With April 15th right around the corner, some of us are anxiously anticipating a tax refund check. As a matter of fact, according to CNN Money, the average tax refund is about $3,000. If you’re lucky enough to be part of this group, what do you do next?
I would like to give you some practical advice when it comes to the dos and don’ts of your refund. Before you spend it, below are a few things to consider.
1. Save it, don’t spend it- Too many Americans look at their tax refunds as free money and spend it as quickly as they receive it. If you don’t spend it, and choose to save it, the money could provide a much larger benefit. Chances are that at some point in your near future an unexpected expense will pop up. Your car could break down, the roof needs to get fixed, or the dentist says that you need to replace a cavity. If you don’t have any extra money to pay for these unplanned expenses, I guarantee that the stress will get overwhelming. However, if you would have saved your tax return and put it into a rainy day fund, you would now have money to pay for unplanned circumstances. Most financial experts suggest having three to six months of living expenses saved as a cushion. Unfortunately, statistics say that 25% of most American families have no savings at all, and are living paycheck to paycheck. Its simple, your tax refund windfall can help with your savings.
2. Pay down debt- In a study done by NerdWallet, the estimated average U.S. household credit card debt stands at over $7,000. When you consider that most people are actually only making the minimum payments, the amount of one year’s interest for this credit card debt is rather daunting! For example, if you owe just $5,000 on a credit card with a 16% APR (the average is 14.9%), making minimum payments of $125 per month, it would take almost 5 years to pay it off, and cost you an additional $2,000 in added interest payments. I often tell my clients that if they want to make a guaranteed return on their money, the quickest way is to pay off their credit cards.
3. Don’t create more debt- This can be rather tricky. Making impulsive buying decisions because you think you can afford something can be very costly and is flawed logic. I once had a client that financed a new car purchase with their tax refund because they now had the money for a down payment. They ignored the fact that they financed it for 5 years and took on the added cost of increased insurance. They acted before taking into account how it was going to affect their monthly budget. They felt that because of the extra money, they could go out and buy the car rather than making sure it was the right time. Simply because they had money burning a hole in their pocket, they created more debt purchasing the car, and took on the added stress that comes along with monthly payments. Whatever you do with the money, don’t get caught up in the moment with this new found wealth and make short term decisions that can have bigger, long term problems!
4. Invest it- Before you decide what you do with your money, consider these percentages: 36%, 35%, and 80%. According to a recent retirement statistic, 36% is the number of American households that have nothing saved for retirement, 35% is the number that will be relying on Social Security for all of their retirement monies, and 80% of people ages 30 to 54 believe that they will not have enough put away to even consider retiring. However, if you took that $3,000 and could average a 7% return over 20 yrs, it would grow to over $12,000. Now, if you also decided to add just monthly $100, it would grow to over $ 64,000! By investing it, you could go a long way towards helping build your retirement nest egg.
5. If you are going to shop, be smart! – If the money is really burning a hole in your pocket, consider making a purchase that will fix a problem, such as home repairs, going to the dentist, or getting yourself into better shape at the gym. These purchases can improve your everyday life, or increase the value of your home. Or better yet, make sure that you physically have more energy, and feel better.
Nobody likes to be told what to do with their money, but a few common sense reminders never hurt. Of all the recent surveys and census information in this article, the statistic that scored the highest percentage in the studies is that over 97% of people desire to be financially independent! It starts one dollar at a time, and being smart with your money. A simple tax refund check can be the start of something great!
Pat Moran is owner of The Moran Group, where he specializes in providing clients proven wealth solutions and financial strategy.