What should I do with my tax return? I get this question a lot, and it’s important to understand the best methods to make the most out of your well-deserved return. Where your return is deposited is largely dependent upon your personal financial situation. Before you go ahead and splurge on a shopping spree, consider the checklist below and the reasons why you should take these into account.
1. Contribute to, or pay off your outstanding debts!
This should be your top priority. If you’re behind on a student loan, car payments, or credit card balance, you’re killing your credit score and could be accumulating an unnecessary amount of interest. Pay off these debts as soon as possible. For credit cards, consider an interest-free balance transfer card to help you through this process. Your credit history is crucial to proving how reliable you are to lenders. You WILL need to work with these financial institutions down the road. Help yourself now by getting good rates on a future mortgage or car loan, for example.
2. Top off your emergency fund.
I’m not sure what today’s official statistics are for how many people maintain an emergency fund, but I can tell you that 3 out of every 5 people I ask don’t have one. So what is an emergency fund? Put briefly, it’s an account balance you should maintain in a high-interest savings account in case an unexpected financial emergency comes up. These could range from losing your job, a car accident, personal injury, medical expenses, or a loss of your home or apartment. Help safeguard yourself from unexpected circumstances and try to maintain an emergency fund of at least 4 months of your salary. Spend some time soon to figure out what your monthly expenses are. Rent, food, health insurance, mortgage payments, etc. Make sure that whatever number you come up with covers these expenses, and then give yourself an extra $2,000 of a cushion. On average in today’s weak job market, it can take up to 6 months to find another equivalent job.
3. Put your money into a high-yield online savings account.
High-yield savings account APY’s don’t compare to what they were 15 – 20 years ago. However, if you’re looking for a guaranteed safe return on your hard-earned money, this is a very viable method. I recommend that every person maintain one of these accounts. Right now, you can open a NO FEE online savings account at a number of reputable, FDIC-insured financial institutions. American Express and Ally seem to be the cream of the crop in terms of no fees and the best interest rate. These two companies offer .90% Annual Percentage Yields on new savings accounts and there’s no minimum balance to maintain and no fee to open an account. Your only restriction is 6 transfers a month, which should be more than enough since you give your money some time to grow. Sure, there are higher-yielding accounts out there, but not by much. You might be able to find a 1.00% or higher, but there are usually fees associated, and the account management and customer service aren’t nearly as fluid. If you’re skeptical about online savings accounts, don’t be. These banks are able to offer higher interest rates because they don’t have physical branches so there’s less overhead. They’re also FDIC insured up to $250,000. I personally have accounts with both Amex and Ally and love them. Their mobile apps make it easy to track my accounts as well.
4. Look into a reputable mutual fund.
Depending on what type of investor you are, seek out a mutual fund that has a proven track record on a given preferred return. Do your research when considering any type of investment, but mutual funds, in general, tend to be safer in today’s volatile stock market. Look at where the majority of holdings are placed and ensure the fund management fee is reasonable. If investing may seem too aggressive for you at this stage, it doesn’t hurt to open an online savings account as mentioned above and begin to save to invest your money down the road.
5. Invest in your Health
Have some returns leftover? Why not put some of that tax return money towards a new gym membership, a yoga class, or buying more organic food? Many people never consider this option, but think about it. Down the road, your improved health habits now will allow you to enjoy more of the money you’ve been saving when you’re older. Spend some of your return on your health and become more active. In turn, you’ll be able to enjoy some new activities with your newfound energy.
6. Invest in your Home
Now might be the time to make some home improvements. Your house is an investment, so why not spend a little now to make it better for you and your family. Eventually, the improvements you make today will help you make a higher return on your property tomorrow.
7. Splurge a bit.
Okay, so now you’ve gone through my checklist of recommendations and you’ve contributed some of your return to a few of these suggestions. Still, have some money left? Enjoy it! Use the remainder of your tax return on a shopping spree or some good food with a friend or spouse. You’ve already helped yourself a little bit by securing your financial future above, so now it’s time to celebrate!
Remember that it’s a good idea to contribute some of your tax return dollars to the first 1 – 6 suggestions. Depending on where you are financial, not all of these may be applicable to you. In some cases, maybe you need to put the entirety of your return into paying off your debts. In others, you can spread it around between your emergency fund and a savings account. If you have debts, paying those off should be your top priority if you want to start down a financially sound road.
I hope these suggestions help you out. Have suggestions of your own? Tell us how you spent your tax return this year in the comments below!
