This is the time of year that many folks come into a mini-windfall of cash. If you are one of those folks, and you complain about not being able to save money, fund an IRA, add to investments, or pay down debt, this is a golden opportunity. That mini-windfall is a potential tax refund. Instead of envisioning all of the lovely, disposable, things you could buy with your refund, consider buying some financial peace of mind. Here are three things to do with this windfall that would be financially beneficial.
First, pay off debt. Have you recently accrued debt or are you carrying a credit card balance? If so, you are not alone. Look at your debts; is the refund you are getting enough to completely payoff a debt? If it is, this could be a good choice given the current high interest on most debt. You can then use either the avalanche or the snowball method to payoff other debts. Use the monthly payment amount you were making on that paid off debt to make a larger payment on your next highest debt if using avalanche, or your smallest debt if using the snowball approach. 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. As a financial planner, I can tell you which debts and in what order provide the shortest payoff time, or saves you the most money.
Second, build your emergency fund. During the pandemic we all learned that having extra cash is a good thing. If you are a two-income household, the emergency fund should be, at minimum, the equivalent of six-to-nine months total expenses. This includes all discretionary and non-discretionary spending. If you are a single-income household, you should really consider having nine-to-twelve months of total expenses as an emergency fund. Your tax refund can add nicely to your cash stash. We can discuss the best ways to hold a cash emergency fund.
Third, start or add to investments. If you have your debt under control, and your emergency fund is sufficient, now is the time to add to investments. Remember that old saying, “the best time to invest was 20 years ago. The second best time is now.” Your tax refund could be just the ticket to get you started or add to your investments. Consult your financial planner and decide whether you should be starting, or adding to, an IRA, a taxable brokerage account, or topping up another existing investment account.
A note about tax refunds… if you are receiving an unusually large refund (and tend to do so every year) now is a great time to meet with a financial planner to figure out why. You should be receiving a smallish-to-zero refund. That way, you are enjoying the benefit of your money all year and not making a free loan to Uncle Sam.
Keep in mind that using your refund for one of the recommended tips does not have to be an all or nothing approach. You may be able to split it up and use it for all three of the above tips. Be sure to use a small amount to reward yourself and do something like a nice dinner, a day retreat, a spa, or take a cooking class with a friend or significant other. 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 #tax #debt #investment #invest