Commentary by Micah Messer
Have you filed your theft receipt yet cough I mean tax documents? April 15th brings about both the United States and the State of Alabama tax filing deadline. Many people actually look forward to this time of year because of the wonderful Tax Return! After all, who doesn’t like to see $3,167 of federal dollars hitting your bank account?
Before we jump into what you should do with your tax return, if you get one this year, we should cover what the tax return really is. You see, the tax return is actually the worst savings account in the world. What happened is you had too much withheld by your company or if you run a small business, you paid too much in estimated taxes. The interest rates on that savings account called the Internal Revenue Services is precisely 0.00%. Of course, if you account for inflation now we are talking negative numbers here. If you had invested that same amount of money in a good growth stock mutual fund or index fund, you could potentially be sitting on $3,483.70 with about a 10% rate of return. Even if you just left it in your local savings account, it would have earned something!
Every year, your goal should be to owe $0.00 and get back $0.00. The likelihood of this occurring is slim to none but you can get really close by looking at past years and increasing or decreasing your withholdings. Talk to your HR department about adjusting your withholdings for the year 2024 to accomplish this. But, it’s too late to adjust your withholdings for 2023 so what should you do with this year's IRS Savings Account Payment (aka Tax Return)?
There are really only three things you can do with money: give, save, or spend. I would advise anyone to talk with a financial coach or money expert for specific advice but in general I would recommend everyone first ensure they have an emergency fund in place. What is an emergency fund? An emergency fund is a separate savings, checking, or high-yield savings account set aside for emergencies (I am talking about a real emergency here, not the killer sale on big screen TVs!).
I recommend three to six months of expenses saved into this emergency fund after you have paid off all your consumer debt (credit cards, car loans, etc.) If you still have consumer debt, put $1,000 aside and tackle that debt! Debt is suffocating this nation, including you. How can we complain about the federal government being 34.59 trillion dollars in debt when, on average, the everyday American is $21,800 in debt outside their home? Stop keeping up with the Joneses, they don’t care about your new car! If you have a fully-funded emergency fund and no consumer debt, what should you do then?
If you have a fully-funded emergency fund, I would either invest your tax return in your 401K, ROTH IRA, or other retirement account. However, if you want to use that money to fix up that shower or buy that brand new toy you have been wanting - go for it! No matter what, though, don’t forget to give. Giving can be the most fun you will have with money!
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