Make your tax refund work for you
Young people receiving an IRS tax refund would be wise to consider four simple steps to smartly handle that money.
It’s tax season. Many people expecting a tax refund dream about how they are going to spend the check they receive from the government; to them it feels like free money that they deserve to splurge on themselves. Young people who are completing an IRS tax form for the first or second time would be smart to consider a different course of action. Making a habit of these alternative steps can lead to a lifelong practice of wise money management.
When the tax refund check comes in the mail or, even better, is direct deposited to your account, think of it as a “bonus” that you want to work for you. Consider these four sensible alternative steps.
- Look around for a money management class through community education, the local community college or a church. The financial knowledge gained will be invaluable to you the rest of your life. Think of the fee to take the class as a smart investment in you! Resources through Michigan State University Extension can be especially helpful; check out the Michigan 4-H Money Management website or take the financial health survey and enroll in a Mi Money Health workshop offered in your area.
- If you have any debt, excluding a car or house payment, try to pay it off. If the debt is a considerable amount, decide if you can afford to put 30 or 50 percent of your refund to reduce the amount of the debt. All debt incurs a cost, whether in accumulating interest, negatively impacting your credit score or its damaging effect on a friendship.
- If you have an urgent need, like a set of tires or warm, winter boots, address that need. If your “needs” are really just “wants,” go immediately to step #4.
- Make saving a habit! Set up a savings account at a credit union or bank and deposit as much of the refund check as possible. As a young person, you have a key ingredient to accumulating wealth that your parents and your grandparents don’t have and that is time. While you are young, take advantage of the miracle of compound interest. Commit to yourself that you won’t touch the money and will continue to add a percentage of any future income. Allow that account to accumulate; once it reaches $1,000, talk to a professional financial advisor about investing your savings. Information you learned in the financial class in step #1 will help you find a reputable investment manager.
Be patient and be proud knowing that your tax return is now working for you.