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Top 10 Things To Do with Your Tax Return

{ Posted on Feb 27 2011 by Marcus Alston }

The US economy seems to be turning around despite continued bad news abroad.  Consumers are tightening their belts and living smarter and spending wisely.  Here are 10 things you should do with your tax refund to continue to maximize your money:

1. Pay off High Interest Rate Debt.  If you have (possibly on store credit cards, national credit cards or high interest rate loans), save on interest by paying these off or down immediately. By paying off high interest rate debt, you save on the interest you were being charged on it.  For example, if you receive a $4,000 refund and pay off a $3,000 credit card balance at 20%, you will save roughly $600 in interest over the year.  In any event, there are certain do’s and don’ts regarding managing credit card debt that you should follow.

2. Start an Emergency Fund. Financial advisers recommend having 3-6 months of your household income in an emergency fund in case you lose your job or have other financial emergencies.  If you have no high interest rate debt, this probably would be the next place to focus your refund.

3. Invest. Invest.  Invest. If you need to build your savings or investments, and already have an emergency fund, consider putting this money away in a savings, money market, certificate of deposit, investment account, mutual fund, or purchase some stock.  According to the Motley Fool, if you save for a 40 year period, and you start with $1,000 and invest an additional $1,000 each year, you would end up with $532,111.07 (assumes a 10% annual return).  This could really help you afford to retire or be a great foundation.

4. Think Long Term.  Start or add to Retirement Savings. Are you behind in retirement savings or want to build a bigger nest egg?  Look into starting a Roth or traditional IRA with your tax refund.

 

5. Save for College. College costs are going up and up.  Unless you send your child to a FREE College, you are looking at paying a significant amount tuition. Consider putting some of the money from the refund into an educational fund.  Every little bit helps and adds up over time.  If you put a $1,000 away a year for your child for 18 years, you will have $18,000 for them assuming you do not invest it.  Factoring in an 8% annual return through an investment, you would have $40,446 at the end of 18 years.

6. Pay off your Car.  While your car may be at a low interest rate, having no car payment is great for your cash flow and will allow you to pay down debt faster, save more, borrow less, investment more, etc.  If your return is not big enough to pay off your balance completely, the benefit may not be as big.  If you pay off a car note that was costing you $400 per month and you keep that car for just 5 more years, you will have saved $24,000, assuming you do not invest it.  Factoring in an 8% annual return through an investment, you would have $29,587 at the end of 5 years.

7. Buy Something that will Save you Money. How about new energy efficient light bulbs?  How about an energy efficiency assessment on your house?  New insulation?  A nice coffee maker so that you don’t buy coffee out?  An extra refrigerator or freezer so that you can buy in bulk and save or eat at home more?  These purchases could significantly reduce your monthly energy and food bills.

8. Consider a Home Improvement Project. While this one may encourage you to spend more and go into debt if your refund does not cover your expenses in this area, home improvement projects can increase the value of your home, which is especially important if you foresee a move in the coming years.  And if you do not move, you get to enjoy the home improvement that much longer.  Also, even in this economy, your home is not a depreciating asset like a car.

9. Finance your Own Business. Starting your own business is where the risk and reward really remain.  Put the money into something you could use to start a side business. You will be able to deduct the money next year, and begin a foundation for additional income.

10.  Pay Down your Mortgage. If you have no debt other than your mortgage, consider paying it down and save on interest payments.  If you pay $3,000 on your mortgage, which is at 4%, you will receive a 4% return on your $3,000 payment through interest payments you avoided.   That’s $120!  Of course, you May be able to invest your money at a higher rate than your mortgage rate.  If so, consider doing that instead.

Bonus.  Of course, you can always donate a portion of your tax return to charity. The more well off you are, the more you should be able to afford to give to charity, so the sooner you become wealthy, the sooner you can help others more!

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