Your Tax Refund: What to do?
Hmmm. What Should I Do With This Year's Tax Refund?
Pay Down Debt? Saving and investing are habits, just like spending and debt are. So, even if you think that paying down debt is the best idea – starting a new habit of investing in a tax-protected (and debt collector protected) 401K, IRA or health savings plan is an even better plan. If you are honest about how long you’ve been trying to pay off debt before you start saving/investing, you know that the issue is more complex than just paying off debt. “Paying yourself first” really works, and that is why investing in Chipotle (or Whole Foods, or a solar company, or Google, or…) is a great idea. Transition out of debt consciousness (thinking first about making the debt collector happy) into wealth consciousness (thinking first about compounding your own gains and beautifying your bottom line) starting with this refund, here and now. Once you do that, then you can (and should) address why your budget is out of whack (which is why you are in debt in the first place) and how to reconfigure your life to become debt-free.
Take a Vacation? Did you know that Americans spend over $3 trillion on health care every year? 75% of health related costs are from preventable diseases, which are aggravated by stress. Clearly, fun and R&R are part of the cure. If you’re thinking that a vacation is the right answer, it is. A little time off and adventure could actually translate into more income. Could that infectious smile and empowered attitude earn you a raise and a promotion?
Should You Save Your Refund or Invest It? There are a million reasons to invest your tax refund, including the fact that if you started at 20 and invested $4,000 religiously (and smartly) every year, you’d be a millionaire before 55, thanks to the power of compounding gains. If you save your money (at 0% gains), you’ll have $160,000 at the end of 40 years. If you invest it, and that earns a 10% gain (what stocks and bonds have done for the past 30 years), then you’ll have over $2,000,000 at the end of 40 years. Get smart about investing so that you are protected, while profiting. When you invest in financial literacy, and know how to optimize your return on investment, you can achieve your goals.
IRA Annual Deposit
Retail Therapy? When you spend your tax refund on shoes, you might end up living in one. Not so cozy. Just ask the Little Old Woman Who Lived in a Shoe. Yes, you have to look the part for the job you want, but don’t use that excuse to justify being a shopaholic.
Paying Off Your McMansion. If you can qualify for a good, fixed loan, you are receiving a historically low interest rate – in the 4% range. That’s almost free money – which means there are not a lot of reasons to pay the loan off early. If you have a high-interest loan and lousy terms on your mortgage, then paying off your home could be a great idea. A financial team (Certified Public Accountant and a Certified Financial Professional) can offer important tips to help make the right choice.
Your Niece’s Cupcake Startup. It’s always tempting to take extra money and invest it in a great idea. However, most great ideas don’t become great, lucrative businesses. If you think it might be fun or educational to fund a startup, then go for it. If you think it will make you rich, reread the saving versus investing chart above! That safe and steady plan is a better bet than starting a business in the hopes of striking it rich (unless you become one of the exceptional entrepreneurs, like Bill Gates, Steve Jobs, Kay Koplovitz, Oprah, etc.).
It’s easy to think that paying down your debt, particularly high interest debt, is the right answer, especially if you are being hounded by a debt collector. However, that is the “make everyone else rich” plan (debt consciousness). The debt collectors are not going to take up a collection to help you out if you lose your job or retire. So, it’s your job to provide for yourself first, and then make bold and effective adjustments to your budget, while addressing the best way to pay down debt – prioritizing the high interest debt first.
And sometimes, the right answer is to reward yourself with a stress-reduction adventure, even when the numbers, on paper, don’t seem to add up. Health is wealth! When you consider how much Americans spend on health care, a vacation becomes a great investment!
About Natalie Pace
Natalie Pace is the author of the Amazon bestsellers The ABCs of Money and Put Your Money Where Your Heart Is (aka You Vs. Wall Street). Learn more at NataliePace.com.
The information presented here is based solely on the author’s views and does not express the observations or opinion of Rainbow Light.