What To Do With That Tax Refund

There are few days of the year that illicit as many different emotions from people as does April 15.  Tax Day – cue the evil music.  We sit with our accountants, or the Jackson-Hewitt people at Wal-Mart, with minds racing and heart rates soaring.  Did we remember all of our deductions?  Did I withhold enough?  What about that inheritance from my grandmother?  What if I have to PAY?!  The list of questions and emotions can be endless.  If we’re lucky, we get a refund. If we’re REALLY lucky, we get a good refund!

So far, the IRS is reporting that the average tax refund in 2015 is $2,800. (Um, would someone like to share some theirs with me, because this was not the case for me?)  The question is what will most Americans do with that $2,800 burning a hole in their pockets?  There are actually several practical, and fun, things we can do with that money.

EMERGENCY FUND — If you don’t have one, start one.  If you already have one, beef it up.  It doesn’t have to be all of it, just contribute.  In case you didn’t already know it, your emergency fun is for e-m-e-r-g-e-n-c-i-e-s.  And, sadly, the cutest pair of wedge sandals or the hottest new lawn mower on the block doesn’t constitute emergencies.  This is your fund for those out-of-nowhere disasters that strike you when you least expect it – your water heater bursts, your car completely dies, you lose your job, etc.  Your “rainy day” could come at any time, so beef up that fund.

REPLACE AN AGING APPLIANCE WITH AN ENERGY EFFICIENT ONE – If you’re fortunate enough to get to view your tax refund as “found money” consider upgrading an older appliance in your home with a newer one that is more energy efficient and will save you money in the long run.  Great options for this are a new refrigerator, a new water heater (or a water heater sleeve depending on where yours is located), an HE washing machine, or my personal favorite… a tankless water heater.  Cold showers are a thing of the past with one of those bad boys!  If you live in an older home, new windows can be a great investment that will drive down your monthly heating and cooling bills.

MAKE A MODEST UPGRADE – If you’re a saver, but want a little treat try slicing off a little piece of that refund for something affordable.  Maybe it’s time for an upgrade to your cell phone or tablet.  Lace up some new running shoes or get the GPS watch you’ve been wanting.  There are lots of fun and affordable ways to reward yourself with a little something while saving the rest.

REFINANCE YOUR MORTGAGE – Mortgage rates are at historical lows.  It would be a very smart investment to use your refund to pay the closing costs of a refinance (if you were to have any).  A refinance could allow you to either reduce your monthly payments or pay off your mortgage sooner.  Either way, you are in a win-win situation.

CONTRIBUTE TO YOUR IRA OR A 529 SAVINGS PLAN – Regardless of your age, investing in your retirement is always a smart investment.  The earlier you start saving for your retirement the less you actually have to invest over time.  It just makes good sense.  A 529 is a college savings plan for your child.  It’s a great way to begin building that future for them.

PAY OFF DEBT – If you’ve got any credit card debt or other ongoing debt, consider either paying it off or making a sizeable payment depending on your circumstances.  Paying off debt allows you more money in your pocket each month, helps you increase your credit score and in general relieves a huge burden of stress.

TAKE A VACATION – Okay, so tax refunds don’t have to be all business.  You could consider it an “all- expenses paid” investment in your family or personal well-being.  Whether it’s a trip to a place you’ve always wanted to go to, a second-honeymoon or that long awaited family trip to Disney World, with the proper planning, you could actually walk away from your vacation without having touched your regular budget.  How’s that for exciting?!

Food for thought: your tax refund isn’t money rewarded to you by the government.  It was yours to begin with.  If you regularly get a sizeable amount refunded to you – consider changing your withholdings.  Sure it’s nice to get that chunk of money, but it might also be nice and beneficial to get keep that money in your pocket in the first place.  Before making any decisions on how to spend your tax refund, we suggest meeting with your local banker, wealth management advisor, or mortgage loan officer to get all the details on your options.

Taxes… they are just so emotionally taxing.