If you are
like most Americans you will be getting money back from the government this
year. In some cases this tax refund can be fairly substantial. Managing the money correctly will help give you some serious breathing room in your finances.
No matter what
you did with your money in the past, try picking one or a few of the options
below to set yourself up for a better financial future.
Pay Off Debts
The first
priority should be paying off any outstanding debts as much as possible. For
example, any student loan, car loan, credit card, or mortgage balance
outstanding should be eliminated with some of the tax refund you get back from
Uncle Sam.
Additionally,
focus on paying off some of the highest interest rate debt (typically, credit
cards) before any lower interest rate loans.
Debt
accumulated on credit cards will continue to compound, but not in your favor.
In other words, as your outstanding credit card balance grows so too will the
amount of interest charged on that balance. That outstanding balance is real
money that you are responsible to pay. Get rid of it!
Put into
Cash Savings
Building up a cash buffer or emergency fund is another excellent option. Any amount you can put into a cash savings fund will help give you the peace of mind so you are
better prepared for the unexpected.
Depending on
your line of work or personal preference you will need to tailor your cash
reserves to your liking. For example, entrepreneurs with potentially unstable
cash flows from their business may want to escrow more money into savings that
can provide income during times when business is slow.
On the other
hand, if your income is fairly reliable it may be better to allocate more of
your tax refund to your retirement account.
Add to
Retirement
In addition
to your company-issued 401K plan, you should be contributing to a Traditional
IRA or Roth IRA every year.
Standard
contribution limits are $5,500 per year or $6,500 for workers 50 years of age and
older.
Don’t be
intimidated to start investing. Use simple, effective strategies and low-fee investment products to allow your money to grow as much as possible. The sooner you start the better!
Home
Improvement Project
For
homeowners with slightly dated houses, using your refund to upgrade a part of
the house will bring immediate financial value as well as satisfaction through enjoying
your new living space.
Studies show
that replacing an entry door, putting in new attic insulation, replacing a
garage door, minor kitchen remodeling, and adding manufactured stone veneer are
some affordable home projects that add the most value.
Have Fun!
Take time to
treat yourself or your family. Now that you have some additional cash make
something happen!
Set aside money to take an extra vacation, go out to eat more often, or get that item
you’ve wanted for so long.
A bulk of
your tax refund should be used to improve your finances by paying off debts,
building savings, and adding to retirement accounts. However, letting yourself
experience some fun with the money is equally important.
The point is
to have balance.
As always,
if you have questions or comments, feel free to send me a message. Thanks for
reading.
John
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