By trusting instinct and intuition, the right decision can become obvious from the wrong one. But desires are hard to resist. Now that your tax refund is sitting in your account, don’t let temptation overrule a smart monetary choice, and follow what your financially responsible gut tells you to do. Use five percent of your refund for a fun purchase, and feel good about investing the remaining 95 percent in any of the following:
Build Your Savings
The broken record singing “build your savings” is as tiresome as the one saying “eat a healthy breakfast.” But really, build a savings. Ideally, an emergency fund should support three to six months worth of necessary living expenses. Last year about 49 percent of employees lacked a personal safety net, according to Forbes. Use your refund to establish a savings account, and then use an app such as Saving Made Simple to help make saving a financial habit.
Get Reliable Transportation
“Car maintenance avoidance” is a real syndrome. It stems from the fear of taking your car into an auto repair shop for a brake check and coming back with 10 other costly repairs. Cushioned with your refund, a brake check shouldn’t be so daunting.
Proper maintenance helps improve the reliability, safety and longevity of your vehicle. Brake pads, rotors and tire replacements are worth the cost. After an inspection, you may even decide that buying or leasing a new car is a better investment than a repair spree. For example, use a $2,000 refund for a down payment to reduce monthly payments. A higher refund used as an initial down payment while signing can also leverage a better lease deal.
Improve Your Credit Score
Your credit score is a measurement that indicates whether you’re a good candidate for a mortgage, a loan or a credit card. The score also helps lenders determine the interest rate to charge you. A higher score provides you with better rates and more favorable terms.
Consider using your tax refund to pay off a credit card and substantially reduce your debt; it can boost your credit score, explains The Nest on Budgeting. Improve your credit by keeping the account open and lowering your credit card utilization rate, which is how much you charge/owe (outstanding balances) vs. your total available credit limit. The lower your utilization rate and balances, the higher your credit score. A utilization rate of below 20 percent is good and an average of 7 percent is best, according to FICO.
Pay off Debt
A tax refund can serve as a negotiation tool to achieve a settlement with a debt collector. Improve your financial management by offering the creditor an upfront lump sum in exchange for a smaller amount owed. Negotiate a lump-sum payment, and you could cut your debt significantly. While bargaining, exert power and hold firm. Know your rights and be aware of fictional scare tactics. Nolo, an online small business and legal website, offers a collection of articles on how to negotiate with creditors, handle tax consequences and strategize negotiations.
Make a Career Investment
Invest in your education and complete online courses to increase your future earning power and employee marketability. Expanding your skill set and advancing your education can also help you land a promotion or change careers.
Make sure that you choose a career that has a positive outlook in the future. For example, those who earn a Master of Administration degree will have multiple career paths available for them with each of them expected to experience significant growth in the coming years. These careers also pay very well, making it more likely that your investment will pay off in the end. Once you have your MBA, you can pursue jobs as a marketing manager, financial analyst, operations manager, or an IT expert, giving you a number of different options within an organization.
Last year, U.S. News & World Report broke down the cost of an online class. Writer Devon Haynie found three-credit courses that ranged between $935 and $1,320 for out-of-state students, and one community college class cost about $515. Also, university online courses cost between $300 and $400 per credit hour. While researching your options, also look for in-state colleges and apply to scholarships to keep costs even lower.
Joe is a former financial advisor and media representative for American Express and Ameriprise. He was the “Money Man” at Detroit television WXYZ-TV, appearing twice weekly. He’s also appeared in Bride, Best Life, and Child magazines, the Los Angeles Times, Chicago Sun-Times, Detroit News and Baltimore Sun newspapers and numerous other media outlets. Joe holds B.A Degrees from The Citadel and Michigan State University.
Having an emergency fund in place sounds about right. You’ll never know when you’ll need it.
It can be really hard to see that “extra” cash and not want to go on a shopping spree. Using it to build a financial footing is much more practical, albiet less fun. Putting the money in savings to build a down payment on a house is another very good option. But I do lean towards paying down short term debt as it is often a costly expense when you figure in the high interest rates.