When people receive their tax refunds, it is difficult not to imagine just what you could purchase with this newly found and unexpected money. Some may think they need to buy a new expensive phone. Others may think they need to spend it on a vacation.
What they should be thinking is: “How can this money help me better my future?”
Here are a few smart choices one should use the money for:
-Pay down financial debt. If you have credit cards or loans with balances, you are paying extra money for nothing. The most similar act of paying interest on an outstanding debt is that of literally flushing money down the toilet. If you have debt, paying it down should be your first and only thought when receiving your tax refund.
-Prepay your mortgage. Putting an extra couple thousand dollars to your next mortgage payment will save you thousands of dollars in future interest and cut off months from when the house will be fully paid off.
-Invest. Put a good chunk of that refund into a Roth IRA. The current maximum you can contribute to a Roth IRA is $6,000 for the year 2015. If you never contribute to the IRA every again, that $6,000 in 30 years will become roughly $60,000! And because it’s a Roth IRA, no taxes will be imposed when you are eligible to take some of it out.
-Buy a car. If your current vehicle is on the outs, there’s no better time to trade up than when you have an extra few grand in your pocket. Better to spend it now than to spend it and not have any money OR a car when your current vehicle eventually does crap out.
-Build up an emergency fund. Let’s say you have no debt, have a working vehicle, and are investing enough for a good retirement. But what happens if something life changing occurs such as an uninsurable medical expense or your air conditioner bails at the beginning of summer. You’re going to need liquid money to access in those situations. If you don’t have an adequate emergency fund, now is the time to institute one.
-Invest in yourself. Is there a certification keeping you from being considered for certain jobs or promotions? Are you close to your degree, but you haven’t been able to finish because of financial woes? Now is the time to use the extra money to finish.
-Invest in your children. Even if you don’t have children, you can create some kind of college fund. Invest in EE Bonds with the U.S. Treasury. It is guaranteed to double in value in 20 years.
My one piece of advice for your tax refund is to not blow it. It may bring you temporary happiness, but a lifetime of financial stability is worth more by far.