With the changes that came along with tax reform, some individuals aren’t getting the tax refunds they were expecting. If you expect to be one of those who owes money this year, consider taking a second look at your tax withholdings so you are better prepared next year.
If you’re one of the lucky ones, you may have already received your tax refund for this year and are thinking about how you’ll spend it. For those of you who haven’t spent your returns, we’d like to do the financial advisor-ly thing, and suggest a few options for ways to maximize the benefits of your 2018 tax refund.
Pay Down Existing Debt
If you have credit card debt, a car loan or even a mortgage, it could be very beneficial to put a chunk of that tax refund towards your outstanding payments. As you likely know, the biggest issues you’ll face with debt is that the longer you wait to pay it off, the more total interest you pay. By paying off your debt early, you’ll pay less to the creditor overall, saving you money in the long run. We recommend paying off the debt with the highest interest rates first, as this will save you the most money over the long-term.
While it may not be the most fun or flashy use of that government issued check, it could be the option that gets you the most bang for your buck in the near term.
Put It Away in a Savings or Investment Account
Another way to increase the value of your tax refund is by investing it. If it’s not money you need now and you’re looking to get the most value possible, this might be the best option for you. By investing that newfound income over a period of 10, 20 or 30+ years, the power of compounding interest can help you make the most of your refund and could help secure the retirement lifestyle you want.
Pad Your Emergency Savings
Now, this might not be a strategy that actually increases the value of your refund, but it would be putting it towards a more valuable cause. It can be tempting to spend that check on something fun. Who hasn’t experienced the money burning a hole in their pocket sensation?
We recommend that everyone have enough money saved in a liquid account to cover between six to nine months of expenses. Now, for some of us that may seem like a lofty goal, but by putting your tax refund towards that goal, it could become more attainable.
No Matter What You Do, Think it Through
A large influx of money can lead us to become emotional. We get excited and start thinking of ways we could use that money to enhance our lives or treat ourselves to little luxuries. What we are advocating for is that you really take a moment to reflect on how you can use your refunded tax payments in the best possible way.
Whether you decide to use your refund for a vacation or retirement savings, we urge you to make sure that whatever that money goes towards, it reflects your values and brings you one step closer to meeting your goals.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Bruce Helmer, a founding member of Wealth Enhancement Group, has been the host of the “Your Money” Radio Show for more than 20 years. He is also featured weekly on the Twin Cities CBS affiliate WCCO, and has penned three financial advice publications.