What Should I Do With My 2016 Income Tax Refund?
Tax season is a great time to revisit your 2016 Financial Resolutions. How much progress have you made? Are you on the right track? Have your financial goals changed? This is an excellent place to start when deciding what to do with your income tax refund.
Depositing your tax refund in a savings account or money market, separate from your checking account, is a good idea until you decide what you will eventually do with those funds. Whatever you do, take the time to carefully consider your options. Be thoughtful with your money, not impulsive.
What NOT to do with Your 2016 Income Tax Refund:
- Depositing Your Refund into Your Checking Account for “Safekeeping” - While I can appreciate the intent, I think we can all agree that comingling your tax refund with your checking account monies puts that “safekeeping” goal at risk. We all know how money from the checking account can dwindle away before we know it. Funds for “safekeeping” should be kept in a safe and separate account, such as a savings account or money market account. Such an account should yield a small amount interest and should not be accessible with the swipe of a credit or debit card.
- Frivolous Spending – I must confess, as a die-hard fan of “The Office” TV sitcom, I believe in having a “treat yo’ self” day every now and then. However, don’t throw all caution to the wind in doing so. Having extra money in your pocket can make you feel like you just can’t live without that new flat screen smart TV, expensive jewelry or that posh handbag. Tax refunds are often frittered away with little or nothing to show for it. If you didn’t NEED it before your refund arrived, you probably don’t NEED it now.
- Purchasing a New Car - Tax refunds often turn into unnecessary automobile upgrades, even when the current car is functioning just fine. Be sure you NEED a new car and that you can afford it. Being able to cover a monthly car payment, and being able to afford a new car, are NOT the same thing. That said, inevitably, cars eventually need to be replaced. Putting money in your savings account to go toward that future purchase isn’t a bad idea.
- Loaning Money to Family Members - Don’t become a bank to others, especially if your own financial health is not in great shape. While taking care of our own is something we instinctively do, be sure that you aren’t short-changing yourself in doing so. Remember, loaning money to relatives can be tricky because it can change the dynamics of your relationship, especially if the money isn’t repaid. A certain amount of guilt comes along with telling your relative that you just cannot give or loan them any money, especially if they know you are getting a tax refund. Keeping quiet about your tax refund can help avoid hassles and hurt feelings.
Financially Beneficial Strategies for Your 2016 Income Tax Refund:
- Reducing/Eliminating Debt - Unless you have a 0% introductory credit card rate, chances are that any credit card debt you carry month over month is costing you a bundle. If debt is weighing you down, using your tax refund to pay off, or pay down credit card debt, and/or other high interest rate loans, is arguably one of the best ways to use your income tax refund. If you have multiple credit cards with different interest rates and varying balances, focus on paying off the card with the highest interest rate first. Once the highest interest rate credit card/loan is paid off, shift your focus to paying off the credit card with the next highest interest rate. Eliminating debt is a great feeling, one that sticks with you well into the future.
- Establish/Increase Emergency Fund/Savings Account - Very few Americans have ample savings in their emergency fund/savings account. How much should be set aside for emergencies? The rule of thumb is to keep three to six months’ worth of living expenses in your emergency fund/savings account. In the event of a serious illness, job loss or other major crisis, it is important to have cash savings in place. When disaster strikes, having three to six months’ worth of living expenses in your savings account can help your overall finances from becoming a wreck. Perhaps you have recently tapped into your emergency funds to cover unexpected costs. If so, you can use your tax refund to build your savings account back up again.
- Home Repairs/Improvement - My honey-do home repair list is never-ending. Over time, things break or wear out around the house. Is it time for a new roof? Perhaps you need to replace the 18 year-old HVAC unit, put a fresh coat of paint on the walls, replace that leaky faucet, add a backsplash, or repair the wobbly banister on your front porch. Your income tax refund provides you with an opportunity to take care of home repairs and improvements. The results of this spending would last well into the future and, in some cases, could add value to your home.
- Save for Retirement – Most people just aren’t saving enough for retirement. Using your income tax refund to make a contribution to your retirement account puts you one step closer to the retirement lifestyle you envision. Depending on your age, goals, income level and whether you have already contributed the maximum amount to your retirement accounts, using your tax refund to get a jump start on Roth IRA contributions could prove beneficial in the long run.
- Vacation or Holiday/Christmas Club Savings –Relying on your credit card for vacations and holiday gifts can possibly result in carrying high-interest rate credit card debt forward for months or years to come. Consider earmarking your tax refund specifically for and upcoming trip and/or for holiday gift-giving.
Again, whatever you do, carefully consider your options. Take the time and purposefully plan where your income tax refund will go. Be thoughtful with your money, not impulsive.
By Wendy Ann Payne CSA, CEP®
Wealth Management Advisor and Founding Partner of Centurion Wealth Management, LLC
This content is for educational purposes only.
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