What to do with your tax refund
It’s that time of year again. You’ve done the hard work and submitted your returns to the IRS. You’ve gone through the grieving process of seeing what you contributed to the government. Now they have rewarded you with a deposit into your bank account. What’s next? We at Bedrock have a couple of ideas for what you can do with your money. These are based on our personal experiences and not intended to be financial advice.
Start a rainy day fund
One of the most oft-quoted stats is that most people don’t have $400 saved for an emergency. Medical expenses, blown tires and car accidents, or lost jobs can occur at any time and wreck any financial planning being done. However, when the average refund is $2,893, this can set you up for success. This cushion allows for “life” to happen and for security to be felt.
Pay off credit card debt
This is a no-brainer for us. Most credit card companies charge north of 20% to carry a balance. When the average debt is $6,270, this extra interest can add up quickly. We like to look at this as an instant 20% return on investment, which can’t be beaten anywhere.
Pay off student loan debt
While we are all hoping for some kind of federal relief for student loan debt, the average loan outstanding is $38,792 (see here). The time horizon for most people to pay off their student loans is 20 years. While we know the average tax return won’t wipe out student debt, every chunk taken out now saves significantly more time in the future.
Invest in you – school, languages, retraining, certifications
This is one that helps you build you into the person you want to be. What goals do you have? Where do you want to go next with your future? If you could have any career you want, what would that be? This money can go a long way to helping you fulfill your dreams.
Fund your retirement
These are just some basic numbers for funding a retirement account. A contribution of $2,893 in a Roth IRA today would be worth $6,849 in 10 years, $16,214 in 20 years, $38,383 in 30 years, $90,867 in 40 years and $215,116 in 50 years. That means for the average 20 year old who retires at 70, a $2,893 investment today is expected to yield $215,116 in the future. This is the value of investing and compound interest in visual terms.
Put it towards one of your financial goals
This is the fun category. We are huge advocates in putting your time and money towards the things that matter to you. What matters to you? These can be things like buying a car or house, funding a vacation, or having money set aside for gifts. There is no judgment here on the “object”, just that it is personal and significant to the individual.
Invest in the stock market
This option is one that we suggest for people who have created a stable short-term financial picture and want to start investing in their future. The long-term rate of return is 9% in the stock market, while current rates of return on bank accounts are around .1%. A word of caution though: there are no guarantees in this. There is the risk of losing a portion or all of what is invested. Be prepared to let this money sit for a considerable amount of time, as fluctuations may occur with the value of your investment.
No matter how you decide to spend your tax return, we want to invite you to share your story on social media using the hashtag #myreturn. Whether it’s investing, saving, paying off debt, or making that dream purchase, our aim is to help empower people to make their own choices and pursue what matters to them. We hope you take that step today.