It’s that time of year where many of you are about to receive your 2017 tax refund. Many people look at tax refunds as a bonus or as found money and look for ways to spend it frivolously on themselves. I, on the other hand, would encourage you to look at your tax refund not as a bonus, but rather an opportunity to help get yourself in better financial shape.
In 2017 the average tax refund was nearly $3,000. Although, $3,000 is not going to radically change your life, it is enough to make an impact on your financial affairs. Therefore, you don’t want to miss an opportunity to better your financial situation. Here are some ideas for your 2017 tax refund that could help with your overall finances.
For those of you who have charge card debt, one of the best financial moves you can make is to take your tax refund and pay down that debt. After all, the average charge card interest in America is about 20 percent, and the interest is not tax deductible. Therefore, by paying down charge card debt you’re getting an after-tax return of about 20 percent. I can assure you no investment can guarantee you a higher rate of return. In addition to the rate of return, when you pay down debt you are also significantly improving your financial health.
For those of you who do not have debt, a tax refund can go a long way in helping you build an emergency fund of money. I’ve always believed that we all need money set aside to handle unexpected expenses such as a new air conditioner or repairs on your car. As opposed to going into debt for these items, it’s nice to have an emergency fund of money you can tap into. Typically, I tell an individual that they need three to six months of living expenses as an emergency fund. If you have not set up an emergency fund, using your tax refund is an excellent way to go.
Another option for your tax refund is to invest the money. If you qualify, you can make a Roth IRA contribution and have that money grow tax free for your future. If you don’t qualify for a Roth IRA you can add this money to your current investment or use it to further diversify yourself.
Another potential investment opportunity is to use the money to save for your child or grandchild’s college education. Using a 529 Plan such as the Michigan Education Savings Plan allows you to invest money tax free for a loved one’s education. We all know how expensive college is, and anything you can save to help a loved one with their education, I assure you, will be greatly appreciated.
Unfortunately when it comes to tax refunds most people deposit it in their checking account and before too long the money is gone. I encourage you to be smarter with your tax refund and look for opportunities to better improve your financial situation. Yes, spending money frivolously can have short-term benefits, but those benefits will be forgotten about before you know it. On the other hand, if you do something smart with your tax refund, it will pay dividends for years to come.
One last note about tax refunds and that is if you are receiving too large of a tax refund, it may mean that you have too much money withheld from your paycheck. If that is the case, you may want to adjust your withholding so that your weekly paycheck will be a little higher and your refund a little lower. Remember, if you get too large of a refund it means that you’ve given the government an interest-free loan. Giving the government an interest-free loan is not a good financial move.
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