If you are looking forward for a huge amount of tax refund from the Internal Revenue Service, you should think diligently about how and where you should expend the money.
Approximately 90% of Americans are expected to obtain tax refunds this year of about $3,036, which is up by 10% from last year. That’s a large chunk of extra cold cash in your wallet, particularly if you are hardly living day by day, or don’t have any steady income at present.
Rather than frittering the check on a luxurious shopping or a one day splurge, it’s critical to place that check – or a significant portion of it – into an investment that will provide you long term benefits to secure your financial future.
This doesn’t mean though that you can’t take pleasure on the money. You just have to ensure that you establish a financial plan prior to hitting the best stores in town.
Diahann Lassus, co-founder of Lassus Wherley – a wealth management firm, believes that writing down your financial plan is a good place to begin. She thinks that the most essential factor in managing your refund is to reflect on where you will use the money and put it on paper. Lassus feels that for the most part, the dollars are higher in your head only than the real figure in your bank account, thus you end up spending more money than what you actually have.
Tax Refund Tips
The following are a few tips that will assist you in designing your financial strategy:
1. Pay your debts. The most overlooked thing when people get too thrilled in receiving their refund is paying their debts. However, the majority of your refund should go into this venue said Lassus.
Lassus explains that if you have large credit card debt, you must allot a much larger part of the refund to pay your debts off.
With the skyrocketing fees and increasing rates, debt is becoming more and more costly. So even if paying your debts is not a fun thing to do, you’ll have peace of mind when you begin eliminating each of them. And when you already paid them all, you’ll save more money for enjoyment as well as discretionary spending.
Lassus normally recommends recompensing your credit card with the highest rate of interest first. However, if you have a few cards with little interests on them, it will be more beneficial to pay back some of these initially, she said.
2. Prepare for a rainy day. Everybody should maintain at least three months worth of expenditures in a liquid savings account. Tom Orecchio of Modera Wealth Management believed that this is vital specifically if you don’t have a job or anxious if you can keep your job.
Most probably at some point in a year, you will have to pay a car repair, medical bill, or replace an appliance. Anticipating for a huge expense later can eradicate the anxiety off of your weekly wages and provide you extra room to breathe.
Aside from paying debt, Orrechio perceived that having sufficient short-term savings is the second most significant step to take after paying your debt off. He also suggests placing your money in a savings account with an electronic link, ATM access, or a debit card, or house some of your refund in a high-yield money market account.
3. Plan and save for retirement. If you have paid off all of your debts and you already established a healthy emergency fund, you can then save some money for retirement.
Orrechio recommends people to assess if they are eligible to open a tax-deductible IRA, or a Roth account to grow tax-deferred savings.
Finding the best IRA rates and placing as much as your refund to a retirement plan like this will permit you to build your retirement nest egg adequately, he said. At present, you are allowed to contribute as much as $5,000 per year in your IRA, and $6,000 if you are 50 years of age or older.
4. Invest for skills development. If you don’t have a job or you feel like you’ll likely lose your job later, using your refund money to learn a new skill is a great idea, Orrechio supposed. If you don’t have huge debt and you have saved sufficient amount of money, it would be beneficial for you to invest in yourself instead.
Orrechio suggests that you train for a new field or go back to school, purchase some pleasant clothes for job interviews, or take a course to enhance your resume as well as interview skills or any other things that may boost your chances of landing a job.
5. Purchase the things you need. If you are saving for a new residential property, then your tax refund should be allotted for the down payment.
If you are not thinking about any debt or you have a good sum of emergency cash with you, definitely, you have the option to use your entire refund for a huge purchase, Lassus believed. Even if you might find it irresistible to make prompt purchases with your money, placing it in a planned and beneficial purchase is a wiser choice.
6. Have fun. While you desire to pay your debts or establish a savings account with your tax refund money, it doesn’t indicate that you have to lock yourself inside your room. Ensure that you’ll get something for yourself to make you feel better, or secure your money in a retirement plan for the next 20 years.
You can check special tax season offerings from restaurants, retailers, spas, auto centers, and even hotels. Make sure that you look for the best deals in the market reserved particularly for Internal Revenue Service checks.