Other than Buying a House, What is the Best Investment for my Tax Refund?
If you filed your federal income tax return on time, you have probably received your refund if you had one due. If not, it’s sure to be on the way soon. You may already have plans for that money, or perhaps you haven’t thought about it yet. Chances are, your refund probably isn’t big enough to buy a house, but saving it can be the start of a plan to have enough for a down payment. If you’re a homeowner, there are several other things you can do with that refund.
The first thing you should do before you receive your refund, and definitely before you spend any of it, is to have a plan. If you don’t already have a household budget, this is a great time to sit down and put one on paper. What are your debts? What are your monthly expenses? Where are the gaps? If you want to buy a house, how much money do you need to save?
Many people flag a certain percentage to put into savings. If you’ve scrimped for the past year, you might want to take a (small) percentage to spend as “fun money.” We’re not talking about anything extravagant like a cruise – maybe a night out to a fancy restaurant, or some new clothes.
Financial experts agree that the best use of extra money is paying down debt. If you have credit card debt with high interest rates, throwing some chunk s of money at those balances is smart. However, it’s smarter NOT to pay off debt on mortgages, home equity loans, or anything else that allows you to deduct interest payments from your next tax return. The tax advantages far outweigh the benefits, and will actually lower your interest rate by as much as 3 percentage points.
Whether you’re a homeowner or you plan to buy a house in the near future, an excellent use for your tax refund is an Emergency Fund. You should have enough money to cover at least three months of expenses in case you lose your job, get injured or have a family emergency that affects your ability to earn income or saddles you with an unexpected large debt. Keeping your emergency fund in a money market mutual fund may be a good choice, where your money will earn an average of 4%.
If you are getting ready to sell and buy a new house, making some upgrades to your current home can net good returns when you go to sell. Look for our next article to learn which upgrades and renovations yield the biggest returns.