Smart Ways To Spend Your Tax Refund

If you’re reading this then know that you are reading the fourth draft of my letter to you. Normally I don’t revise and edit my work that much, but today has been truly difficult to write to you.

It’s not that I’m sick or have suffered a major crisis, nothing like that. Today I’m struggling with giving you the most prudent financial advice.

My goal is always to tell you how to save money or use your money in the most efficient way, but today I simply can’t do that.

Why? Because I know you won’t listen to me.

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Tax returns for many Americans have started to begin rolling in. In 2011 the average tax refund was nearly $3,000 according to IRS statistics. Returns are expected to be about the same for filers in 2012. My letter to you today was going to be about what are the best things you should do with that money.

I planned to tell you five prudent financial moves to do with your tax refund.

1.    Start or add to your emergency fund. You need to have enough money to cover 10-12 months’ worth of expenses stashed away in a savings account. Six months just isn’t enough in this economic climate.

2.    Max out your 401(k) or IRA. For 2012 you can contribute up to $17,000 to your 401(k) and $5,000 to your IRA. Adding to your accounts now means a lot more cash for you down the road in twenty to thirty years.

3.    Make an extra mortgage payment. Making just one extra payment a year can save you from paying thousands of dollars in interest payments. Plus it will help you pay your house off years earlier.

4.    Start a 529 college savings plan for your child. Don’t keep putting this off. Otherwise it will be too late and too big of a financial burden to send your child to college.

5.    Pay down high interest debt like credit card balances. You need to get rid of these kinds of debts as quickly as possible or they will eat up all of your money. Pay off the debts that charge the highest interest rate, regardless of how much you owe. Work your way down the line, going by interest rate.

All of these are smart money moves and what I’m supposed to tell you to do with your tax refund. But it’s hard for everyone to resist spending large windfalls of cash. So I thought I’d make my advice a bit more realistic. If you’re going to spend your tax refund I want to help you spend it wisely. Sometimes you’ve got to spend money, to save money. Here’s how…

First, if you’re a Starbucks fan, I want you to buy an espresso/latte machine for your home or office. Your average daily iced mocha latte or Frappuccino runs you about $4. If you can resist adding on a cookie or muffin to your order and only fulfill your coffee cravings every other day you’ll still spend about $40 a month.  Over the course of a year that adds up to about $480. Yikes! Bet you didn’t realize quite how much your caffeine fix was costing you. Instead spend a couple hundred dollars on a nice espresso/latte machine. I found this one on Amazon for $162.00. You’ll make your money back on this in just four months time!

Another beverage machine that can save you money is a home soda maker. Americans consume the equivalent of two cans per person per day of soda and sparkling water.  If the average twelve pack of name brand soda runs you $6 and you drink two cans a day you’re spending about $30 a month on this carbonated delight. A good home soda maker will run you about $80. Plus some allow you to control what you add to the water so not only will you save money, but you’ll also be able to make your drinks healthier! Not to mention how great it will be not to have to lug those heavy soda packages from the grocery store.

Same goes if you are a bottle water drinker! Lugging those huge 24 packs of water is strenuous and difficult. Not to mention buying one to two packages a week can quickly add up! Save yourself the heavy lifting and some green by investing in a water filter. A quality water filter will make your water just as pure as most bottled water and can easily be attached to most faucets.

Keeping with the water savings look into low flow shower heads. Gone are the days when low flow shower heads ruined our hair like they did to Jerry, Kramer and Newman on Seinfeld. Today’s low flow shower heads still give off plenty of spray, but still save you money. If you use the shower an average of 30 minutes a day, replacing a typical 5-gallon-per-minute shower head with a 2.5 gallon-per-minute flow shower head will save you about $100 a year. Plus you’ll get the added bonus of not running out of hot water if your one of the last ones to shower for the day!

There are three major appliances in your home that account for a large chunk of your monthly utility bill, your refrigerator, clothes washer and dishwasher. If any of these appliances are more than a decade old, you’re spending a lot more than you need to. A high efficiency refrigerator uses less than half the energy its predecessor did a decade ago. Most energy efficient appliances will cost more initially, but they’ll save you money in the long run. Not only will they use less energy and reduce your monthly utility bill, but today’s best clothes washers and dishwashers use a lot less water and can reduce your water bill as well.

Another appliance worth investing in is a great outdoor grill. Instead of eating out, cook out on your grill once a week and bank that extra cash. Because most of the nation is experiencing summer like temperatures already, backyard grills are not as cheap as they normally are this time of year. You can get a quality one for a couple hundred dollars though. Just be sure to only buy ones with features you need. Adding on features like burners and higher BTU output raises the price significantly.

What’s the one thing we hear about practically every day that keeps getting more expensive? Gasoline. Experts predict we’ll hit $4 a gallon very soon and it most likely won’t stop rising until we hit $6 a gallon. Ouch! Why not take some of that refund money and invest in a bicycle. Now I’m not suggesting you give your car up altogether and ride your bike everywhere. That’s just not doable. But what about some of our shorter trips? According to federal travel statistics, 50% of the trips we take are 3 miles or less, a distance easy enough to bike in most areas. Next time you need to make a trip to the bank or pick up an ingredient or two from the grocery store consider taking a bike ride to get there instead of your car. You’ll save yourself gas and get in some easy fat-burning activity!

An extra $3,000 is hard to come by. It’s not every day you get thousands of dollars deposited into your bank account. So spend it wisely. My rule of thumb is to bank 90 percent of the money and spend the remaining 10 percent on fun things. That means if you’re getting $3,000 back you’d use $2,700 in a financially prudent method I named above and use the remaining $300 to buy something fun like a bicycle or espresso machine! Tell me how you plan to save or spend your tax refund in the comments section. I look forward to hearing from you.

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Keeping Money in Your Pocket,

Nancy Patterson