Tax day is only a few weeks away. If you are receiving a tax refund, you have some fun decisions to make. A recent study found that only 31% plan to put some of the refund toward their retirement savings, and another 19% plan to pay down debt…meaning only half of people are taking steps to improve their financial situation with their refund.
We know. You get a check in the mail or it shows up in your checking/savings account. Saving it or paying down debt is about as fun and exciting as…well…I don’t know, but it’s not. Unfortunately, doing the right thing sometimes isn’t that fun. However, it is a good feeling when you do the right thing.
What should you do?
- Pay Down Credit Card Debt – Have a balance on a credit card that has been lingering? Use your refund to pay it down or get rid of it. It’s funny how making smart financial decisions can really feel good once it’s done.
- Start or Increase Your Emergency Fund – Do you only have a few hundred/thousand in cash for emergencies? Then you should probably deposit it there if you have no credit card debt. By having money in an emergency fund, you can avoid putting those emergencies on a credit card, thus saving you costly interest. A common recommendation is a minimum of one month’s expenses in your emergency fund.
- Make a Contribution to a Roth IRA – If both 1 and 2 are in good shape, put that money toward your future. You can’t over save for your retirement, so dumping that refund into a Roth IRA makes for a smart decision. If you don’t have one in place already, some smart places to do so are Vanguard, Charles Schwab, T Rowe Price, Fidelity, Scottrade, etc. Some people don’t realize that the most important thing about a Roth IRA is what investment you use inside it. Here are some things to consider:
- Only Use No-Load Funds – Loads are sales charges paid to brokers. You can avoid these charges, which many of the entities listed above offer.
- Consider Your Age, Time Horizon and Risk Tolerance – This can be tricky, so if you aren’t sure, use a Age-Based or Risk-Based fund.