Being Wise with Your Windfall: Tips for Using Your Tax Refund

coins-currency-investment-insuranceIf you’re expecting a hefty tax refund this year, you may, like many people, intend to have some fun with your windfall. After all, it’s your money and you worked hard for it. There’s nothing wrong with heading out for some much-needed vacation time or buying a big gas grill for those summer cookouts. As tempting as that may sound, before you buy anything, consider the benefits of using a tax refund to better your financial situation.

Savings

If you’re among the many Americans who lack a rainy-day fund, think about setting all or part of your refund aside in an interest-bearing savings account. You never know when the transmission in your car may give out or an aging roof might start to leak. These are costly repairs, and the average American is unprepared for them; in fact, just 39 percent of Americans are capable of covering an emergency costing $1,000 or more. If you lack at least three months worth of emergency savings, that tax refund may serve you better as an emergency financial reserve.

If your roof could use some work, repairing it is an excellent use for a tax refund. You’ll head off more serious problems resulting from neglect somewhere down the line. But be diligent in looking for a qualified roofing contractor, and ask yourself several questions to determine what, exactly, you need. Check with the Better Business Bureau to make sure your contractor is accredited, and check out the BBB website for complaints or any disputes or scams a company may have been involved in, as well as tips regarding what to look out for.

Pay Down Debt

Debt is a fact of life for most Americans. If you struggle with credit card debt or are behind on the mortgage, your refund can help you out. Paying off debt is a smart move because the high-interest merry-go-round can be very hard to get off when you’re just managing it by paying the minimum every month. That can take you years to pay off even a moderate amount.

College Savings

According to CNN Money, most Americans can expect to pay about $57,000 for a degree at a public college, and more than $100,000 at a private institution. That’s a lot of money for anyone. Why not use your refund to open a 529 or Coverdell education savings account? And investing in your state’s 529 plan may result in a nice state income tax deduction. However, beware of using the money for unqualified purposes, which can earn you a 10 percent penalty.

Roth IRA

A Roth IRA lets you stash money away that becomes tax-free after age 59.5 as long as it’s been open for at least five years. You can contribute to it as you wish and withdraw the sum of your contributions without being hit with a tax or penalty. Your Roth earnings can be used tax-free for education expenses or for a first-time home purchase.

Invest in Yourself

You are your own most valuable resource, your best hope for earning and growing your assets. Improve your ability to do that by investing in training, additional education, or by joining a professional association. It’s a good way to sharpen your skill set, pick up new knowledge, and make valuable new professional connections. The more you can improve yourself, the more valuable you’ll be to an employer or to clients.

Travel

Speaking of self-improvement, are you aware that travel broadens perspective and helps you keep problems, challenges, failures, and successes in their proper context? Think about spending a portion of your refund to go someplace new, a destination that’s always interested you.

Think of a tax refund as an opportunity, an annual chance to improve your financial situation and personal prospects. Think carefully before heading off to the Jacuzzi store or ordering a season football ticket package. By being strategic with your financial prospects, you can put yourself in a much better position to acquire those “toys” you really want and achieve financial security.

Teaching Kids About Money

Kids and Money

Ideally, one’s financial literacy should have its roots at home. However, the majority of parents are either not willing or are ill-equipped to deliver money lessons to their kids.

 

As the world continues to change, the need for learning financial literacy at an early age has never been more important. If you learned the hard way, it does not mean that your child should go through the same. Teaching children about money while they are still young will give them a better chance of making smarter financial decisions in the future thereby enhancing their chances of success.

 

While a typical child’s money habits usually start to manifest at around the age of 7, you can maneuver them into the right path by starting to teach them basic financial concepts such as saving and spending while they are as young as three years old.

 

You must remember that, as a parent, you are the biggest influence on your child’s behaviors, their financial habits notwithstanding. As such, if you want to help raise a generation of financial savvy and mindful consumers and investors, you not only need to teach them how money works but also how to spend it wisely.

 

Tips on How to Teach Your Kids about Money

 

1. Be an Example

 

You find it cute when the child tries to mimic mom or dad. However, this is not limited to just how you walk or talk, those little eyes are observing and taking in every little thing you do. As such, if you are constantly splurging money in front of them, they are likely not going to give it a lot of respect themselves.

 

The best way is to deliberately display good habits such as creating a budget for whatever purpose right in front of them. Discuss how you are going to use the money and what needs to be left out. This way, they see that money is a serious topic that needs to be approached with respect.

 

2. Teach them about Earning

 

One of the best ways of teaching kids about the value of money is by making them earn their allowances. You should not give them cash just because they are alive. This contributes to entitlement. Instead, allow them to put their sweat into it.

 

Playtime is one of the most valuable things to a kid. Thus, by asking them to sacrifice some of that time and do some extra chores around the house so they can be able to buy that toy they are asking for, they will realize that money is valuable.

 

Moreover, give them a commission on each chore they do around the house. The benefits of this is that they will be more responsible in addition to understanding at an early age that money is earned.

 

3. Teaching about Delayed Gratification

 

Delayed gratification is an effective way of combating the ‘buy now, pay later’ mentality that afflicts most young adults leaving many in credit card debt. To teach this, you have to reinforce the idea that waiting usually pays off.

 

4. Teaching Against Impulse Buying

 

Impulse buying is another bad financial habit that affects most young adults. Teach your child early against it by always creating a budget before you go shopping. Start by outlining everything you are going to buy, the stores you will look into, and the price range for each item.

 

Go online and compare prices from the different stores and clip the coupons together. Give some of the savings you will make from these efforts so they can appreciate the value of bargain-hunting. This process will let them know that planning a purchase is better than impulse buying.

 

5. Sticking to Your Budget

 

Even after teaching them the value of earning money and creating a budget, a child may still make the mistake of spending all of their allowances on a single item and having nothing left for other things. This presents a teaching lesson as you will not give in to their demands that you give them more money. This will let them know the consequences of overspending. They are likely going to be more careful about how they use their money next time round.

 

6. Teach the Value of Saving

 

You obviously get your child toys or dolls regularly. However, when there is one that they really want, use that opportunity as a teaching aid. Set up a process for saving money in a bank account or piggy bank and tell them to save up the money they make from doing their chores. Some toys might be too expensive, and you might have to chip in from your pocket, but this should only be after seeing that they have put a lot of effort into saving.

 

7. Keep Track

 

One of the most important money management skills is knowing where your money is going. As such, have them use a notebook to detail their expenditure. Moreover, give them a file where they can store their receipts and statements. You can then,together, go through these records periodically and discuss where they could have done better while commending them on where they made good decisions.

 

Money management is one of the key pillars of life management. And because success is usually a result of good habits compounded over a long period, it is essential to teach your kids about money while they are still young. Use this article as a guide to offer them the best chances of success in the future.