Tuesday, February 19, 2013

What are you doing with your tax refund?

April 15th is fast approaching us.  That wonderful deadline where that mysterious Uncle Sam that I've still yet to meet comes either asking for money or sends me a check.  It's time to look at the ways you can use any refund coming your way.

1.  Pay down debt 
This is step 1 for anyone that still carries debt, especially credit card debt.  Paying off credit card debt is going to be the best guaranteed return that you'll find.  According to CreditCards.com as of February 6th that national average interest rate on credit cards was 14.96%.  If you carry $10,000 in credit card debt at the national average rate, it will take over 12 years to payoff if you make the minimum payment and you'll end up paying over $4,400 in interest over that time.


If you carry no credit card or high interest debt then it comes down to what you're comfortable with.  If you have student loans or a mortgage then you need to check the interest rates.  With mortgage rates being historically low for the last few years if you happened to refinance then skipping this step might be the way to go.  If the interest rate is 5% or less then feel free to skip, between 5-8% then it's a toss up.  Anything over 8% and I'd be paying down debt.

2.  Build your emergency fund
Life happens.  It's best to have a cushion to tide you over in case something major happens like a roof leak, car accident, job loss or any other possible problems that you couldn't have planned for.  An emergency fund is about the only way that you can plan for the unexpected and I highly recommend having some savings set aside for this purpose so you don't have to go into debt to cover any expenses.  The standard recommendation is for a 3-6 month emergency fund although this is highly dependent on what you are comfortable with.

3.  Invest it
If you're already investing, then keep it up.  Saving and investing is the only way to be able to reach financial independence.  I prefer to invest in dividend growth stocks and will continue to do so because I feel they offer the best opportunity to reach early financial independence with a growing income stream.

4.  Spend it
If you've taken care of all of the above and have already reached financial independence then by all means spend it on something that you enjoy.

We're expecting around a $2,000 refund but I haven't run all the numbers yet.  When we get the final amount, around half will be spent on getting my wife's car tuned up and taking care of some routine maintenance on it and the other half will be put into savings towards early FI.

How will you be using your tax refund?

19 comments:

  1. $2k is a pretty hefty refund! I'll be getting a $600 refund, which I'm pretty stoked about. I was expecting to pay Uncle Sam, so getting a check put a smile on my face...then I looked at how much money the dear "Uncle" already took last year and lost the grin.

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    1. Headed Home,

      Its a pretty nice refund but I want to get it lower so I can have the money througout the year. Preferably between $500 to $1000. I get a huge paycheck and a small paycheck every month so if I left the allowances at 0 I'd be getting closer to $7k and that just doesnt work for me. Why give the government a $7k interest free loan?

      Thanks for stopping by!

      Delete
  2. The wife and I haven't received a meaningful refund (more than $100) since we got married. Most years we owe money at the end -- just the way I like it. No sense having the government keep that money for you any longer than is needed.

    Don't get me wrong, I am fine with paying any taxes that are owed. I just have a problem with the way the current withholding system occurs. If I had it my way, there wouldn't be any taxes withheld from my paycheck ever, and I'd reconcile things with the government once annually, by taking a withdrawal from my savings (which of course would be accounted for ahead of time in my budget).

    Unfortunately, most people don't seem to plan and save with the same diligence that I do, so we end up getting punished because most others can't be trusted to have money available to cover their taxes once the bill comes due -- and therefore must be subject to regular withholding all year long.

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    1. Executioner,

      If it was up to me I'd do the same as you. Just save up money and settle at the end of the year but they have to use the withholding system because most people wouldnt set anything aside. Itd be nice if they could have it go to a savings account and you could keep the interest earned. Kind of like an escrow account.

      With getting married last year and having my first real year of investing I tried to give us a bit more of a cushion on taxes for 2012 but I'm gonna do my best to get it closer to the $500/$1000 level for 2013 taxes. Ideally I'd have it a little negative like you.

      Thanks for stopping by!

      Delete
  3. Pursuit,

    Refund? What refund? :)

    I owe almost $1,300 this year. This is the second year in a row I've owed more than $1k. Gotta love dividends, capital gains and online income.

    I'll probably have to start doing estimated taxes this year to avoid any penalties.

    If I were to receive a refund I'd probably just look for ways to invest it. Wouldn't change a thing! :)

    Best wishes.

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    1. DM,

      I don't envy your tax bill although I would take your dividends off you. Since my paychecks are huge on the 15th and small on the 1st I get taxed like crazy on the big paycheck. Its difficult to try and get my withholding right so I'm hoping to get it down to around $1k from here on out so I can have that cash during the year to invest it.

      Thanks for stopping by!

      Delete
  4. My answer is easy - I invest it completely. However, recently I had very little refunds, so I may need to lower my dependents.

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    1. Martin,

      I wish I could invest it all but I'll take the peace of my mind with my wife's car in top shape. I'll still get to invest half of it so I'm happy with that. As long as you're disciplined enough to save it during the year I'd keep your dependents the same so its a small refund. Although as your portfolio and dividends grow that you might need to drop them due to the added income.

      Thanks for stopping by!

      Delete
  5. I'm going to be investing whatever I get back, whether it's $1 or $1000, it's going to the brokerage account.

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    1. MyFIJ,

      That's great that you'll be getting to invest it all. Its great to hear. I just hope that those with debt will use it wisely and pay off some debt with it.

      Thanks for stopping by!

      Delete
  6. I'll probably use a couple hundred bucks as fun money and deposit the rest in my brokerage account. I think I should be getting about $2200. That is what the turbo tax estimator said.

    Cheers!

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    1. CI,

      I can't blame you at all for using some as fun money. Especially once all the debt is gone. I just hate when I hear people talking about what they're going to buy with their refund when they still have debt.

      Thanks for stopping by!

      Delete
  7. I am using mine to pay off all my credit card debt, if anything is left over, then putting it towards principle of the mortgage.

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    1. Edgar,

      That's great. it's refreshing to see someone actually use the refund to pay down debt. Too many people see it as just extra spending money.

      Thanks for stopping by!

      Delete
  8. While I love investing and would prefer to snag up some more shares of some of my favorite dividend growth stocks, my wife and I have instead decided to add a little more money to our emergency fund since we might be having some changes coming in the near future that could require some savings. We already have a fully funded emergency fund but don't feel like it would be a bad idea to boost it up a little more.

    I think the order you present the options for a refund are exactly right. Unfortunately I think most people go straight for the last option and spend it even though they probably shouldn't be!

    ReplyDelete
    Replies
    1. Dan,

      I'd love to invest the whole refund, but the peace of mind with having my wife's car in great shape is worth not getting to invest that money. Having a larger emergency fund, especially with some changes coming soon is smart. You can always dial back on the emergency fund after things get settled.

      Way too many people see their refund as a special bonus every year and treat themselves when it should be used for something productive. If you're out of high interest debt then I have no problem taking some of the refund and using it as fun money. Even worse, they probably don't realize that it was their money to begin with and they lost the opportunity to do something with it during the year.

      Thanks for stopping by!

      Delete
  9. We're not sure how much we will be receiving but if we don't have to pay more taxes we will be placing our refund towards the principal of our mortgage.

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    Replies
    1. Marvin,

      Applying it towards your mortgage is a great idea. It's pretty amazing how much one extra payment each year will knock off the life of the loan and the amount of interest you pay.

      Thanks for stopping by!

      Delete
  10. Beautiful post. In my inference, either way, whether we pay on due time or in move ahead, we just have to pay what is for love from us. On the other offer, the pool must be fair adequate to tell us what is right.HARP

    ReplyDelete