By Clint Haynes, NextGen Wealth
It’s everybody’s favorite time of the year; tax season. Sometimes we are pleasantly surprised and sometimes not so much. If you happen to be the former, then you might be wondering what some fiscally responsible ideas are for that tax return. While these ideas might not be as exciting as taking that money to Vegas, they are what I would recommend doing for at least a portion of that tax return.
Pay Off Debt
One of your first orders of business should be to pay off any high-interest debts. This could include credit cards, student loans, etc. You may not realize how much owing money affects you, in particular high-interest debt. Paying these debts off, or at least paying them down, can truly bring you a sense of well-being and I can assure you it will last much longer than taking that tax return with you to Las Vegas. If you’ve never been debt-free before, it can be a strange feeling knowing you don’t have any more debt payments. It will feel great so take some time to enjoy it.
Top Off Your Emergency Fund
If you don’t have any high-interest debt or there’s still some money left over, then consider building up your emergency fund. This money should be easy to access and highly liquid. Since the funds are earmarked for an emergency, you should be able to access them quickly.
If you don’t have an emergency fund and don’t know what that is, let’s take a step back. Basically, an emergency fund is a sum of money that you set aside to help you cover unexpected expenses that are not covered in your regular budget. Expenses like your car breaking down, blowing a tire, an unexpected high medical bill, and so on. Those are emergencies and having some money set aside to cover them will go a long way toward keeping you out of debt.
If you don’t have any high-interest debts and your emergency account is full to the brim, your next stop should be your retirement accounts. Putting money in your retirement accounts is a great tax shelter. It’ll also offer a cushion down the road as you cross the retirement age threshold. The money in your retirement accounts is a hedge against what the future may bring. Since they can’t be accessed easily without paying a penalty, your retirement savings will continue to grow. As I always like to say, the worst thing that could happen from putting extra money in your retirement account is you get to retire early ““ now that doesn’t sound too bad of a worst case scenario.
College Savings Accounts
If you have kids, consider setting aside some of your tax return into a 529 Plan. This will help them cover their higher education costs without going into debt. There could also be some tax advantages for you as well. Just like with your retirement savings, college funds generally have an early withdrawal penalty. There is also a penalty for using the funds for non-qualified expenses. Make sure you understand the pros and cons before investing into a 529 Plan.