Spending Your Income Tax Refund

Apr 2017

 

For many of you there’s a mad rush to complete your 2016 tax return or to file an extension. For others, you have completed your return and, in fact, have already received your refund. For those of you who have received your refund or are going to receive it in the very near future, the question is what you should do with your refund.

All too many people treat their tax refund as a bonus and look for ways to spend it. I, however, believe there are some other things you should do with your tax refund that will be more productive and go a long way to improving your financial health. The first thing that I would look at doing with your tax refund is to pay off high interest rate debt.

The number one thing I think people should do with their tax refund is to pay off high interest rate charge card debt. Just think, the average American pays over 18.5 percent interest on their outstanding charge card balance and the interest in not tax deductible. Therefore, by paying down on your charge card debt you are getting a guaranteed 18.5 percent on your money. I don’t know any investor who wouldn’t jump at the chance to receive a guaranteed 18.5 percent return on their money. Even before making an extra payment on your home mortgage I want to pay off charge card debt. After all, home mortgage interest rates are a fraction of what charge card interest is, and it is tax deductible where charge cards are not.

If you don’t have any outstanding charge card debt, making an extra payment on your mortgage or paying down other debt is always a good thing to do. Remember, debt has a way of strangling you, and the more debt free you are the greater flexibility you will have.

For those of you who are free of debt, a good option for your tax refund is to put the money away for your retirement. Whether it is to invest in a Roth or a traditional IRA, investing for your retirement is an excellent use of your money. In today’s world, it’s almost impossible to save too much for your retirement. Therefore, once your debt is totally extinguished, saving for your retirement is a great way to use your tax refund.

One last thought and that is if you feel that you have saved sufficient amounts for your retirement, another excellent use of your tax refund is to use it to save for your child’s or even grandchild’s college education. Opening an account with the Michigan Education Savings Plan (MESP) is a great way of going. Remember, one of the beauties of the Michigan Education Savings Plan is that the money and all the growth on the account can be withdrawn tax free as long as you use it for a qualified education expense. In addition, one of the beauties of the Michigan Education Savings Plan is that you can virtually use it for any public or private institution in the country.

It’s obvious that I don’t think you should use your tax refund to rush out and buy a new big screen TV or something of that nature. I encourage you to use your tax refund in a way that will truly increase the quality of your life; that is either by paying off as much debt as possible or by investing the money for your future. Granted, by doing it my way you don’t get instant gratification, which is what our society seems to push today; however, by doing it my way you will improve your financial health and give yourself a much better quality of life into the future.

Good luck!

 If you would like Rick to respond to your questions, please email him at Rick@bloomassetmanagement.com.