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Getting a Tax Refund? The Good, the Better, and the Ugly

| April 07, 2020
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Tax day may be delayed this year, but it’s never too soon to start planning. If you’re like the 73% of Americans who received a refund last year,you’re looking forward to getting money back and thinking about how best to use it, or what might be fun. There are many ways an extra infusion of money can enhance your life, but some of them are better than others. As with most kinds of money management, looking at the long-term benefits is the most important place to start. Our suggestions fall into three categories: the good, the better and the ugly. 

1. The Good: Pay Down Debt, Start an Emergency Fund, Invest
According to Bankrate.com, the average refund was a little more than $2,800. That amount sounds exciting, but you already know what to do with it. The average U.S. household has more than $7,000 in credit card debt, so paying down your existing debt will save you money and put you on better footing to weather whatever volatility the future may hold. Another benefit is that you will have more disposable income to put towards paying down any additional debt and staying current with your obligations. 

No credit card debt? Your first step should be to be sure you have an adequate emergency fund or add to your existing one. A good benchmark is to have three to six months’ worth of expenses put away. There’s a psychological benefit here, too. People with robust emergency funds report that they are more confident about their long-term financial goals.4 

Emergency fund all set? Be sure you’ve contributed as much as you can to your retirement accounts. If you would like help with an evaluation of your financial situation to examine your mix of savings and investment accounts, please call the office for an appointment.

2. The Better: Make Improvements
Knowing you’re on sound financial footing (see #1 above) means you can look to other types of investments, such as investing in your home, your community, or yourself. If you own your own home, is there an upgrade that would improve its value (careful—not all upgrades do), increase convenience, or enhance its safety? Be sure to carefully evaluate your options and get estimates before committing to proceed. 

Is there a cause close to your heart in your community that could use a boost? Nonprofit charitable, civic, and arts organizations all contribute to life in your community and even beyond. Even a relatively modest donation can have a large impact on organizations working to benefit youth, seniors, neighborhoods, and your community in general. In addition to improving the quality of life for you and your neighbors, it creates a virtuous circle that can spur others to invest in their own communities as well. 

Finally, you can invest in yourself. First and foremost, find out if taking certification training, or even just a pertinent class or two, will help invest in your job performance. Many professional certifications are available with less work and expense than obtaining an advanced degree and can provide substantial rewards both in salary and job satisfaction. On a more personal note, a yoga class or personal trainer can jump start your exercise experience and put you on the road to better health. And don’t forget the importance of hobbies to enrich your life. It’s never too late to take up hobbies such as painting, photography, bird-watching, cooking, or even learning a new language. Any of these options can help give you an enriched life for years to come. 

3. The Ugly: Lifestyle Creep
Tempting as it is to use your refund to have a little fun, it can become all too easy to let a little fun turn into a regular increase in your lifestyle that is hard to support, and can lead right back to credit card debt or using up your emergency fund. And that’s what we mean by “ugly.” Still, the old saying “all work and no play…” applies as well. Here’s an idea: if you need to commit most of your refund to something practical (see #1 above), think about taking just 10% of your refund (okay, maybe 15%) and selecting something meaningful, and then making a commitment to save or invest the rest. Make it the start of a new resolution to pay yourself first, and your future self will thank you. Even in times of great uncertainty, there are smart choices you can make with your money. 

Remember that all kinds of budgeting, whether it involves your cash, your investments for the future, or your time, is best understood in the context of your complete financial picture.

If you want to review your financial strategy or discuss additional options, please call the office for an appointment. 

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