Did you get a big tax return this year? According to Fortune.com, "...many people who filed early are seeing slightly small refunds than in previous years". The average 2018 tax return so far in January and early February 2019 is $1,865 according to IRS statistics.
Whether it is a big return or not, you must always strive to put your money to work. If you received a large tax return, you either are paying too much in taxes from each paycheck or took advantage of the many tax deductions. I recommend you take my FREE mini-course to learn how to adjust your taxes so you can bring home more money.
Below are seven helpful tips on how to make your tax return work for you this year.
1. Put Your Money into an IRA
Every year, households should be striving to save the maximum amount into their Individual Retirement Arrangements (IRAs). These retirement accounts have tax advantages and save you money either today or in the long-run.
It is estimated that over 43 million households have an IRA; yet, only "Thirty-five percent of households contributed to traditional IRAs, while 36 percent contributed to Roth IRAs."
2. Pay off Debt
Using your tax return to make a large payment towards debt is an outstanding way to start getting ahead. It should be no surprise that this is recommended as we preach debt freedom on this blog.
When you pay down the debt principal, you are also lowering the interest amount charged. Less Interest = Less Money You Owe. It's a win-win situation.
3. Save for a Family Vacation
When is the last time you took the family on vacation? Plan a summer getaway by researching websites for deals such as hotels.com or IHG.com to book early hotel rates. Whether it is a long weekend or week-long trip, make memories with the family and take a lot of pictures.
It doesn't have to cost an arm and a leg to have a family vacation. One of my favorite memories is reserving a cabin at a KOA campsite. The overall trip with gas cost about $220 because the cabin was $40 per night and we purchased our campsite food from the town's local Wal-Mart.
4. Save for a Home Down Payment
It can be rewarding being a homeowner; however, taking care of a home and purchasing one can be expensive. Depending on the size of your tax return, if you have plans to save for a house, I recommend putting aside a percentage of your tax return and keep it for future fees and expenses that may arise during your home purchase.
I highlight several tips on how to get a mortgage that I recommend you read. It covers everything from Private Mortgage Insurance to Escrow and Closing Costs.
5. Buy Term Life Insurance
After building your emergency fund, I am quick to tell clients to have a term life insurance plan. While a life insurance policy will help to cover funeral expenses, that is not the sole purpose.
Having a life insurance policy ensures your family can receive the financial support needed. This is especially true as the household may go to a single income or if the spouse is a stay at home parent receiving no pay, a life policy can be a financial blessing.
You want to set up your family for success by ensuring you have adequate coverage to pay off any remaining bills (credit cards, mortgage, loans, college expenses) and then some until the surviving spouse can return to work.
6. Purchase a 529 College Savings Plan
With recent changes to educational laws, you can now invest an Educational Savings Account from Section 529 Plans towards a child's education. If your child attends a private elementary school or will attend college one day, start investing some money into a College Plan. As long as the investment is used to pay qualified school expenses, it will have many tax advantages.
If you are interested in learning more, I have an online tutorial College Savings Plan-The Complete Guide, that will explain both the 529 Plan and Coverdell Education benefits and How-To.
7. Invest it
Determine if you can invest for the short-term or long-term. For short-term investing, I recommend a liquid investment such as a Certificate of Deposit (CD) or a short-term bond. A liquid investment means the ability to convert such an asset into cash quickly. Be sure to read last week's blog on Should You Put Money in a CD or a Savings Account. One source to find Government Savings Bonds is through Treasury Direct.
I wouldn't recommend stock investing for the short-term as your initial investment may not have the adequate time to recover its principal and fees purchased.
Nick Carroll is a published author of 6 Steps to Achieve Financial Freedom and has worked as a Commercial Credit Analyst, Investment Marketing Associate, and worked at the Pentagon-Air Force Budget Office. He is a graduate of Creighton University with a Masters in Investment Management and Financial Analysis and holds a Bachelor's in Banking & Finance.