Amidst shelter in place many of us still managed to file our tax returns. If you are fortunate, you got a small refund instead of owing. If you got a large refund, it’s time to look at what’s going on with your withholding. Some folks got both a tax refund, and a stimulus payment due to the COVID-19 pandemic. If that’s you, are you wondering what to do with your tax refund or Coronavirus stimulus windfall?
Let’s keep a few things in perspective. If you need your tax refund or stimulus payment to stay afloat right now, then use it. It’s important to keep a roof over your head and food on your table. If not, and you have some flexibility as to how to deploy this windfall, consider the following.
First, pay off debt. Look at your debts and see if the refund you are getting is enough to completely payoff a high interest debt. If it is, do that! Then use the monthly payment amount you were making on that debt to make a larger payment on your next high interest debt. Work with your financial planner and pay off the debt that gives you the greatest bang for your buck and you’ll be debt free in no time. A financial planner can tell you which debts and in what order provide the shortest payoff time and/or saves you the most in interest depending on your goal.
Second, build up your emergency fund. If you are a two-income household, the emergency fund should be the equivalent six months of total expenses, at minimum. This includes all discretionary and non-discretionary spending. If you are a single-income household, you should really consider having nine months, minimum, of total expenses as an emergency fund. Your tax refund can add nicely to your cash stash. Single, or married, having up to a year’s worth of expenses in accessible cash is always a good idea. But you should at least have the minimum of six months for two-income households and nine months for single-income households.
Third, start or add to your investments. If you have your debt under control, and your emergency fund is sufficient, now is the time to add to your investments. Your tax refund, or stimulus, could be just the ticket. Consult your financial planner and decide whether you should be starting, or adding to, an IRA, a taxable fund, or a Roth account. This year, you can make contributions to certain accounts, like an IRA, up until July 15 even if you have already filed your tax return. Confirm with your financial planner if that’s available to you.
Keep in mind that using your refund for one of the recommended tips does not have to be an all or nothing approach. You should use a small amount to reward yourself and do something like make a nice dinner, a day retreat, or take a cooking class with a friend or significant other even if it’s virtual. Another idea would be to look at the cost of an annual streaming service and prepay for a year’s worth of entertainment. Just don’t blow your windfall on things you don’t need and won’t notice in a few weeks.
As an independent Certified Financial Planner™, I can help you decide how to put your windfall to work. Contact me and let’s get started! #talktometuesday #refund #Hireaplanner #bonus #income #cash #CFPPro #foundmoney #stimulus #pandemic #COVID-19 #Coronavirus