Are you getting a tax refund this year? Have you planned out how to spend it? If the answer to the second question is no, then we urge you to read on.
Don’t treat your refund like found money, remember, you’ve been paying towards this all year long in the form of taxes. Rather than treating it like going to the grocery store hungry, have a plan in place prior to that refund showing up.
“A goal without a plan is just a wish.” – Antoine de Saint-Exupéry
- Start with a crisis fund. Keep one month of expenses in liquid savings for true emergencies, like hospital bills, your roof caving in, or discounted Beyoncé tickets. (Okay – not that last one.) The crisis fund should be separated from your checking account so you reduce the temptation to spend from it. You can use IRS Form 8888 to designate your refund to a particular crisis fund account.
- Get matched. Have an employer match for your 401(k) or 403(b)? You just landed on the only free lunch in the investing world. If you plan on sticking with the company and they would keep matching contributions in your name based on the matching vesting schedule, don’t let free money pass you buy.
- Tackle high-interest debt. Prioritize paying down any debt that has a high-interest rate, generally 7% or higher. The amount you could earn investing is unlikely to rival the cost of the interest payments.
- Stash away a freedom fund. Put away enough cash to cover you for at least three months. This will allow you the freedom to go – or be let go – from a job without the added financial stress.
- Stockpile a retirement fund. Aim to save 15% of your income for retirement (or whatever you can afford). Outside your employer-offered retirement, open an IRA, too. When it comes to retiring, time is your best friend – and everything helps!
- Invest in other long-term goals. Once you’ve got everything else covered, now you can think about those long-term dreams: a loft in a great neighborhood, paying for your kids’ college, sailing around the world.
Camille Williams has been preparing taxes since 2011 and has worked for several large tax firms including Jackson Hewitt and Liberty Tax Service. Ms. Williams was compelled to start doing taxes as a way to offer a tax service that operated with integrity due to the sensitive information that tax preparers handle.