3 Powerful Ways To Make Your Tax Return Catapult You Towards Success - Smart Money Seed

2/5/18

3 Powerful Ways To Make Your Tax Return Catapult You Towards Success

'Twas the night before tax day, when on my commute home
I felt great excitement, right up in my dome.
I took the dog out to the mailbox with care
In the hopes that my W-2 would be in there!

Christmas is a special time of receiving for most fortunate children. Although good parents will try to instill the value of selflessly giving in their children, let's all be honest with ourselves. . . the kids just want the toys! And although we've gained perspective that Christmas isn't just all about the gifts, we don't at all mind our own much more boring version of Christmas morning that still gives us geezers that childlike joy inside. . .

TAX RETURN SEASON, BABY!

If you're privileged and fiscally responsible enough to have a little wiggle room allowing you to do something with this extra cash besides simply making ends meet, you need to really make an impact with this thing!

Whether your tax return is just a few bucks or it represents some serious spending power, this "extra" cash can go a long way in helping you achieve your financial goals. That is, of course, as long as you don't waste the entire thing on booze or a fancy dinner.

3 Success Strategies

Similar to most aspects of your financial life, you'll probably want to diversify your bonus allocation. However, if you have a lofty financial goal such as paying off debt or saving for a house down payment, allocating most or all of your bonus toward that goal is completely acceptable and can make an enormous impact.

1. Contribute to retirement

Some people adapt the mindset that their bonus is "play" money, so they decrease their retirement contribution or don't contribute at all. While it's certainly okay to use some of your bonus as "play" money, wasting all of it that way is grossly irresponsible.

Let's assume that you receive a $1,000 tax return and your usual retirement contribution on your salary is 10%. If you're currently 28 and plan to retire when you're 62, that $100 will grow to over $2,500 by the time you retire. If you receive that same return every year and continue to invest $100, your $3,500 contribution will grow to over $25,000!



Pro Tip: Since this money is most likely not essential to your day to day needs, what if you doubled your contribution amount? You'd still pocket about $600, but that $200 annual contribution would grow to nearly $60,000! That represents a full year of retirement income for new retirees according to New Retirement.

2. Pay off debts

This is the main philosophy Ty and I utilized during our first couple of years after college which you can read about here and here (Ty's story is packed full of valuable content and is our most popular post on the site!). The rate of return on paying loans doesn't always look as appealing as the rate of return on potential investments. For example, you may be paying 5% interest on your student loans but noticed the S&P 500 saw returns last year of 21.83%. Why the hell would you take a 5% return when you can get 21.83%??

The answer is that you're guaranteeing a rate of return for yourself while effectively giving yourself a monthly raise by freeing up cash. Nobody exactly knows what type of returns the S&P 500 will pay out tomorrow or over the course of the next year. A bunch of smart people work incredibly hard every day to answer that question, and they're quite often wrong. The market is only up about 5% so far this year, so now paying off your loans doesn't look so dumb after all!

Also, you free up whatever cash you had been paying toward your loans to do whatever you want with it. When we graduated, Ty watched $428 head out the door for his loan payments, and my payments totaled nearly $600. That is an absolutely brutal amount of money to pay each month for shit we already had! Now we have the freedom to make progress toward our other financial goals or do things like go on bachelor party trips to Vegas this summer!

I should point out that neither Ty nor I had any credit card debt. If you have credit card debts that are gouging you for 20% or more interest, you need to put every extra penny you can pick up on the street toward this debt and evict it from your life forever.

3. Build your rainy day fund

The term we use for this in the biz is an emergency fund. However, you don't need to wait for a truly life threatening emergency to tap into this fund. Your emergency fund should be used to cover unexpected expenses you wouldn't have planned for in your monthly budget like a medical bill or car breakdown. 

If you don't currently have an emergency fund, Dave Ramsey recommends setting aside $1,000 as the first step toward getting your finances in order. Dave teaches to then pay off your debts and build your emergency fund all the way to 3-6 months of expenses to cover things like unexpected serious illness or job loss. 

Whether your tax return is $100 or $1,000, future you will definitely appreciate having a little extra cash in the bank to ease the stress next time an unexpected expense comes up!

Just Do Something!

When you come across any extra cash whether it's in your regular monthly budget, a tax return or bonus check, or an inheritance, don't worry about toiling over what decision is perfect for you. Take a second to think about it, look at your current financial life and your goals, and just do something positive with it! Unplanned dollars you don't need to survive day to day can go a long way in helping you reach levels of financial success you previously never thought possible.

What are your plans for your tax return? Are you doing something we didn't write about, or did our ideas inspire you to make a positive financial decision? Let us know in the comments!

No comments:

Post a Comment