Last year, the IRS reported it was giving out more than $305 billion in tax refunds, with the average refund being almost $2,5001. For 2021, the tax deadline was extended to May 17th and many people will be receiving their refunds soon. There are plenty of ways to spend it- such as paying down debt, building your emergency fund, or investing it. If you plan on receiving a refund, here are some suggestions.
Pay Down Debt
If you have high interest debt, use your tax refund to start paying it off. Ideally, pay down the debt with the highest interest rate first. If you are debating between paying down a 6% car loan or 17% credit card loan, paying the one with the higher interest rate would be a good idea. The sooner you can be debt free the better. You cannot truly experience financial independence if creditors are following you.
Establish an Emergency Fund
Ideally, we recommend everyone to have 3-6 month worth of expenses in cash. This means having that amount in your checking/savings account where it is easily accessible. It’s a good idea to do that because there are plenty of things that are infrequent but costly. These are things like car repairs, home maintenance, healthcare expense, or loss of income. We know these will most likely come up at some point, but we do not know when. Having a sufficient emergency fund in place will help you stay on track and prepare for these situations.
A common goal is to save 15% of your income. If you are saving less, it may be a good idea to contribute to your retirement savings. You can make contributions to your Roth IRA or taxable account. For many clients, you may have heard us refer to your taxable account as “the bridge”. This account can serve as a back up to your emergency fund and is normally the one that early retirees use first for expenses.
If you are doing everything right already, take this opportunity to treat yourself. This could be shopping, going out to dinner, or maybe even donating. You can’t save all your money and you shouldn’t feel guilty spending it. I’ve always been a big fan of the phrase from Warren Buffet, “Do not save what is left after spending, instead spend what is left after saving.” If you hit all your savings goals, spend what is left over on whatever brings you the most enjoyment.
As always, call our office at 847-550-6100 with any questions or schedule a free consultation to address your long-term financial 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. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy ensures success or protects against loss.