Let’s face it. When it comes to taxes, most of us are indifferent. Some feel the pain of the loss from each check, while others cringe when its time to actually file. No matter where you fall on the spectrum, we get it. It’s not fun but it has to be done.
On the bright side, there is one main advantage to tax season and that is the infamous tax return. If you set up your claims correctly, there’s a high chance that you will receive a return – which means that there could be some extra money in your pocket.
However, before you spend it frivolously, we encourage you to take a step back and think about your goals. Yes, it could be easy to go ahead and press purchase on those shoes that you’ve had in your online shopping cart for awhile. But let’s think bigger AND ask ourselves the hard questions. Do I have a financial plan? How will my financial plan benefit from this purchase? What else can I be doing with this money that can potentially provide me with a greater return-on-investment?
Fortunately, i’m here to give you 4 financially-savvy ways that can help you “spend” your tax return wisely. Let’s jump in!
1. Open (or add to) your investment account
Is 2018 the year that you proclaimed you would start investing? Well, the good news is that we have a long way to go before we reach the end of the year. The bad news is that it’s already April! April signifies the second quarter, which essentially means that time is flying.
If you are new to investing, we recommend that you first start by becoming familiar with what investing is, how investing can potentially fit into your financial plan and the various types of investing options available. For example, our company helps all individuals build and manage their portfolios via currency trading. Right now, our focus is on one form of currency trading, FOREX, which involves the buying of one currency and at the same time selling another.
Many people are afraid to begin investing or simply decide to put it off due to lack of disposable income. I’m here to reassure you that there is no magical number. You can invest with $100 or $1,000. The goal should be to create the habit (of investing) and build your portfolio over time. There is also a special spot within investing called compounding interest. This is interest you earn annually that is added to your principal — so that the balance doesn’t just grow, it grows at an increasing rate.
2. Pay off existing debt
Remember what we just said about compounding interest? Well, in the last section it is highlighted as a benefit to you. However, when it comes to debt, interest can unfortunately negatively impact your overall balance.
If you have credit card debt, for example, paying it off can be the best investment you can make with your tax refund. Doing so delivers a guaranteed return on your money and decreases the amount of interest you were paying your lender. In short, they are getting less of your money with the account being at a $0 balance.
If you have multiple debt, my recommendation is to list them out and figure out which one has the highest interest rate. Since we’ve been discussing credit card debt, see an example below:
So let’s say you have two credit cards: one has a balance of $2,000 and an interest rate of 10%. The other credit card has a balance of $1,500 and an interest rate of 18%. While it may seem enticing to pay down the higher-balanced card, that decision can ultimately cost you more in the long run because of high interest rate of the other card. It is best practice to tackle the card with the higher interest rate so that you are reducing your balance AND reducing your payments overtime.
3. Build (or add to) your emergency fund
Life happens —and it’s usually when you least expect it. This is why it’s so important to have some money tucked away for any unplanned circumstances. A general rule of thumb is to put away at least 3 – 6 months worth of living expenses so that you can be covered in the event of a job loss, a sick child/parent etc.
If you can’t cover the 3 – 6 months initially, that’s okay. Be sure to at least open the account (which can be structured similar to a savings account) and then make a conscious habit to set aside money from each check thereafter until you are comfortable with the amount you see.
4. Consider property investment
Current homeowners and real estate investors are going to love this one! Think about that squeaky bathroom faucet that you’ve been swearing that you were going to fix. Well, let’s fix it now! The reality is, it has to be fixed and you can either pay now or pay later. This is especially important if you are planning to sell your home soon. Not only can it improve the overall quality of your life, but it can also potentially increase the overall value of the home.
Another financially-savvy way to use your tax return is to make an extra payment on your mortgage. That one additional payment can bring down the overall cost of debt.
Have you received your tax return yet? How do you plan to spend it? Did you use one or more of the recommendations above?