How should you maximize your tax refund?
STEP 1 Before You Spend It, Plan It
It is exceedingly important to have a plan for the refund money BEFORE you ever receive the money!
STEP 2 Build the Wall
Next, you need to build a wall of protection! When maximizing your tax refund, there are three categories that can help you build this wall:
(1) Save it, (2) Reduce Debt, (3) Invest it
FIRST: Save it
One of the biggest reasons people fall off of the “I’m Going to Achieve Debt-Freedom” wagon is because they do not have any savings. Life is going to happen and it will cost money! If you do not have any savings you will remain broke. Do you currently have money saved for emergencies or Known, Upcoming Non-Monthly Expenses (Christmas, vacation, property taxes, annual memberships, homeowner’s association fees)? Before attacking debt or investing, you need to save money! Start with saving at least one months of expenses. How would it feel to have one month’s of expenses JUST SITTING THERE in your bank account? I remember the day that this happened – and I did not have to mail it out to a creditor!!
If you do not have savings, use your tax refund to fill it up!
SECOND: Reduce Debt
Don’t skip ahead to this step! Make sure you have savings first! Too many people race past the previous option and use their $3,000 tax refund to pay off $3,000 of a $5,000 credit card. They have no Emergency Fund, they haven’t saved for Known, Upcoming Non-Monthly Expenses, and now they have just spent all of that money on a credit card. Even if the $3,000 paid off the credit card, it is still not worth it if one does not any savings! Think about it this way. If the $3,000 credit card had a monthly payment of $100, how long will it take to get that $3,000 back into the bank? THIRTY MONTHS! Not worth it.
BUT, if you have taken care of the Emergency Fund and have saved for your Known, Upcoming Non-Monthly Expenses, it is time to attack the debt! Pull up the Debt Freedom Date Calculator (Excel) and calculate your own Debt Freedom Date! Make some debts leave your life!!
If you have already saved money and reduced or eliminated your debt, your next step is to invest. Investments are the KEY to funding your big time plans, hopes and dreams! Investing is simply using your money and possessions to create more money and possessions. The goal for any investments is to gain more in return.
Stay tuned for Step 3!