Tax season is in full swing, which means millions of Americans will receive tax refunds over the next few months. While it may be tempting to spend your check on gadgets, vacations or other luxury items, strategically investing this money could help better position you for the short- and long-term.
From addressing immediate needs to amplifying future funds, tax refunds can be an excellent way to give your investments an extra boost each year. Following are a few ideas to consider.
1. Prepare for the unexpected. Start an Emergency Fund. We’ve all heard this before, but this is truly one of the most important steps in building a solid financial foundation. Unexpected job changes, health expenses and home repairs are just a few items that can wreak havoc on your monthly budget. Help reduce stress and unnecessary angst by saving the equivalent of three to six months of expenses. Setting aside this amount of money can take some time, so kick-starting the kitty with a refund is a great way to start.
2. Pay down high interest debt. Eliminate as much in interest payments as possible with your refund. Credit cards are obviously a big target here. However, if you’re without that debt, consider an extra car, house or event student loan payment. Allocating an additional lump sum can help you save a significant amount on interest, so evaluate your current debt and consider where you can make the biggest impact. Then, once you have a plan in place to reduce debt, use the credit sparingly.
3. Start or add to your investments plan to meet your long-term goals. Many diversified products can be established for as little as $500 with low monthly minimums. Talk with your financial advisor to see if there are options you should consider to better round out or maximize your current portfolio.
4. Make a 2014 IRA contribution. There’s still time to make these contributions. The tax filing deadline is also the final opportunity to fund 2014 IRA accounts. Those under the age of 50 can contribute $5,500 to a traditional or Roth IRA. Individuals over 50 can contribute $6,500 each year. Fully funding retirement accounts, like an IRA, is always a strategy to keep in mind as you consider the best place to put “extra” money.
5. Invest in yourself. Education and skills development is not always an area people consider when they have additional dollars to play with. Consider your strengths as well as potential areas of improvement. Taking a course or adding a new skill to improve your earning potential is a strategic investment that is often overlooked. Don’t undervalue the potential effect this can have, both financially and mentally.
It’s easy to view tax refunds as “bonus” money, but the reality is that you’ve worked hard to earn these dollars, so take the opportunity to make them work for you. Avoid the temptation to spend the money on unnecessary items. Use your refund to help stimulate your financial future—not the economy.
John Leis is Vice President of Personal Financial Solution for American Century Investments. He may be reached at 816-340-4271 or firstname.lastname@example.org.