(KTVI)Remember when you had to have the latest and greatest electronic gadget, a new car, a bigger house? No cash? No problem! That was before the recession and a new frugality where you try to save, use credit more carefully, and live within your means.
So how will you handle this year’s tax refund? Leslie Greeman, financial advisor and author of “Dating Our Money”, has some advice.
1. Evaluate your top priorities
If you are drowning in credit card debt, you can cut the length of time in almost half by bumping your payments up from 3% each month to 5%. If you are paying interest rates approximately of 18.9%, you can pay off your debt in 49 months if you pay down 3% or shorten the time almost by half by paying 5% which equates to 25 months.
2. Create an emergency fund
Many people have been unexpectedly laid off and left without any savings or emergency fund. To cut into their retirement or 401k will cost an enormous tax penalty. Having an emergency fund of 3 to 6 months helps create a cushion to make these unexpected changes more bearable.
3. Invest in a Roth!
I love this investment vehicle. It is like creating an emergency fund but better! My first choice for clients almost always would be to take their tax refund and put it in a Roth. Your money can grow for retirement. If you have some unexpected family emergency, you can take the money out without penalty, except for the interest. The money invested is considered “after-tax” so you will not need to pay taxes at the end of your life on this money like you do with a Traditional IRA. Many people feel like their money is STUCK in a traditional IRA because they cannot take it out unless they again pay an enormous tax penalty unless they are 59 1/2 or older. You also don’t have the RMD (required minimum distribution) that a Traditional IRA involves so ALL your money can keep growing until you need it.
4. Will/Estate Planning
Have you updated your will? Do you have the proper estate planning documents in place? My husband passed on unexpectedly at 35 and we never found his will so I know the value of having those documents and keeping them in a safe place that your family and loved ones know about.
5. Life Insurance
Have you got a term life insurance policy? Most people can get a term life insurance policy that could average between $25 to $50 a month if they are in good health and a non-smoker that would at least cover the mortgage on their house and final burial expenses in case they unexpectedly die? Aren’t your loved one worth that?
6. College Savings Plan
It is never too early to start saving for your children’s college! Compare the same numbers as you did with the Roth IRA. Putting money away NOW is important because you have the power of compound interest that will help your money grow so you can meet the continually rising cost of education.
Resist the impulse to spend! Create a plan for your tax refund and it can work for you and reap huge benefits for you and your family in the future