April 18th is the day your taxes are due this
year and it’s a date that is quickly approaching! For many Americans tax day is
something of a holiday because we typically overpay our taxes during the year
and then get a refund from the government at the end of the year. That means
millions of us get a windfall to the tune of hundreds or thousands of dollars.
In the past your impulse might have been to spend that money quickly on something
frivolous and soon forgotten by the time the next tax day rolls around. As a
reader of the Bill Stark Blog you’ve now had your eyes awakened to the power of
your money. This year let’s do something new with our tax refund: let’s use
that money to make us even more.
Here’s how…
Pay off your debt
There’s a reason I talk about debt so much on The Bill Stark
Blog: consumer debt means having the most powerful force in the universe working against you. It’s easy to
follow the directions on your loan payment plan simply writing one check each
month and being done with it, patiently paying someone interest for 10, 20, or
30 years. In almost all loan circumstances paying off the debt faster means
paying off the principal faster which in turn means lowering the amount of
interest you wind up paying your lender. The less interest you have to pay? The
more money you save yourself on the original loan amount.
That’s why using your tax refund to pay off some of the debt
you owe is such a powerful opportunity to get yourself on the road to financial
independence. Contact your lenders and find out how you can make extra
payments, then deposit your tax refund and make that payment! If you’re
interested in more specific strategies for paying down your debt find out the most powerful debt repayment strategy in this article or read about
turning your debt into a game over here. Also, if the debt you’re repaying is a
student loan read my guide on repaying student loans to learn about a ton of programs that can
help you repay your loans or get them forgiven entirely.
Start your IRA
If you’ve got no debt or you’ve paid off all of your high
interest debt (anything at a 5% or higher interest rate) it’s time to get your
retirement savings started. Your traditional or Roth IRA can help get you to millionaire status in time for retirement but only
if you actually open the damn thing. Now that Uncle Sam has given you a chunk
of cash as a tax windfall you have no excuse to not start investing that money
effectively. Find your preferred investment organization (I recommend Vanguard.com, and I’m
not even getting paid to say so!) and open your IRA.
For those of you who find the notion of that process
intimidating consider this: on average it takes as little as 5-10 minutes to
set up your IRA, and most organizations have a live human you can talk to for
help on the phone. If someone said they’d pay you thousands of dollars to fill out a form on a website you’d jump at
the chance. This is the same thing!
Set aside your money so it can start growing for you and spend as little as
5-10 minutes of your time to do it. You can even make it an annual ritual: each
year at tax refund time you simply deposit your refund and put it into your
IRA.
Two final notes on your IRA: generally a Roth IRA is a
better fit for most Americans (it’s what I use). However you need to determine
if a Roth or Traditional IRA is right for you. The key difference is that a
Roth IRA lowers your taxes later while a traditional IRA lowers your taxes now.
Additionally if you’re not sure what to invest in check out What to Buy When Buying Stocks. Follow the advice there to keep your fees as low
as possible while maximizing your returns in a manner that allows you to be
lazy with your investments (an active investor is an investor who is losing
more money than they need to!).
Stock your emergency fund
When I wrote my 10 Steps plan I focused on your emergency savings not once but twice. That’s
because they’re an incredibly important tool for ensuring your financial
success. Your emergency cushion or emergency fund can actually save you
thousands of dollars in a year by making sure you never have to pay the incredibly high costs of being broke. If you haven’t built up at
least $1,000 in savings as an emergency cushion to prevent you from having to
borrow from your credit card or a payday lender if a sudden surprise expense
comes up use your tax refund to do that immediately.
Then you can put what’s left towards paying off your high interest debt, and
when that’s done you can put any remainder into your emergency cushion to start
fully funding your 3-6 month emergency fund to handle a sudden loss of
employment. Your emergency savings are a life saver when life throws you a
curve ball (as it inevitably will) so don’t skimp on properly shoring up your
emergency fund using your tax refund.
Fix your car
Millions of Americans rely on their personally owned motor
vehicle as their primary mode of transportation. It’s how we get to work, it’s
how we get the kids to school, it’s almost impossible for many of us to imagine
what life would be like without our car. It’s paramount that we maintain care
of our vehicle to maximize its lifespan, but sometimes the expense of a car can
be costly and we put it off only to make the problem worse and spend more money on the eventual fix to undo
harm we could have prevented if we had simply gotten the car repaired in the
first place.
I’m not immune to this. Driving the 405 in Seattle I once
had a pebble fly off a construction vehicle in front of me, bounce off the
interstate, and connect exactly with my windshield leaving a small nick in the
glass. Being that it was summer and the small chip didn’t impact my ability to
drive safely I let it be figuring I’d get around to it. I even called a few
places that specialize in glass chip repair for $50-60 that actually come to
your work while you’re parked and fix it. I wouldn’t even have to take the car
in!
But I didn’t do that. I put off the repair until that
February when what had been a chip had had months of filling with tiny amounts
of water from our Seattle rain, freezing overnight, and slowly expanding in
size. Fill with water, freeze, expand the chip. It soon became a crack, then a
spiderweb that went all across my windshield. By the time I took the driving
hazard in to get fixed my $50 chip repair while I sat at work going about my normal
day had ballooned to an expense 10 times the size costing me $500 on my
insurance deductible as they replaced my entire windshield. And I had to sit
there for four hours while they did it!
For me it was a hard lesson learned: when your car needs
repairs, get it fixed! Failure to do so will cost you more money long-term than
sucking it up now and using your tax refund to get your vehicle maintained
properly.
Fix your house
If there’s one thing more important to most of us than our
vehicles it’s our homes. If you’re a home owner with a tax refund looking for
ways to get a return on your investment maintaining your house is a fantastic
opportunity. Just like your car, your house can have small costs to maintain
now that can balloon into gigantic costs later costing you thousands more than
a bit of spending early on could have saved. When was the last time you had
your gutters cleaned? How old is your water heater? Is it time for a new paintjob
before you start getting mold and damage to your walls?
Your home is your castle, and you don’t want an unguarded
castle. Use your tax refund to futureproof your home by keeping it well
maintained and save yourself thousands in future expenses for repairs that didn’t
get done in a timely fashion.
Upgrade your house
Do you have a perfectly maintained home? Good for you! There
are still things you can do to earn money through savings by investing in your home.
If it’s not repairs it’s upgrades. Those old windows? Time to transition to a
higher insulation rated version that will help reduce your heating bills in the
winter. Still using old fashioned light bulbs? Upgrade to LED bulbs to cut on
your energy bill. Have your home insulated using the most modern insulation
methods, a return on your invest that can be as high as 90% of your home
heating costs. In fact, modern insulation methods have gotten so good you
actually have to install a ventilation system to produce air flow because of
how air tight they are! That’s a hefty return on your investment quickly before
even considering the increase in value you get from upgrading your home if you
decide to sell.
The Bill Stark Blog isn’t big on consumer spending generally
but when it comes to increasing the efficiency of your home spending your tax
refund on upgrading is an area that can turn into a smart investment.
EnergySaver appliances, a new, properly insulated roof before your old one
starts leaking and causes mold, solar panels, a geothermal heating/cooling
unit; all of these are additional consumer expenses can save you huge amounts
of money long-term. They require an initial investment (your tax refund) before
they start paying that money back later in savings and that makes them a good
consideration for using your tax refund.
Switch your cell plan
If you pay over $50/month on your cell phone plan you’re
getting ripped off. While contract plans are falling by the wayside as more and
more discount providers come into existence there are still millions of
Americans locked into a cell phone plan that costs them $100/month or more for
the same service they could get at a third the cost. One problem: many plans
charge you a fee for breaking a contract.
When T-Mobile first burst onto the scene with their “uncarrier”
model they offered to pay your fee for breaking your contract. That’s a great
offer to take advantage of but if you’re not in a situation to do that or the
provider you want to switch to doesn’t buy out your old contract your tax
refund can bail you out. Look at this way: if you pay $100/month for your cell
plan but have to pay $400 to break your contract, switching to Cricket and
paying $35/month saves you $65/month. That’s a savings of nearly $800/year
which means over the next 12 months not only will you earn back the $400 you
pay to break your contract but you’ll wind up with an extra $400 in savings.
Not bad for an upfront cost paid by your tax refund!
Savings on your cell phone bill is so simple I wrote an entire article about it. Also if you’re interested in switching to
Cricket you can get a special offer of $25/off from the Bill Stark Blog here.
It’s up to you
Tax refund season is almost upon us. This list is not
exhaustive for all the methods by which you can use your tax refund to actually
earn your money through the year. If you take away one thing from it let it be
this: your tax refund doesn’t have to be a shitty shopping spree where you buy
a bunch of consumer anchors that tie you down through the rest of the year.
Instead it can be your golden opportunity to start generating more tax returns
in value through cost savings, investment income, or just saving yourself on
thousands in debt that you would pay through the upcoming year. How do you plan
to use your tax return to make your money? Share in the comments below and we’ll
write an even longer tax return
article for next year!
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