What to do with that refund? Make some wise money moves
Toolbox
Published: March 20, 2005
We are getting to that time of year. The sun finally rises before you do. The temperature during the morning drive to work doesn't necessitate de-icing the windshield. And, this weekend my sons will be signing up for Little League. Yes, we are turning the corner, bidding adieu to the white stuff and hello to the green.
Flipping over the calendar to the fourth month of the year also means tax day is just around that corner as well.
If you are getting a refund this year, somehow that makes paying taxes seem like there's a goodie after the signature page. Certainly, we could discuss why getting a refund is really not a good thing. After all, why give the government your money to use all year so you can get what seems like a windfall the next April. With the average refund this year going out at $2,300 this tax season, wouldn't it be nicer to have $200 extra dollars a month in your pocket when you have earned it than to get a large check once a year? Sometimes all it takes is a little re-jiggering on the deductions you take on your W-2 to put you in balance so you neither owe taxes nor are owed a refund next year.
Still, if you have a refund this year, $2,300 is a lot of money. When the check arrives, then the debate begins. What to buy with your newfound wealth: dirt bike, new snowboard, widescreen TV … the list goes on and on. At the risk of sounding a bit like your mother, here are a few suggestions:
Consider taking a percentage, even 100 percent of your refund and contributing to your IRA or setting up a new one. Even if you get the refund after April 15 so the 2004 contribution deadline has passed, open up an IRA for 2005.
If you have already contributed the maximum for 2005, before you abandon investing that refund; please consider opening an account for a child for college. If you contribute $2,000 this year for your 5 year old in a conservative mix of equity mutual funds, you would have just under $5,000 in 13 years at a 7 percent rate of return. The same can be said if you put the money in an equity mutual fund for yourself if you don't have education needs.
It may not be very exciting and sure puts a damper on your parade, but paying off some old credit card debt wouldn't be such a bad idea. With interest rates on credit cards up in the stratosphere, paying down debt is not only intelligent, it's going feel better in the long term than a week's vacation in the sun.
Reassess your emergency funds. Normally, most families should have three to six month's worth of living expenses set aside in a liquid investment such as a money market fund. Now would be a good time to check your money market balance and make sure your expenses are at a level that you can sustain yourself for those months in the event of a job loss or sudden lifestyle change.
Double up on your mortgage payment next month. Making an extra payment each year can lower the length of your mortgage by up to 10 years depending on the length of your current term. The extra payment would be applied to principal only thus lowering your debt.
After you invest, contribute or pay down like a solid and responsible citizen then comes the fun part. Take a long weekend near home at an inn that you have driven by and wondered what it would be like to stay there. Buy that new digital camera so you can capture the kids or grandkid's lives before they aren't kids anymore. Indulge in a day spa or spend an evening at that special restaurant that you never feel you can afford. Make a memory which will last long after the moment. After doing the "right" thing, do the other "right" thing and have some fun.
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