In the Hoover house when you stumble across some unforeseen cash we call that “magic money”. Magic money is that money that just surprises you! Like when you’re doing laundry and find change in your jeans pocket. Or when you go to put your winter jacket on for the first time of the year and find a crumpled up $10 bill in the inside pocket. Well sooner or later we all come across some unforeseen cash – like maybe your tax refund! So for this edition of Friday Financial, I thought it would be helpful to discuss what to do with your new found “fortune”.
How to Spend Your Tax Refund Wisely
- In previous editions, we have discussed the concept of an emergency fund. If your emergency fund is not sufficiently funded, you should strongly consider taking the opportunity to build it back up. Your first goal should be to make sure you have at least $1,000 saved or $500 if your income is less than $20,000. Ultimately, you should work to have 3-6 months of your monthly expenses saved.
PAY DOWN DEBT
- There is no such thing as good debt! Debt means you owe someone else money because you could not pay for it yourself. Unless it is your parents, no one lends money for free- so that means you are paying interest that is compounding daily. Consider making an extra payment on the mortgage, car, credit card, etc. I like the Dave Ramsey debt snowball approach to paying down debt. This process has you tackling your smallest debt first- to get the ball rolling! We feel this approach keeps it simple and reinforces good behavior. A word of caution if you are making extra payments, make sure it goes to the principle and not the interest.
- Two great ways to invest are for yourself or for your kids future.
- Yourself- I am a big believer in pay yourself first. So we always like to make sure we fund a Roth IRA. Whether it is a Roth, Traditional, or SEP consider using some of your magic money to invest. (The pro/cons of the various retirement options are a discussion for another time.)
- Your kids- If you live in Ohio, College Advantage is a great way to save for your kids college via the 529 Plan. Don’t let the name scare you, a 529 plan is just named after the Internal Revenue Code which created these types of savings plans. Bottom-line, a 529 plan has lots of benefits including multiple investment options, low fees, and if you live in Ohio a tax benefit.
- Assuming you get a decent interest rate/return on your investment, then the longer time horizon you have the better. In other words – if you get a 3% annual return on your investment you will accumulate more interest over a 20 years period than a 10 year period. So whether it is for you or the kiddos don’t wait – the more years your money can work for you the better!
One last way to spend that magic money…
- Do I even need to explain this one! For most of us, our natural tendency is to spend-spend-spend so this one should come easy. And as long as you have considered the options above- you can feel Free to spend your hard earned magic money on a little fun! Remember, because you are saving- you can do more living!
So if you stumbling across some magic money – I hope you will consider some of the options you have to use your new found treasure- and spend your tax refund wisely! Send us a note to let us know where you have come across some magic money!
Fourth Friday Financial (FFF) is written by Mary’s Dear Hubby Andy, because he was “voluntold”. 😉 We have been together for 2 decades and you will begin to see that our differences compliment each other well. Through this monthly series we hope you find practical information for taking control of your finances.