Benjamin Franklin said there were only two things certain in life: death and taxes. The other certainty, is that for most recipients, the money will be gone almost immediately after they receive it. According to a 2019 tax return study by NRF, 65% of Americans will spend their returns on vacations, large purchases, or even a “shopping spree.” This seems normal right? The truth is that our unrestricted spending habits have robbed us of the opportunity to get ahead financially. So before your tax return burns a hole in your pocket, or your bank account, let’s talk about some ways to “stretch” your funds and create some solid financial habits.
Tip #1 Breathe
Federal Tax Returns present the largest, lump sum, cash payment that many of us see each year. We often have spent it, even before it ever arrives in our mailbox, or in our account. This habit of spending money in our minds, is exactly why it disappears so quickly once it reaches our pockets. One of the first tips to hold on to more of your return is to breathe. Simple right? Inhale, then exhale. Taking a moment to pause before we start imagining what we will do with this money will allow us to explore other opportunities with our money. Knowing your options gives you power over your impulses to buy something right now! Pause, then begin to think about how to make this money work for you.
Tip #2 Save For A Rainy Day
Saving the money from your tax return is one of the best, and most difficult things to do. The fact that we get so excited about our tax return is a cause to make us pause. Around the time our tax return comes in, we have started receiving the bills from the holidays. Credit card statements show our wild spending during the holidays. Bank accounts are depleted to try and pay these bills. As a result, the Post-Holiday spending remorse sets in, and we find ourselves spending our returns to try and pay off the bills. Normally I would argue that paying down debt is a good thing, except when we don’t have a cushion of savings. Your tax return can create a great balance builder to start a savings account. If you haven’t saved money recently, then saving anything, any amount, will be a step in the right direction.
Tip #3 Pay off a high interest debt
If you have money set aside to cover an unexpected expense, then it might be wise to consider tackling some debt. Depending on the amount of your tax return, you might be able to pay all, or a large part of an expensive monthly debt. Even paying down debt, will free up cashflow during the month and allow for more savings, or additional debt reduction payments. But what debt(s) do I pay off? There are a lot of strategies out there to consider; however I always lean towards which debt would bring you the most satisfaction to pay off? Seeing a debt disappear after you pay it off is both satisfying and empowering. When you make progress towards a goal, it builds confidence and helps you stay focused on your goal. The secret is to keep paying all of your debts on time, and use the money that you were paying on the old debt towards your next one.
Tip #4 Invest
Investing can be a complex and risky option if you are not an expert. However, in recent years, the platforms and offerings to invest have become more consumer-friendly, and make investing as easy as downloading an app. There are different types of investment options however, for beginners, I would look at low cost index funds that are broad and diverse. These funds can be found fairly easily using tools offered online or through an investment app. The point of investing versus saving is to create the opportunity for your money to earn more interest than a traditional savings account. The key here is to do your homework and choose an option that makes sense for you.
Tip #5 Save For Retirement
Everyone knows that saving for retirement is important. So why do so many of us avoid this important discussion. We have all hear that Social Security may not be around when we retire, so it is up to us to plan and save. Contributing towards an IRA or, Individual Retirement Account, is a great option to set aside money annually in an account that we cannot touch without a penalty until we retire. There are two options available to you for retirement savings; Traditional IRA and ROTH IRA. The biggest difference between a ROTH and a traditional IRA is how and when you get a tax break. The tax advantage of a traditional IRS is that your contributions are tax-deductible in the year they are made. The tax advantage of a ROTH IRA is that your withdrawals in retirement are not taxed.1
- Nerdwallet.com
Make the commitment to accomplish more with your tax return by investing in your financial future. Try to resist the temptation to “splurge” and instead, focus on the long term benefits of creating the prosperous life you have always dreamed of.
“Do the difficult things while they are easy and do the great things while they are small. A journey of a thousand miles must begin with a single step.” – Lao Tzu
Truth and Cents 