A few years ago, I was walking in the mall and overheard a business owner trying to convince a woman to use her tax return to purchase a weave. She said that her hair was an investment.
I didn’t stick around long enough to hear the customer’s response, but in my mind, I was thinking, “Buying a weave is not an investment, no matter how cute you will feel. I don’t care how you cut it.”
With the end of tax season on its way, it is my hope that you use your tax refund with financial wisdom and prudence. If you are still on the fence as to what do you with your tax refund or what money moves constitute an “investment,” here are a few ideas.
Pay off any outstanding credit card debt. For most of us, our tax returns are one of the few times of the year we experience a financial windfall. If you have credit card debt, be smart and use at least 75% of your tax return to get you out of debt. If you are really serious about getting out of debt and sidestepping interest, use all of the tax return to pay off your debt.
Pay some more on your student loan. Right behind credit card debt, many of us are straddled with student loan debt. When you make your check to your student loan lender, make sure you write a note to let them know that this extra money will be added to the principal. If not, they will use the extra money toward the interest, which you don’t want. You want the principal cut down. With a lower principal, they total amount of interest will lower as well.
Beef up your emergency fund. If you have little or nothing in your emergency fund, they use this set of money to cushion you from life’s unexpected costly events. My rule of thumb is having at least six months of net income in the bank. Consider automating your payments as well.
Make a home repair. Remember that conversation about perceiving weaves as investments that I overheard? How about shifting the conversation from “self-improvement” to home improvements. Investing in major work in the home—an extra bathroom, a paved driveway, or a renovated kitchen will increase the cost of your home, for sure. You will definitely see the return of investment when you can increase your selling price for potential buyers or renters.
Get ready for retirement. You are never too cute to begin thinking about retirement. You can make contributions to an IRA for a given tax year up until the time you efile your income taxes for that year. That means you can make a 2014 contribution up until April 15, 2015. Roth IRA contribution limitsare the same as traditional IRA limits: $5,500 or $6,500 if you are age 50 or older.
Although the contribution limits are the same, Roth IRAs work differently. Unlike the traditional IRA, the money you put into a Roth is not tax deductible; Roths get after-tax dollars. But once in a Roth, the money is generally not taxed again when you withdraw the money at retirement. You can even take contributions out without penalty before retirement, although there are some restrictions on that too.
Individuals who own their own business or work as a contractor have their own IRA choices: SIMPLE IRAs have risen to $12,000 in 2014, with catch-up contributions of $2,500. SIMPLE IRA is an employer sponsored retirement plan offered within small businesses that have 100 or less employees. SIMPLE is an acronym for savings incentive match for employees.
Contribution limits for SEP IRAs work differently. The SEP stands for simplified employee pension. It is an individual retirement account or IRA, into which employers can make retirement contributions for themselves and their employees. You can contribute up to 25% of gross income up to $260,000, for a maximum contribution of $52,000 in 2014.
Frugal Feministas- How are you going to use your tax return?
If you need deeper work around healing your relationship with money or overcoming your blocks and fears, maybe it’s time for some money therapy.