Get Rich From Your Refund
by Jennifer Strailey
Sure it feels good to blow your tax refund on something frivolous — but only for about five minutes. This year, consider a longer relationship with your return. Here are nine ways that money could bring you closer to financial freedom.
1. Get out of debt. In his book, The Neatest Little Guide to Personal Finance, Jason Kelly advises this strategy for eliminating credit card debt: rank all of your bills from lowest to highest in terms of balance due. Apply your refund to one or more bills. Then determine an amount that you can pay each month until the card is paid off. Next, add the amount you were paying on the first card to the minimum payment on the second card until it is paid. Repeat the process until you're down to the last card.
2. Invest in your future. Put that return into a money-growing, tax-deferred Roth IRA. At a rate of 8 percent annually, in 20 years a $6,500 tax return could be worth more than $30,000 in retirement savings.
3. Buy some security. Financial adviser David Bach author of Smart Women Finish Rich, says people need to create a security basket in their financial planning. Your security basket should include adequate insurance and a safety net of three to 24 months worth of expenses to cover you in case you lose your job.
4. Invest in mutual funds. They come close to the perfect opportunity to participate in hassle-free investment, says Eileen Michaels, author of When Are You Entitled to New Underwear and Other Major Financial Decisions.
5. Buy stock. Columnist John Grund suggests looking for stocks selling at a price/earnings ratio of no more than eight or 10, and then holding on for the long term. Look for little companies with good ideas.
6. Invest conservatively. If the stock market is too volatile for you, invest in a CD or money market account. Your money still will grow faster than it would in a savings account.
7. Open a medical savings account. If you're self-employed or a small business owner, consider using your refund to buy "high-deductible" or "catastrophic-care" coverage. Then, you can contribute money to an MSA established at a bank or brokerage firm. Such an account will protect you from being wiped out by an expensive hospitalization or long-term illness.
8. Save it for a rainy day retirement. Put the money into an emergency savings fund. Then increase the amount you put into your 401(k). If you're concerned about a smaller paycheck not covering unexpected expenses, you'll have the emergency fund to tap into.
9. Learn from it. Invest in a Roth IRA educational fund for your child. An education IRA grows tax-free and the earnings are exempt when used for college. You can establish an education IRA with your bank or broker.
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