So Tax Time is here again. Aside from the joy of realizing just how much money you give to the government each year, you might also get a little bit back. If you don’t, then I’m sorry I brought this up and please skip to the next post or something. If you do, then awesome - forget about those no-tax-refund-getting losers - they’re not even reading this anymore anyway. At least I hope not.
So what are the smartest things you can do with that influx of extra cash. CNN Money has the low down…
1. Pay off credit card debt.
Across the board, financial planners said that using refund cash to pay down high-interest credit card debt was a win-win. “You pay off your debt first, no ifs, ands or buts about it,” said Drew Tignanelli, president and CPA at the Financial Consulate.
“Psychologically, it seems like a good idea to have money in the bank,” said Tignanelli. But if you’re carrying high-interest debt, having money in the bank “is more of a psychological crutch than an economic benefit,” he said, because keeping money in the bank when you are paying higher interest on debt just doesn’t make financial sense.
If you have been procrastinating paying down credit card debt, then Tignanelli suggests using the refund from Uncle Sam as a “stake in the ground,” representing a commitment to turn the tides on your credit card balance.
2. Build up emergency savings.
Given the precarious labor market right now, building up a reserve fund of cash ought to be a top priority.
“If you have lost or think you are going to lose your job, then just put that money in the bank,” said Beth Gamel, CPA/PFS at Pillar Financial Advisors. “If you are not in that situation - you have a job, and it looks pretty secure - you still should look at your cash reserve,” she added.
Gamel said that risks associated with living paycheck to paycheck are higher now than before the recession, because banks are more reluctant to extend lines of credit to people with less-than-perfect credit histories.
So which should you do first - pay off debt or save for emergencies? Greg Plechner, CFP with Modera Wealth Management, said that while he recommends people have 6 to 9 months of expenses available in cash, the decision to pay down debt or accrue a reserve fund is a matter of interest rates.
“Any interest rate over 10%, in my mind that almost takes precedence over the emergency fund,” said Plechner.
3. Invest for the long term.
While stocks have started to climb back from multi-year lows, the major indexes still have a lot of growing room, and now is the time to take advantage.
Gordon Bernhardt, CFP and CEO at Bernhardt Wealth Management, recommends that if an individual has no credit card debt, this is a very good time to get into the market, by opening up a brokerage account or a tax-advantaged retirement account like an IRA.
If you’ve got at least 5-10 years before you’ll need the cash, then investing for the future - particularly for your retirement - is a smart move today.
“I am extremely positive that 5 years from now, the market is going to be a lot higher,” said Bernhardt.
To protect yourself from volatility, Bernhardt recommends you “take that money and buy an index fund - that is going to be the easiest way [to] get diversification at a low cost.”
4. Treat yourself.
If you’re on top of your debt, feel secure in your job, and have a cushion of cash built up for emergencies, then even professional financial advisers are ok with you splurging on that new TV or vacation.
“We need to balance our long-term planning with our short-term planning, so I have no problem with my clients doing something fun, or an extravagance, and I encourage them to do that occasionally,” said Tignanelli.
Gamel echoed the sentiment. While it may be a year when few consumers feel comfortable splurging, “if you don’t have any problems, your job is secure, you have your debt in order, and don’t foresee any demands from that cash cushion, then buy what you feel like,” she said.
