It’s that time of year when you are filing your taxes and hoping that the federal and state returns have a belated holiday gift waiting for you when you sign on the bottom line. Whether your refund is $500 or $5,000, you will want to make sure you have a game plan for your new found cash or it’s likely it will end up in the wonderful world of consumer shopping. As a side, remember not to get too large of a state tax refund as refunds from your state become federally taxable the following year. Who wants to get taxed on their own refund? Here are seven your smart money moves strategies for your federal tax refund.
- Pay Down High Interest Rate Debt- Even though it might be sexy to invest your money or buy the latest tech gadget, the first place that refunds should go is to pay off debt. Especially high interest rate debt. This means all credit cards, high interest rate student loans, high interest rate auto loans, or anybody you owe money to at this time.
- Build A Rainy Day Cushion- Many people don’t have a sufficient cash reserve, especially one that would cover three to six months of their monthly expenses in the event that they have an emergency or an opportunity. Set up a separate savings account or money market account at your bank to build up this reserve. If you think you are going to touch the money and you can’t trust yourself, go to your financial advisor to set up a money market account as part of a brokerage account.
- Start A Retirement Account- If you already have a Traditional IRA or Roth IRA, you are ahead of the game. If you don’t have one of these accounts, what a great opportunity to get one set up for yourself. You should double check the income limitations for a contributory Roth IRA, but you can always contribute to a Traditional IRA no matter what your income. Depending on your situation, you might want to look at a strategy called a “back door” Roth IRA.
- Invest In Yourself- It’s hard to measure the ROI on taking a one week executive leadership course or investing in a sales training program, but making an investment in something that will help you generate more top line revenue for your family is always a good idea.
- Make An Extra Mortgage Payment- Most people don’t realize that Microsoft Excel has a free amortization tool in its suite of financial templates. Imagine you make just one extra mortgage payment today. What effect would that have on the life of your mortgage? If you did this for five or six years in a row, could you dramatically shrink the life of your mortgage? Making just one extra mortgage payment a year with your tax refund is another great strategy with your tax refund.
- Start A Small Business- Have you ever heard stories of people who investing just a tiny bit of money and created millions of dollars of wealth starting their own business? Just look at the founders of companies such as Subway or Kinko’s. If you have always wanted to start something small on the side out of your house, this could be a great way to invest your money to create additional family income. Remember, most small businesses fail, so you need to be prepared that you could lose all of your money.
- Buy Something For Yourself (NEVER more than 50% of your refund)- Some of you may be salivating to get that tax refund so you can fix up your kitchen or your bathroom. Or perhaps there is a trip that you have always wanted to take. For some of you, it might mean a small shopping spree or buying that pair of shoes you have so desperately wanted over the past year. Although not my first choice, as long as you don’t spend more than 50% of the tax refund, buying something small could be an option for your tax refund. Never spend more than half of your refund in this category.
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Ted Jenkin is a frequent guest columnist for the Wall Street Journal and Headline News Weekend Express. He is the co-CEO of oXYGen Financial. You can follow him on LinkedIn @ www.linkedin.com/in/theceoadvisor or on Twitter @tedjenkin.