At this time of year, many working Americans have filed their Federal and State income tax returns. For most tax filers, the process of filing a tax return has become the first step toward receiving back the excess money they’ve paid in taxes every year. In fact, recent data shows that over 75 percent of all income tax filers receive a refund check, and the average amount was just over $3,000. So, let’s look at three ways to put our tax refund windfall to work for yourself or your family.
At the moment, I will refrain from asking all you wonderful tax-paying folks why you insist on making an interest-free loan to anyone (Government notwithstanding) on an annual basis. Instead, let’s consider three of the Personal Financial Planning needs commonly faced by most families, and develop simple strategies to put your return-of-capital (aka: your refund check) to work.
Your process should begin with an honest assessment of your current needs and cash flow position. Most experts in the field recommend that a family have essentially a rainy day fund the rough equivalent of anywhere from three to six months of recurring monthly expenses. If you rainy day fund is lacking, then this would be a perfect choice to park some or all of the return-of-capital.
The reduction of any outstanding credit card debt can and should be a very high priority to any person or family. Although we all have debated the very tempting invitation to buy an item today and pay for it over time; eventually, we all learn that paying for smaller items over a long period of time can be very costly due to high interest rates, and the compounding effect of paying interest on the interest. Whether you believe that paying off highest interest rate credit cards is the important priority, or paying the lowest balances to zero and attacking the remainder of your credit card debts in a cascading approach is the best method, both strategies represent very useful and prudent uses of a tax-return check.
Tax advantaged retirement savings accounts
A deposit into an Individual Retirement Accounts (IRA) is a fantastic way to put the return-of-your capital to work when addressing a longer term goal, like retirement. Of course the longer your investment horizon (which is to say, the more years you have to invest before needing to use IRA proceeds to help fund your retirement) the less conservative you can be with the risk profile of investment choices in your IRA account. Investment options are vast, but research shows that investing in a well-chosen mutual fund that’s tied to a stock index like the S&P 500, DOW Jones Industrial Average, or the NASDAQ often leads to better performance and higher returns over time than active management.
Phillip Dawson is the Academic Program Manager for Post University’s Finance program. Dawson holds extensive leadership and executive experience in diverse industries including medical supplies, insurance and risk management, financial services, asset allocation, strategic marketing, business development, brand equity, cost efficiencies, productivity and profitability. Dawson earned a Bachelor of Arts in Psychology from Connecticut College and a Master of Business Administration in Finance and Marketing from the University of Connecticut.