Deciding What To Do With Your Tax Refund
It’s tax time and for many that means a refund. With a little thought and planning, this money could do a lot of good.
Before deciding what to do with your tax refund, you must first ask yourself a few questions:
- Do you have enough saved for emergencies?
Having adequate emergency savings is a very important part of being financially sound. In recent years, three to six months of income is what most experts believed to be a sufficient amount of emergency savings. There are many that now believe we should have nine months of household income in savings as it is taking the unemployed longer to find new employment. If you still need help determining the amount that’s right for you, there are many tools and calculators available online that will help.
- How much is your debt costing you?
The goal here is to calculate whether using your refund to pay down credit card debt would save you more money than investing the cash. This requires an analysis of your debt and the amount of interest you’re paying vs. the amount you would gain on investments.
- Are you expecting any additional earnings in the near future?
If you’re expecting additional cash anytime soon, such as a gift, work bonus, or extra paycheck, then you’ll have a little more money to work with in the near future that might afford you a little flexibility now. Maybe you can pay off some debt, save a little, and then treat yourself to that new gadget you’ve had your eye on.
If after answering these questions you still have cash in your hand, here are some suggestions on smart ways to utilize extra income – no matter where you are in life.
Millennials (Young Singles)
Learning to manage money is key right now. A successful financial future depends on it and now is the ideal time to establish solid saving habits. Consider setting up multiple savings accounts – one for emergencies and others for specific goals, such as trips, large purchases, new cars, etc.
Investing in a Roth IRA may be a good idea as well. Your earnings will grow and be tax-free after age 59 ½, (taxes are paid up front) and for qualifying life-changing events you still have the ability to withdraw contributions without a tax or penalty prior to that age.
Gen X (30s and 40s)
Starting a family and moving up in your career can be a hectic time. Automating your savings, retirement, bills and any other financial obligations is highly recommended. It will help you stay on top of your finances so you know where you are in a moment’s notice. And a clear understanding of your finances will help you stay out of debt, which is one of the key goals of your generation.
Now is a good time to pay down credit cards, put a little extra in your retirement account, or start a 529 college savings plan for your children (only if your own retirement savings is on track).
Some boomers are empty nesters and many still have kids in college. No matter which scenario applies to you, now is the time to get serious about your retirement savings.
This means building equity in your real estate, using extra cash to bulk up your retirement, and getting in the habit of paying for big purchases with cash. Take a good look at IRAs, consider the tax advantages of each and decide which type of IRA works best for you.
Continue to save! Remember to maintain your emergency savings account and make large purchases with cash. This may also be a good time to look at tax-free “gifting;” it’s an excellent option to distribute tax-advantaged money (up to $14,000 annually) to loved ones!
We’re here to help! If you need assistance with financial planning, IRAs, or any other savings goals, call or stop by today.
Always consult your tax advisor to discuss your tax situation.