So, you did your taxes. Good! And you probably got a refund, which you’ve given a nickname… something like, “The IRS is going to direct deposit my new Wii Fit this week!” or “My new Blu-ray player is coming by check, actually.”
Cut that silliness out right now, buster! You’re going to want to throw that refund check straight in a savings account, because it’s one of the easiest things to save ever. Just get in the habit of always saving your refund check (the years that you get one). It really is the easiest way to beef up your savings without having to think about it.
Sure, everyone around you may be spending their refund checks, but you can buy yourself a piece of your financial future with that check. Of course, I don’t believe in saving blindly, I always think savings should have a purpose. Here are my top 5 savings ideas for your refund check:
Getting Established Fund
Someday, you’re going to graduate (hopefully). Even if you don’t, you won’t be in college forever (even Van Wilder eventually left school), and then there will be this weird transitional period where you’re looking for jobs, trying to get together cash for security deposits on apartments, maybe even trying to move your stuff across country.
Trust me, because this is where I am right now. I know you will need a little money for the few months right after you graduate. Save for it now.
Knock Out Credit Card Debt
Ok, not “savings” in the strictest sense, but if you’re carrying a balance, throw your refund check at it, and then some. And cut that credit card into little tiny pieces – for now, anyway.
Emergency Fund
I just think everyone should have an emergency fund, even college students.
Roth IRA (Individual Retirement Account)
Ok, you’re totally not thinking about retirement right now, because you’re not even (really) working yet. I get that. But you should be thinking about it, because compound interest is on your side. Check it out:
If your refund is $300, and you put it in a Roth IRA that grows at 8% per year, and you retire at 65 (say you’re 20 now), that $300 refund turns into $9,576.13 when you retire. Even factoring in 3% inflation, that’s still $2,695.50 in today’s dollars.
Extra bonus: you can still contribute to a 2008 IRA if you do it before April 15th, 2009, so you can still contribute up to $5,000 for your 2009 IRA. (I’ll talk more about IRAs in the future. If you’re not sure about them yet, just dump your refund in a savings account for now, and decide later when you’ve got more info.)
[Insert Big Ticket Item Here]
The best savings goal is something that means a lot to you. Maybe you plan to get married in the next 5-10 years – that’s something worth savings up for. Or maybe you’re driving a junker and you know you’ll want to replace it after college. Or you want to go traveling after school. Your goals are your goals, so work toward them!
P.S. Go ahead and spend some percentage of your refund on whatever you want. I’m not a savings Nazi – have some fun! Just consider keeping that percentage small (10% sounds good to me).
Random author aside: I never get a refund anymore, thanks to things like blogging income where I have to withhold my own taxes. No matter how much I ask my day jobs to withhold from my paychecks, I always end up owing the IRS like $500.
I hate to sound all “you whippersnappers!” but those of you who get a refund… I wish I could save it, so you should!
I hear you Stephanie! Gone are the days of nice refund checks after a year of work. It’s now been replaced with chunky quarterly payments for us self-employed people!
Good thoughts on the blog…I enjoy your writing!
I agree with you about the credit cards. Paying off your credit card debt is saving lots of money in interest.
I even wrote a post about the pros and cons of getting a credit card at http://debtfreecollege.blogspot.com/2009/02/weighing-pros-and-cons-of-credit-cards.html.
Thanks,
Nate
I have big plans for my return. 100% of it is going to reduce my still growing graduate student loans. I am putting my work bonus there too. After they are both credited my non-subsidized portion will be paid off to date.
I know! Self Employment sounds like heaven until the IRS comes a knockin’. Luckily, this year it wasn’t too bad. I miss refund checks…
I’ve started a 529 plan for our kids in addition to adding some reserves to our emergency fund. This could be a great opportunity to invest in their education while stocks are cheap.
Great advice, although I am in the same boat as you and dont get a refund because my wife is self employeed. I work hard just to minimize my tax burden.
Great post, I always worry about people I talk to that are depending on their tax refund just to survive the next few months. That is NOT a good strategy! I mean at least blowing a portion of the refund on some big ticket item is better than depending on the refund to feed the family.
@Jesse: Yes, exactly! I have a tendency to hang out on Yahoo Answers, and the Business and Finance section is just full of people who say that they are relying on their refund to pay rent or something. That scares me more than anything! You should never, ever depend on a windfall. You may owe taxes instead of getting a refund, your bonus may not come this year, and you may never get that inheritance you’re waiting for. You just can’t depend on things like that.
I paid off my student loan with my tax refund. So glad to get that loan off the books!
Advice anyone?—I worked as a co-op student for half of last year and will get a pretty good return (in college standards) this year. I have a decent savings account from all those summer jobs since high school and was considering not taking out a loan but using my return instead for a summer school class. Should I take out the loan or spend the tax return?