Tomorrow is the day. Tax Day 2017. For most of us, there is good news that Uncle Sam is in debt to us. About two thirds of Americans can expect a refund.
So once that money comes in, what do you do with it? One recent survey found that more than 1 in 3 Americans plan to use the money to pay off debt. Is this the right move? Before you take that step, here are some questions you should be asking yourself.
What type of debt are you looking to pay off? There is a big difference between credit card debt at 15% and a mortgage at 4%. Understanding the kind of debt you plan to put money towards is a key first step in determining your plan of attack. Around here, we like breaking down debt into three categories – Oppressive, Working, and Enriching. Remember, you OWE it to yourself to recognize the differences. From there, you can make a more informed decision about where to direct your refund.
How much do you have in your emergency fund? There is no substitute for money in the bank. So many of us get that refund and feel compelled to do something with it quickly – pay down debt, invest it, buy yet another set of tiki torches. “No really, honey, this summer, we’ll really use them!”
There is nothing wrong with holding cash. In fact, it can be the difference maker in getting through the next curve ball life throws at you. Say you got a $5,000 refund, put it all toward your student loan, and next week one of those April storms sends a giant tree limb onto your back deck. Having that five grand would come in pretty handy about now. It sounds basic, but it’s important to remember that once you pay down debt, that money is gone. Cash gives you liquidity. And liquidity increases your flexibility and survivability.
Are you building your investment portfolio? If you’ve been a responsible saver and have limited or no high interest debt, this could be the right time to think about building up your investment portfolio. Especially if you’re early in your years of accumulating wealth, you don’t want to underestimate the power of compounding. The more you save and invest early in life, the better your chances you’ll be positioned to reach your financial goals and live the kind of retirement you want.
These are decisions you should discuss with your financial advisor, but are all questions that should be on your mind when that check comes in the mail or that direct deposit hits your account.