closing costs and miscellaneous fees (use your refund to pay for them), but you’ll likely get that back, and a whole lot more, by paying less in interest expenses over the life of your loan. As an added bonus, you might even be able to lower your monthly payment.
8. Do Nothing
Okay, well, not literally. What we really mean is put it in a savings account and keep it as an emergency fund. If you typically live paycheck to paycheck and constantly worry about coming up with the money for unforeseen expenses (i.e., if the car breaks down) this could provide you with some relief and the peace of mind you need. And that can be immeasurable.
Of course, there are plenty of other ways to use your refund check. And certainly, these ideas may not provide the entertainment value that, let’s say, going on a three-day cruise of the Caribbean may provide. Instead, these choices offer you the opportunity to get the most bang, long-term, for your tax refund buck.
We’d love to know what you end up doing with your refund.