So what should you do with that tax refund you might be getting, or already got?
Ha, Ha… okay but seriously, here would be my hierarchy of financial needs. It might help you think through your plans.
If you are barely making it, and LITERALLY have no savings to your name, then maybe take the first couple $1000 and park it in a savings account or money market (a good high yielding one can be found at salliemae.com.) Start that emergency reserve ASAP!!!
Now, what if you have your emergency reserve, or at least the start of one. Next on the list would be to take a good hack at any high interest debt you have. Anything you are paying over 7% on means paying it off will guarantee you a good return. Not paying interest is the equivalent of earning it! Of course start with the highest cost stuff first, if you have a credit card you’re carrying a balance on then it’s probably that! Or God forbid you have some kind of payday loan, pay that off yesterday!
So what if you’re in pretty good shape, and you have an emergency reserve, AND you have your debt in check, whats next? I’d say either a normal or Roth IRA contribution. With either one you’ll be saving tax costs; the normal tax savings now, and the Roth tax savings in the future. My general rule of thumb is, if you are making less than $100,000 a year then do the Roth, if over $100K go with the normal IRA. The idea is, if you aren’t paying much tax now, it’s possible you’ll be paying more in the future so you should do the Roth IRA, and the reverse for the normal IRA.
Next on the list… do you own a home or want to? Maybe your tax return should go into a fund that starts you moving down that path. If you plan to live in the same area for more than 5 years, and can handle the responsibility of ownership, it’s probably a good financial idea to own rather than rent (I have some hesitancy on that one given the huge run up in prices lately).
So you’ve checked all the boxes above? Maybe open that betterment.com account I’ve mentioned before. You can get an entire well diversified portfolio in one shot! Your money is at risk in the market, but over the long-term it should grow (if it doesn’t we’ll all be suffering together! ha ha).
What if you are one of those people who REALLY has your stuff together? Your emergency account is filled, you’ve got no debt, and you have a good investment portfolio outside your retirement accounts. What then? Well, maybe it’s time you start to move into some higher level stuff. Ascend the financial ladder a bit more. Maybe you can start saving a down payment for a rental property, dip your toes into some individual stock names to start learning more about the markets, maybe buy a lottery ticket with bitcoin/Ethereum, start a small business or something else that would require you to learn and grow in your knowledge of finance.
Wait did you say spend it? Okay, okay, we are all human and have to have some fun. To be honest, each year that we’ve gotten a refund, I’ve usually designated a portion of it to spend on something fun, but if you actually want to improve your lot in life and have less stress about money, make it a small portion.