Thursday, February 13, 2014

What do you do with that Big Tax Refund?

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About 200 tax returns into the tax season and I have seen a lot of big tax refunds.  If you read my last post, you know that I'm not opposed to a big tax refund, but, what's the best thing to do with the money?  The answer is, it depends...

1.  If you're behind on any bills, please, for the love of God, catch them up and keep the bill collectors at bay.  After that...

2.  If something important, like your car or your HVAC system is broke, get it fixed, and fixed good.  After that...

3.  If you don't have $1000 dollars saved for an emergency, open a savings account and put $1000 dollars in it, and please, for the love of God, Don't Touch It, unless you have an emergency.  After that...

4.  Spend some of it, no more than 20%, on you or your family for something that makes you, and them, happy.  You should enjoy the fact that you've accomplished steps 1 through 3.  That's more than many families will accomplish in their lives.  A $1000 emergency fund is a BIG DEAL, and you should be proud of it.  After that...

5.  Pay off credit card debt.  All of it, and shred those credit cards, and get a debit card only.  After that...

6.  Pay off student loan or car debt.  After that...

7.  Put away 3 to 6 months of expenses in that savings account we talked about in Step 3.  Leave It Alone!  It's for emergencies.  After that...

8.  Feel free to spend the rest on something you want, or a vacation you desire.  If you've accomplished Steps 1 through 7, you probably have a good budget, and a good plan for your future.  Everything that follows is optional, and you can do any of the steps in any order.  If you want...

9.  Fully fund that Roth IRA for the year.  You have until April 15th.  Or...

10.  Sock some money away for the kid's college fund.  Maybe an Education Savings Account or a 529 plan.  Or...

11.  Put a big chunk towards the house.  Big payments now increase the power of the normal payments you make.  Don't listen to the morons who say you should always have a mortgage.  They don't know what the hell they're talking about.  The Super Tax Genius rules say NEVER do anything just for the tax benefit, and owing money to the bank qualifies as one of the dumber things you can do.  Or...

12.  Upgrade the house.  Maybe new counters, new bathroom.  Whatever.  You've demonstrated that you're smart enough to spend your money the way you want.  I would probably jump on Step 11, but if you've got 1 through 7 done, you don't need me to nag you.

If some of these ideas seem familiar, that's because many of them were inspired by listening to Dave Ramsey.  I don't think his advice is absolutely necessary for everyone, but if you've tried to get your financial life in order and failed, you should follow his plan, TO THE LETTER.  If you're out of debt and your retirement plan is on track, you probably don't need all of his advice, though we can always learn something.  Check out the link by clicking his name.  He's helped a lot of people.

Here's a link to his book:
Dave Ramsey's Complete Guide to Money: The Handbook of Financial Peace University

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