Make a Bucket List for Your Tax Refund

“It’s our busiest time of year.”

That’s what a local flooring contractor recently told one of my researchers. As he explained, “Everyone’s busy spending their tax refunds.”

It’s not surprising… According to one survey from January, 43% of folks planned on putting refund money into savings, 42% wanted to pay off debt, 13% wanted to buy a physical luxury, and 9% wanted to fund a retirement account.

If you notice, that adds up to more than 100%. That’s because many participants had more than one plan.

That’s a responsible way to look at any kind of financial windfall. In fact, many folks like to split refunds into three “buckets:” Savings, debt payments, and “fun” money. But I’d like to add in another bucket: preparation money.

Here’s what to consider for each of these buckets…

Bucket No. 1: Preparation. Before you plan anything else, you want to make sure you either establish or replenish your emergency fund.

If you remember from our issue last year, an emergency fund involves having the funds available to pay your expenses should you face an accident or job loss. Everyone will need a different amount, but generally about enough to cover six to nine months’ worth of expenses. That varies based on your marital status, job security, and health. Take the time to evaluate your needs and set aside the appropriate amount.

Also in this bucket – getting your affairs in order. If you’ve put off writing a will or setting up a power of attorney, now is the time to do it. And several websites including LegalZoom and Quicken WillMaker make the process simple and affordable. Don’t put this off and leave your heirs with uncertainty when you die.

Bucket No. 2: Savings. Now, many people simply put their refund into a savings account and let it sit there. They might think this is the best option for savings, but it isn’t.

A better option is to put that money to work. Putting it into a Roth IRA or a trading account means you can start earning interest. And with the typical savings account only paying less than 1% right now, you’d do far better investing in some safe mutual funds instead.

In fact, the average return for the current open positions in my monthly newsletter, Retirement Millionaire, is 71.3%. If you’re not already a subscriber, get started now and find ways to make your money work for you. Click here to learn more.

Bucket No. 3: Debt payments. This is a healthy use of your refund as well. Paying off debt sooner means fewer interest payments and more savings in the long haul. If you don’t know where to start, consider paying off the highest-interest account first.

You can also try to pay the lowest balances first so you can close out those accounts. But it depends on your situation. We discussed both strategies in an issue of The Sunday Refresh, our weekly e-letter headed up by two of my researchers. You can read it right here.

Bucket No. 4: Fun money. Home improvements would count toward this bucket. And you may be able to deduct some improvements the year you sell your house. These costs can add up, so make sure to keep track of any capital improvements like central air and a home security system. If you install any energy-saving products, they might also earn you a tax credit for next year. Just be sure to keep the receipts.

Taking a portion of your refund for self-care is ideal. Putting it toward something like a few massages is a great way to improve your health, as I’ve said for years. You can also invest in classes to keep your mind sharp or take the time to start a garden… I’ve often said gardening is great exercise. And it’s a good time of year to start planting vegetables.

One final point… If you do receive a large refund, keep in mind that you’ve overpaid your taxes during the year. That means extra money every month that could have gone to an investing account and earned interest. You’re losing all that time value. Take a few minutes to re-evaluate your withholding amounts to avoid the issue next year.

What We’re Reading…

Here’s to our health, wealth, and a great retirement,

Dr. David Eifrig and the Health & Wealth Bulletin Research Team
April 19, 2018