Tax day is here, so you probably know by now whether or not you’re getting a refund this year. Exceptions apply to procrastinators who are reading this post instead of finishing up that tax return. Don’t feel bad if this is you. You’re joined by about 15 percent of Americans who said they’ll wait until the last minute to file.
Earlier on in tax season, the majority of filers were expecting to get money back, or had received it already. That makes sense, since the government hands out billions of dollars in refunds each year. So, if Uncle Sam hands you some cash back, what’s the best thing to do with it?
Surveys show the most common goals are saving and/or investing. Personally, I’ve been eagerly awaiting my tax refund (anyone else obsessed with “Where’s My Refund?” on IRS.gov?), in the hopes of doing more investing this year. But, if you’re like me, you probably want to do some financial housekeeping before making any moves. It is April after all, so ‘tis the season for spring cleaning.
Paying down credit card debt is a good place to start.
It’s usually in your best interest to pay off high-interest (read: credit card) debts before you invest. That’s because high-interest credit card payments will likely end up eating away at any investment returns, or canceling them out altogether.
In the world of investing, the goal is to make progress, not tread water. Use those extra tax dollars to propel you forward by putting an additional dent in your credit card debt. Keep it up and one day, you may be able to reward yourself by crossing “pay down debt” off your housekeeping list.
Next, make sure you’re covered for emergencies.
As kids, we were all taught to call 911 when disaster strikes. But in the case of a financial emergency, your local switchboard operators probably can’t help you. If they can, please tell me where you live, so I can move there.
Having an emergency fund is always important, but your investment accounts should not be treated as your “in case of emergency” savings.
A good rule of thumb is to keep three to six months’ worth of easily-accessible emergency funds. Opening a savings account that will not penalize you for withdrawals is an easy way to accomplish this.
Bottom line: If you don’t have credit card debt, your housekeeping list may be shorter. But, it would look even better if you use some of that tax refund to save for a rainy day.
Finally, put those tax dollars to work!
Congratulations! You didn’t wait for spring to do your housekeeping, so you’ve already worked hard to pay down your credit cards and build emergency savings. You’ve also worked hard for that tax refund, so let it work for you through investments.
If you’re new to investing, you’re probably very risk-wary, and that’s okay. Diversification of your assets may help you “manage” your risk.
To help you reach your investment goals, Ellevest generally recommends low-cost Exchange Traded Funds. (P.S. Get a plan, girl!). You can use your extra tax money to make a big-time contribution to your plan. Then, you can set up smaller, automatic contributions for subsequent months.
Of course, in order to do that, you’ll need to keep your housekeeping up. We hope you do, and we hope you use the tax money you get back to invest in your future.