It’s that time of year again and with returns coming in the millions every day so are those returns being sent back to you. With the average return at $3,200.00 so far this year as of February 28th, according to the IRS.gov, what can you do to get your best return on investment with your tax return? However you approach your tax situation, if you are getting something back this year you should view the money as an unexpected windfall that you were not expecting and put the money to use for you. Three great strategies include:
Paying of your high interest debt:
The more debt that you carry, the more money you are taking away from your future self, if that is six months from now or forty years, if you are carrying balances month over month you are depriving yourself of future resources. Using this year’s tax returns to pay off your high interest debt should be your number one priority. Not only will paying off your higher interest debit provide your future self more financial stability, it could help improve your overall credit score by reducing your revolving available or credit utilization. With a better credit rating you can help yourself to lower loan rates in the future as well.
In basic financial advising we learn that clients should establish an emergency savings fund equal to three to six months of their living expenses. Savings for your emergency fund is one of the most important concepts in financial advising. Too often, an individual’s finances are ruled by their emotions and biases, we often overlook the boring future of saving for a rainy day when we can get instant gratification (something now). Unfortunately, no one can predict when an emergency situation might pop up, from the car breaking down to a medical emergency of yourself or a loved one; and if you don’t have the money set aside you may have to charge the expense on high interest credit cards or shuffle other bills around so that you can get back to work to pay those expenses off. Putting your taxes towards your individual emergency saving fund is a great idea.
Contributing to your retirement:
Funding your retirement each year is probably the most important thing your can do for your future self financially. Since you are treating your tax return as an unexpected windfall, using that money to contribute to your retirement will have your future self reflecting on how smart you truly are. While rates of return may fluctuate on your retirement account, the sooner you start, the more your money will compound, leaving you a bigger pile of money when the time comes to retire. With so many different types of retirement plans available to you it is important to do your research and talk with a professional advisor or your accountant when starting out to help find the right plan for you.
Keeping your long term goals in mind when making financial decisions is imperative, how you plan and prepare for your future is essential to creating a better outcome. Create and follow your budget and set your goals.
Regardless of your approach, tell me how you approach you taxes and your returns. Start a conversation and lets have a better money discussion.