In the spring of 2013, my roommate was waiting anxiously for his tax refund. He even called the IRS and waited on hold for about 45 minutes (by the way, don’t call the IRS during tax season) to check on his refund status. He received his direct deposit of the Federal tax refund on a Thursday and on Friday he went out and bought a Fender Stratocaster, the king of electric guitars. As far as he was concerned, that was the single best use of a financial windfall.
If you already own a Strat, and you’ve somehow managed to convince yourself that you don’t need another one, here are a few more responsible suggestions for what to do if you get some of your money back from the government this year:
- Remember that it’s a “refund” and not a “bonus”: This is the money that you overpaid to the government throughout the year, so be sure to use it in a way that advances your financial plan.
- Remember that compound interest works against you if you’re in debt: Paying off a high percentage credit card is like an automatic return on your investment. If someone could show you an investment that guaranteed 12% or even 18%, you’d jump all over it, right? Well, paying down a high-interest, non-tax-advantaged loan like a credit card guarantees a return equal to the interest rate.
- Check your emergency fund: You need 3-6 months’ worth of expenses in cash. If you have a sudden job loss, you need to be able to meet your needs without relying on a high-interest credit card. If your emergency fund looks a little bit weak, adding your refund to it can help protect against an unexpected financial hardship.
- Fund your tax advantaged retirement accounts early: Many people fund their retirement savings accounts, like IRAs, at the end of the year. By taking a lump of money from your refund and funding your account earlier in the year, you’ll have longer to take advantage of the miracle of compounding.
- Change your withholdings: If you’re counting the days till your tax refund arrives (and it’s going to be a big refund), it’s possibly because you’ve had some challenges managing your cash flow throughout the year. By reducing your withholdings from your paycheck, you’ll get more money with each paycheck. One warning though – you won’t have as big of a refund to bail you out come tax time, so you need to make sure you’re being intentional with your cash flow during the year. Rather than wait for the bail-out, try setting up an automatic monthly savings program throughout the year.
- Have a little fun: If you can use the refund to ward off one of the threats to your financial independence (like credit card debt) do that. However, if you’re meeting your savings goals, you have an emergency fund in place, and you don’t have a big capital need on the horizon, have a little fun. Spend some time doing something you love with the people you love doing it with. After all – that’s one of the reasons you need the money anyway.
If you’d like help setting up your retirement plan, please contact Steve Hengehold via email [email protected] or 513-598-5120.
Date Posted: 03/14/2016 Advice provided in this article is meant for educational purposes only and financial education is important to us. Before making decisions regarding your personal financial situation, please consult an advisor or conduct your own due diligence. If you would like to discuss your Wealth Accumulation or Retirement Income Plan with an HCM Wealth Advisor, please give us a call – 513-598-5120. Located in Cincinnati, Ohio, we serve clients in 23 states, and we’d love to help.