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How Should You Spend Your Tax Refund To Get Ahead?

| May 12, 2017
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If you’re expecting a big fat refund check from Uncle Sam, this might be one of your favorite times of the year. But before you start planning your next vacation or making a list of the new toys you want to buy, take a moment to look at the big picture. In 2016, the IRS reported that that the average tax refund was $3,120. Even if you don’t think that’s a significant enough amount to impact your financial future, you’d be amazed at how some smart planning can make a big difference down the road. Let’s look at some ways you can you use your refund to get ahead financially.

1. Pay Off Debt

Big debt, small debt, it doesn’t matter. Debt is debt. Start with high-interest debt and work your way down. Did you know that the average American household carries over $16,000 in credit card debt and pays an average of $1,292 in interest annually? Sure, using your tax refund to reduce debt isn’t as fun as going on a trip, but think of the satisfaction you’ll feel when you see your balance decrease, knowing that you are saving yourself thousands on interest in the long run.

2. Beef Up Your Retirement Savings

Even if you are diligently contributing to a 401(k) or IRA, chances are you aren’t maxing out those accounts. Let’s say you deposit your $3,120 refund in an IRA and see a 7% rate of return annually. In 20 years, you will have earned approximately $400 on that investment due to compound interest. Let’s go a bit further. If you invest your tax refund every year for 20 years, your retirement savings could see a $70,000 boost!

3. Invest in Education

Most of us dream of our kids going to a great school and getting a solid foundation for their future career, but have you considered how much of an investment it will take to get them to that point? The numbers can be daunting. For the 2014-15 academic year, a full-time student was looking at a bill of at least $22,750 (for a public college) and as much as $45,760 for a private institution. The costs will vary depending on room and board and other educational costs, but either way, it’s a good chunk of change.

Open a 529 account with your tax refund and, once again, let compound interest help you get ahead. Not only will your investment pave the way for your child’s future, but it could also give you a tax break.

4. Build Your Emergency Fund

An emergency fund provides you with a cushion for those times when life gives you lemons. If you don’t have readily available savings, something as simple as an unexpected car repair or medical bill could derail your finances. Or, if you know you have a large purchase or a life milestone approaching, such as welcoming a baby into your family, having an emergency fund will help you avoid digging into long-term savings or going into debt to cover costs. You can’t put a price on the peace of mind that an emergency fund will give you, so think about investing some of your tax refund to boost your short-term savings.

5. Be Generous

You may not think giving your tax refund away will help you get ahead, but it could make a lasting impact on someone else’s life. Find a charity or cause that is close to your heart and pay it forward. Your gift could also help you when the next tax season rolls around. Just make sure to get a receipt for your contribution and itemize your deductions.

It’s okay to treat yourself when your tax refund comes in, but don’t splurge just because the money is there. Make a list of your financial priorities and then map out how your refund could give your financial future a boost. How are you planning to spend this year’s tax refund? If you would like guidance on how best to use your refund, contact me at (626) 529-8347 or email me directly at [email protected].

About Ricky

Ricky Biel, CRPC® is a wealth manager with Haydel, Biel & Associates, an independent financial advisory firm serving individuals and families near Pasadena, California. The firm was founded in 2004 by Chris Haydel and Ricky Biel with a desire to provide unbiased, client-centered, community-based financial advice. Together, they have built a practice that has grown into a family of caring, smart professionals committed to blending proven investment methodologies with creative financial technologies that make it easier than ever to accomplish your goals. They strive to keep things simple and fun to give their clients peace of mind and alleviate financial stress. HBA Wealth takes care of their clients’ needs first and foremost and goes the extra mile to make their clients’ finances grow. To meet and see how the HBA Wealth team may be able to help, contact them today at (626) 529-8347 or email Ricky directly at [email protected].

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