Last month we talked about what you can do to reduce your taxes. This month we’ll talk about something that’s a little more fun … what do to if you’ve got a check from Uncle Sam. Some people may find that they’re getting not one but two checks in the coming months.
The first could be from a standard federal tax refund. In 2007, the average refund so far has been a little more than $2,000. That’s nothing to sneeze at. However, before you get too excited, we’d be remiss if we didn’t point out that this refund is technically just a return of your own money. It means you paid too much to begin with so it’s not exactly free money. However, the second check is closer to free money. It will come starting in May thanks to the federal government’s economic stimulus package. Depending upon whether you’re single or married, and how many children you have, and your income level, you could see a check in the mail from Uncle Sam that may be as much as $600 – $1,200. Uncle Sam hopes you’ll spend that money and jump-start the economy. While we’re all for helping out, here’s some food for thought on other ways to make the most of that money:
Pay off high-interest debt: If you have credit card debt or a home equity line of credit, this is a great time to pay it down. Paying off debt is like getting a guaranteed return. If you are paying, say 16 percent interest on your credit card and you decide to pay down some of that balance, you’re in effect getting a “guaranteed” 16 percent return.
Pad that emergency fund: If you don’t have at least $2,000 in an emergency fund, creating an emergency fund is a great use of your tax money. In an ideal world, you’d have at least three to six months of savings tucked away in this fund. If you’re in a two-income household, you can err on the shorter side as you’ll have another income to help out if one of you unexpectedly loses a job. If you’re on your own, aim for the longer end of that range.
Invest in your retirement: In addition to participating in an employer-sponsored retirement savings plan (like a Thrift Savings Plan), in 2008 you can put up to $5,000 in an IRA (and up to $6,000 if you are over 50). Most Americans are woefully under-invested for their retirement. A “rough” rule of thumb is that when you reach the traditional retirement age of 65 you can spend up to 5 percent of your nest egg if you invest wisely and have reasonable odds of not outliving your money. So to get a sense of how big that egg needs to be if you were to retire at age 65 today, take your current income and divide by 0.05. This is a rough estimate, it does not adjust for inflation but the point is to shock you into seeing how important it is to save. For instance, if you make $40,000 a year, you’d need an $800,000 nest egg to maintain your same standard of living.
Invest in yourself: Take a class, upgrade your skills, learn something no one else in your work environment knows. Being the “go to” person is a great way to make sure when staff reductions come you’re at the tail end of the list.
Have some fun: Take a tiny sliver, 15 percent or less and have fun with it. The goal is to balance your desire to enjoy today with the need to save and invest for tomorrow.
For more tax tips or financial advice, visit Military.com's Finance channel.
