During the course of the next month, many Americans may suddenly find themselves feeling wealthier than perhaps they should. We all worked hard for our money, and the average tax return will be around $3,000. Refunds vary in size, of course. Perhaps we should celebrate by getting a big screen TV or by going on a really nice vacation. Then again, although these uses could certainly provide “utility,” maybe there are better ways to use a refund. Let’s try thinking differently about a refund.
Someone once suggested to me that I think about my money earned like a general thinks about the soldiers he deploys. How can I best deploy my soldiers to fight on my behalf? Maybe “killing” $7.50 on these amazing buffalo bourbon wings every Wednesday isn’t the best deployment of my troops (don’t worry, Bob — I’m not cutting out the wings).
Here are some ideas to consider when deploying your refund soldiers this spring:
• Determine if you and your tax liability are predictable.
Have you been getting $5,000 in refunds every year for the past three years? Any major life changes anticipated? Sometimes, just thinking through your future and analyzing a few years into the past is enough information for tax planning purposes. For complicated issues, go to your accountant, but if you have the discipline to not “kill” the soldiers you get in your paychecks, maybe you shouldn’t be making that interest-free loan to the government every year. I would rather have my $5,000 as part of my paycheck during 12 months than get the $5,000 without interest the next tax season.
• Deploy your troops to defend you from debt, but only if it makes sense.
Not all debt is bad. In fact, in a rising rate environment, your student loan at 3 percent might make a lot of sense to carry in installments, especially if you can buy assets or deploy your soldiers to take out that pesky 18 percent credit card in your wallet. Your car loan might have less than $3,000 left on it, but at a 4 percent APR, is that really the best use of your return considering average market returns? Don’t inflict casualties on your soldiers for nothing.
• Think like Putin: What can you annex?
Consider using your tax refund to start an invasion into new financial territory. Fund a Roth (if income appropriate) or some other retirement plan. Up your retirement contributions and use your refund as a cushion for your cash flows. If you don’t own a home, then consider buying one. If you have the first home thing down, then maybe it’s time to acquire a rental.
As a banker, I connect the word “asset” with financial instruments, but are there assets in your industry that can help you earn or save more of your soldiers?
• Use your soldiers to fill holes in your insurance.
Most of the United States population is one emergency away from bankruptcy. If you can’t make it without income for three to six months, then your insurance coverage is even more important. Bite the bullet and deploy some soldiers to cover your downside.
• Consider the time constraints of your decisions.
If you can’t handle the risk, then don’t deploy your soldiers into new financial territory that keeps them there for a few years — or until 59 1/2 for that matter. The best intentioned investments will go south in a hurry if the risk of time is not considered. This is a big topic with too much detail to cover in this column — talk to your banker, financial advisor and CPA as appropriate.
• Consider the value of peace of mind.
If thinking about these topics causes you stress, then maybe it’s time to find a professional. If that big screen TV will really improve your happiness and mental health, then go buy it.
After you’ve done all of this, then maybe you can consider a family vacation. There is value in consumption. Before you consume though, make sure you won’t feel bad about it later. You don’t need to take responsibility for supporting the economy of the country. As for me, I’ll have those buffalo bourbon wings and a glass of cold beer at Bob’s Place.
Benjamin A. Gochberg lives in Avon.