With tax season starting everyone is eager to get all their forms together and submit as early as possible to get that favorable return. I am no different as I have already submitted my federal and state taxes and both have been accepted 🙂 Actually, I already got my state return direct deposited into my account! But what do you do next? After you get it what options do you have to best apply that money towards? In my personal case, after lots of consideration I will be putting all my return money to pay off all my credit cards. There might be a few hundred dollars left over, in which case that will go towards principle of my mortgage. In past years I would take my entire return and put it towards the mortgage or towards student loans, but this year after some expenses the credit cards climbed too high for comfort so its time to cut them down to zero.
Mortgage- An extra payment on your mortgage can be HUGE! Some people actually dont realize the difference one extra payment a year can make, not to mention if you do more then one and if you only do one, but make it large. Lets for example assume you had a $160,000 mortgage at 3.75% interest and made an extra $1000 payment each year the below breakdown would be true and as you can see you would save $77,850 over the 30 year length of the mortgage (source: Mortgage Calculator). I have spoken with many people who have disciplined themselves to take their return every year and put it right to the mortgage in full.
|normal payments||with entered extra payments||savings with extra payments|
|total payments paid||266754.58||188904.14||77850.44|
|total interest paid||106754.58||28904.14||77850.44|
Credit Cards- This is the option I took this year. With just over $5000 worth of credit card debt right now its really dragging me down and although its all interest free right now, at the rate I am going and with some expenses I know I will have this year I wouldn’t have it paid off in full before the interest free promo expired without applying my tax return. Ideally, I would have liked to put my return towards my mortgage, but this is equally beneficial for me right now.
Student Loans- For me I didn’t even consider student loans. A few of mine are deferred right now since I am still in Grad School and the ones I pay have a great low interest rate right now so it could be a lot worse. Although I do have just about $122,000 in student loan debt, I hope to utilize my growing and developing multiple income streams to make significant strides against that debt in the short term.
IRA/Investment Account- Without risk there usually wont be much reward. While this is true for some people risking their tax return with a stock play may not be the best choice. A better choice may be to move the money into a RothIRA which in itself contains numerous tax benefits and in a way provides you with tax benefits for your next return the following year. Of course when it comes to investment and retirement accounts you want to perform your own due diligence as what may be best for one person isnt best for another.
Spend It- This is not surprisingly the most popular. Whether its buying a large electronic you were waiting, using it for a down payment on a new car or booking that vacation to the Caribbean some people just want to splurge with their refunds and that can be ok too! Be smart about it, if you are getting back more then you thought maybe split it up, buy something and put some away or towards debt. We can typically go year round and not think about our tax return or come up with premature decisions of what to do with the money, except for those few months during tax season, suddenly we expect it and want to spend it. This is where that good discipline I mentioned in the mortgage section comes into play. If you did alright all year without those taxes and already paid them out… maybe you can do ok with not spending all of the refund??
What do you plan to do with your refund?