I’m a little odd. I love tax season. We have relatively uncomplicated taxes so it usually takes me less than two hours to file our taxes using an online program and we almost always get a respectable return. Every year we have the same battle: what should we do with our tax returns. It’s easy to talk about being responsible, but it’s a lot easier to spend that extra cash on a new toy or, preferably, a Disney vacation. If you are expecting a bit of money back here are some smart ways to handle that extra cash:
Five Smart Ways to Use your Tax Returns:
Pay off debt: Our goal for the next two years is to pay off all of our debt (including our car and student loans) so we can buy a house without having to worry about other debt payments. This tax season we were able to wipe out nearly all of the remaining balances on our credit cards and pay off some old medical bills. Using that money to pay off debt is a simple way to take a little weight off your shoulders and improve your credit score.
Create an Emergency Savings Account: If you’ve already paid off your debt, consider starting or adding to an emergency fund. This money is in place to keep you from taking on more debt when someone gets sick or the car goes caput. At minimum you should have enough money to cover your bills for 3 months. Ideally, you should work up to about 6 months.
Invest in your future: If you don’t have any debt to pay off and you have an emergency fund, consider investing the return in a mutual fund or IRA. IRAs allow up to $5,500 per year. Maxing out your investment ensures the most bang for your buck when you retire. The best part is that you cannot take cash out of here without 59 ½ without a penalty so you’ll be more reluctant to take away from your retirement cash.
College Fund: If you plan to contribute to your child’s college education, consider investing this money in a college fund. Specifically, your state’s 529 plan. The money added into these accounts accrue interest until your child withdraws the cash to pay for college. Some states have additional benefits and better rates so check with your state to find out more information. Benefits could include: tax-deferred investments, unlimited contributions and free money (through earned interest.) Check out this article to find out which states have the best plans.
Vacation Fund: If this cash is just a bonus use it for your vacation fund! According to an article in Psychology Today, taking an active vacation (golfing, swimming etc.) helps reduce job stress, promotes family bonding and communication and improves overall health. So if you can afford it, use some of that money to get away!
What do you plan on using your tax return for this year?