Tax Season is again upon us.
Much like the holidays, it seems to come earlier and earlier every year. Unlike the holidays, though, I don’t see this as an annoyance: I like to get these things taken care of as quickly as possible, and while Jingle Bells in October will send me into fits of rage, getting my W2s and Ps and Qs and sundry other tax-related forms in February and March makes me eager to see just how badly Uncle Sam has stuck it to me in the preceding three hundred and sixty five days, and to take a little bit of that back.
Many financial advisors would accost me for actually getting a tax rebate, saying that I am just giving the Government an interest-free loan. They are correct. On the other hand, I lack the patience for paperwork necessary to correct the issue, and I like getting a check in the beginning of the year. I think of it as enforced savings. Laziness for the win.
Regardless, many Americans are now in the midst of tax preparation, and many of those many are already planning on how they are going to spend their return. A down-payment on a car. A new computer. A shopping spree at the mall. For those less fortunate, a nice, warm cup of coffee.
Allow me to propose some alternatives.
1. Start An Emergency Fund Everyone should have some money set aside for an emergency. If the car breaks down, or the furnace blows up, or your water main breaks – or, if you’re like me, and all three of those happen in the same bloody year – it’s comforting to know that there is already money set aside to deal with the problem. Dave Ramsey, author of The Total Money Makeover, recommends setting aside at least $1,000. I have already done this, so it isn’t an issue for me, but if you don’t have an emergency fund, why not use your tax return to start one?
2. Pay Off Your Debt Debt will cripple you. America’s debt problem is a horrible, amazing thing; millions of people are living beyond their means, and getting further into the hole every day. Why not use your tax return to start climbing out? A portion of my tax return is going toward paying off my student loans.
3. Pre-Pay An Upcoming Bill Getting out of debt is great, but so is not going further into debt. If you have an expense that you know is coming up, why not set aside your tax return to meet it? I’m already thinking about next year’s heating bills, and another portion of my tax return is going toward pre-paying that bill.
4. Break Your Credit Card Habit Continuing on the “debt is bad” theme, you can also use your tax return to help break your credit cad addiction. I will typically put a few hundred dollars a month on my credit card, just to buy groceries, gas, and similar expenses. I pay this off every month, so it isn’t a terribly important issue for me, but for many others, their credit card debt – and the interest the owe on it – grows every month. Why not use your tax return to help change the tide? A portion of my tax return is going to be set aside for the expenses I normally put on my credit card. Then, when next month rolls around, I’ll spend the money I would have used to pay off my credit card to meet that month’s expenses. Credit Card addiction broken.
5. Start Investing Assuming you’ve done all of the above, that you’ve established an emergency fund, payed off your debts, and aren’t in danger of going into more debt, why not start making your money work for you? You don’t have to be a stock broker or financial wizard to get a return on your money; all you need to do is open a high-interest savings account. I use ING Direct, and whatever is left of my tax return this year will go into this account, quietly and consistently earning me about 3.5% every year.