By Hirsch Serman, MBA, CPA
By now many have filed and even received their tax refunds. Our situation is vastly different than last tax season just 11 months ago. With the uncertainties of COVID, unemployment spikes, and no understanding of what to expect in the near future, we may need to consider how we will use our refund differently than in the past. Consider using these funds to strengthen your personal financial situation. According to a February 5, 2020 Bankrate.com article, the average refund for 2018 tax year was $2,869. The earlier one files, the quicker the turnaround to receive your refund.
While it is tempting to want to take your refund and head somewhere warm (if you can find somewhere to go), I would advise you review the list below, use your funds towards reinforcing your financial position.
Here are some suggestions for you to maximize the impact of your refund:
- Pay off your high interest credit cards and other high interest loans. On May 13, 2020, creditcards.com reported the average interest rate on credit cards is 15.99 (the lowest since June 2017). According to a May 1, 2020 article by thebalance.com, the average balance per person is $6,194 in 2019 – an increase of 3% over 2018. I am not aware of any other way to earn the equivalent of 15.99% on your money with effectively no risk. This would be my strongest recommendation.
- Over 50% of Americans do not have cash on hand to cover a $1,000 emergency and roughly a third of Americans incur an emergency costing around $2,500 on average. If you do not have or need to boost your emergency fund, this is a great way to ensure more security in your life. It is recommended that you hold anywhere from three to six months on hand. This will create a sense of more security and avoid the need to cannibalize your retirement account or land in debt. The amount to hold on hand depends on your personal situation and how you are weathering this COVID storm.
- Get a financial tune up to put you back on track. We are in an everchanging world of demands on our time and resources. What was working a year ago or needed in the past often is not what works in our best interest today or in the near future. Often we deviate from our budget and plan. Work with a financial counselor to help refocus on your spending habits and to fully understand your financial environment.
- It is never too early to put money towards retirement. In fact, the earlier you start the better. It is amazing the power of time when investing. The annual contribution limit to an IRA for 2019 is $6,000 ($7,000 if you are over 50).
- College can be a very expensive investment and your children deserve the best opportunities available to them. In today’s reality, you may be juggling your obligations, kids, college savings, and possibly helping aging parents. Take advantage of a 529 savings plan to potentially facilitate a better return on these funds.
- It is wise to review your insurance and bolster your coverage where necessary. This may include long term insurance, an umbrella policy or proper coverage on your home.
- Teach your kids the importance of saving and developing the healthy habit of learning to save. You may want to match money they put into savings or even help them start an IRA if they have earned money through the year.
- Consider a Health Savings Account (HSA). There are few benefits that are triple tax free and these plans are a trifecta in many ways (check with your insurance company on eligibility). Your contributions are tax deductible, your money grows tax free, and you can use the money tax free to pay for medical expenses.
- Have an up to date will, living will, and estate plan to take care of your and your children’s future. Having your affairs in order is crucial to minimizing costs and emotional torment later. It can be extremely costly having your estate go through probate – especially if there is no will and plan in place. This can eat up a significant amount of hard earned assets you have been disciplined to accumulate.
- Get a jump start in your charitable contributions for the year and teach your children to help others less fortunate. There is always a yearend rush to make contributions that are deductible. This can help alleviate the rush and reduce the impact of contributing all at once.
Should you still want that vacation, I suggest limiting the expenses to the amount of your refund to the extent possible. This will avoid using credit cards and incurring large interest costs unnecessarily.
Hirsch Serman, MBA, CPA is the founder of Lifecycle Financial LLC, a company that helps those going through Divorce and other life cycle changes to navigate the financial pitfalls of a new life dynamic. The company was founded through personal experiences in divorce and watching the changes in an aging parent. He has worked in finance for over 20 years (including financial planning and tax) and has taught on the university level as well as conducted seminars for high school youth on personal finances. Hirsch is a member of the American Institute of CPAs (AICPA), The National Association of Divorce Professionals (The NADP), SplitReady.
INC., KKHT Radio, MomsBlog.com, DivorcedMoms.com, The Divorce Coaching Hour with Christy Stratton, The Memphis Business Journal, The New Southern, and Funding Sage media outlets have all covered his work in Divorce and Hirsch was selected to be a New Orleans Entrepreneur Week Fellow. Hirsch has a passion to serve others and has worked with numerous non-profit boards including the United Way and is a trustee of Texas College. Please reach out with any comments to firstname.lastname@example.org.