What should to do with your TAX REFUND this year??

in #life5 years ago

Receiving a large tax refund is exciting and it may be tempting to go out and spend it right away without any thought. Tax refunds tend to burn a hold in ones pocket!

The first thing you should do when you receive your tax refund is wait a week before touching the money for anything.

Having a "cool down period" where you do not touch the money will allow you to avoid many of the impulsive purchases/decisions that you may make when the refund is received. Many people often regret those impulsive purchases later on when the excitement wears off!

Now that you have waited a week many of those urges to spend have probably diminished and now you can really decide what to do with your tax refund.

There are many smart things that one can do with a tax refund no matter the size. Below I will discuss a 3 great ways to apply your tax refund to improve your personal financial situation!

  1. PAY OFF THAT DEBT! If you are carrying a balance on a credit card which usually charges interest in excess of 15% you should not even think about spending your tax refund on something like a new TV since you have not even paid for your previous purchases and it is costing you. Use the money to reduce the credit card debt which will eliminate a large chunk of interest that you are paying each year. For example: If you carry a balance of $2,000 on a credit card charging 15% interest you are paying approximately $300 per year in interest! Lets say you receive a $2,000 tax refund and it is used to pay off that credit card, now the interest expense drops to $0 and you most likely will have saved your self more than $2,000 in interest expense if you are only paying the minimum balance due on the card!

  2. SAVE THAT S**T! If you do not have an emergency fund you are setting yourself up for disaster if lets say an unexpected $2,000 car repair comes in or an unexpected medical bill. If you have no emergency fund you will be forced to most likely take on credit card debt and as mentioned above this can be costly. Using your refund to start or add to an underfunded emergency fund will help you avoid these situations. It is recommended that you have 3-6 months of living expenses socked away in an emergency fund, if you do not have this better think twice about blowing your refund.

  3. RETIREMENT! Have you contributed to your retirement accounts this year and are those contributions enough to meet your retirement goals? If the answer is no you may want to consider using your refund to contribute to your IRA or other retirement account. Not saving enough for retirement is an issue that many Americans have. There are statistics that suggest 1/3 Americans have less that $5,000 saved for their retirement which is shocking! If anyone thinks they can retire comfortably on that they are CRAZY! Some sources reference that for a retiree to generate $40,000 in income without working they need a little over $1,000,000 saved! That may seem like a ton of money and not achievable but it is! Running a simple retirement calculator can do this for you. I ran a simple scenario assuming the following criteria:

Age: 30, Retirement Age: 65, Starting Account Balance: $0, Inflation Rate: 3%, Annual Contribution Increase: 3%, Before Tax Return on Retirement Assets: 8%

Results: In order to reach 1 Million Dollars at age 65 you need to start contributing $5,540 increased by 3% each year in order to reach 1 Million at age 65.

Now one factor the example above does not take into account is that the fact that 1 Million today will not have the same spending power in the future due to inflation. So to achieve the purchasing power of 1 million today in 35 years when the person in the example above will retire they actually need to save more to factor this in.

How much more you ask? According to the same retirement calculator and parameters above you will need to start out with $15,587 per year increased 3% annually in order to achieve a balance in retirement at age 65 equivalent to a 1 million dollar balance today! The value of the account must be about 2.8 million to achieve this. So if you have not started saving it is very important that you run through your own calculations and start saving as saving. See below for a visual chart from my example above and also a link to the website I used so that you can run your own simulations.

The graph below shows the chart to reach 1 million (Not the chart to reach the $2.8 million)

You can do your own calculations here:

https://www.fool.com/retirement/2017/06/17/calc-how-long-will-it-take-me-to-save-a-million-do.aspx#top

As you can see there are some highly beneficial actions that you can take with your tax refunds that you receive this year! This is not a comprehensive list and there are many more beneficial actions that you can take but I just wanted to go through a few to get you thinking!

If this post has been beneficial to you please upvote, resteem, comment and follow to support future content!

Disclaimer:

This article is for informational purposes only and should not be considered legal, financial, tax or investment advice. Please consult your own adviser.

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