Last year the average taxpayer received a federal tax refund of nearly $3200. Having received such a large check in the past, I can fully appreciate the temptations to spend the money on something “fun”. We all work hard for our money so a new toy or vacation should be considered reasonable. Right?
But, if you can resist the temptation to splurge, your IRS “windfall” offers a unique opportunity to significantly bolster your financial situation.
1. Unshackle yourself from debt
Debt is the modern form of slavery, and the average household is drowning in nearly $7,000 of credit card debt. Worst of all, the interest on such debt is money that you’re literally throwing out the window. Eliminating $3,000 of credit card debt with an 18% percent annual interest rate would save you nearly $540 every single year in interest charges. This makes paying off such high interest debt one of the best investments you can make.
2. Take the first step to becoming a millionaire
You can’t become financially independent without planting your financial seeds. As we discussed previously, small sums invested consistently can snowball into large amounts if given enough time. Unfortunately, 56% of Americans have less than $10,000 saved for retirement. Consider investing your refund in an investment vehicle like a Roth IRA every year so that you can retire comfortably, instead of having to live your Golden Years relying on meager social security payments.
3. Provide yourself with the gift of peace of mind
Washing machines break, tires need replacing, and pipes burst. That’s life. But there’s nothing worse than facing a financial emergency without the funds to meet the challenge. That’s why an emergency fund is essential. The sad truth, however, is that 62% of adults have less than $1000 in savings. As an old African proverb advises, “save your money and one day it will save you.” Provide yourself with peace of mind. Use your tax refund to establish your emergency fund.
4. Invest in yourself
There are over 5.5 million job openings in the US. Unfortunately, many of these positions will go unfulfilled due to a widening skills gap. Potential employees simply don’t possess the skills that employers are looking for. You can use this to your advantage by obtaining additional training to gain the skills employers are seeking. Use your refund to enroll in courses at your local community college or gain additional skills through online courses. Consider additional certifications to advance in your current workplace.
The most lucrative investment you can make is the investment in yourself.
5. Save for the down payment of a major purchase.
Too often, we get in trouble by making major purchases without having the appropriate down payment. Making a 20% down payment for a home, for instance, will not only garner you a better interest rate on your mortgage, but it will also prevent you from having to pay costly private mortgage insurance (PMI). PMI is an insurance premium you’re required to pay that protects lenders in case you default on your loan. It is essentially a tax for those without enough money for a sizeable down payment.
Similarly, most experts advise that you follow the 20/4/10 formula when purchasing a car. Your down payment should be at least 20 percent of the purchase price, you should finance for no more than four years, and your total car expenses should take up no more than 10 percent of your gross income.
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Using your tax refund to save for the appropriate down payment on a major purchase will save you money in the long run.
There are few times in our lives that we receive a sizeable lump sum of money. Make the most of it by using your refund cash to help further secure your financial future.
BMWK, what do you plan on doing with your tax refund?